Managing Joint Ventures and Alliances

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• Managing Joint Ventures and Alliances

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ALLIANCES

• Agreements Between Corporations To Act Together
• A Phone Call, A Handshake
• JVs, Mergers And Acquisitions Are More Formal

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JOINT VENTURES

• Cooperative Business Activity
• Two or More Partners
• Independent Company
• Preserve Their Identity
• Allocate Ownership
• Assignment Operational Roles
• Determine Financial Risks and Rewards

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MERGERS AND ACQUISITIONS

• Era of Consolidation and Shakeout
• Entire Corporations May Combine
• Weaker Subsidiaries are in Play
• Only One Business Survives
• Culture Clash is the Main Issue
• Entire Assets and Capabilities are Acquired

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GREENFIELD VENTURES

• Start from Scratch
• No Partner to Deal With
• Must Fit Government Regulations
• Wholly-Owned Operations
• Total Risk is Yours
• Mostly Discouraged in Foreign Countries

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OTHER ALTERNATIVES

• Technical Assistance Agreements
• Technology Transfers
• Franchising
• Agents
• Distributors and VARs
• Contract Manufacturing
• Service Companies
• RD Agreements
• Project Related Joint Ventures Staffing Only
• Etc.

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LEGAL AND FINANCIAL ADVANTAGES

• Specified Minimum Foreign Investment
• Duty Exemptions
• Extract Profits in Hard Currency
• Reinvestment Requirements
• The Big Question Where Do You Take The
  Profits?

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JV DRIVING FORCES

• Market Access
• Access to Financing
• Access to Capital (Building)
• Access to Labor
• Access to Technology
• Risk Reduction
• Regulatory Requirements
• Cost Savings

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JV DRIVING FORCE (Cont.)

• Specific Market Expertise in Marketing,
  Engineering, Installation, Customer Support, Etc.
• Complimentary Skills
• Adaptation to Local Standards
• Dont Dominate Small Company

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KEY IS MARKET ACCESS AND LOCALIZATION

• Establish or Improve Market Position Quickly
• Contacts, Recognition and Legal Standing May Be
  Impossible in New Markets
• Time is Always the Issue
• Local Government May Require Minimum Local
  Content for you to Sell
• Range of Localization can be from an Agent to
  Total Product Manufacturing
• Last Step is RD Center

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PUSH/PULL APPROACH

• LARGER HI-TECH COMPANY IS OFTEN
• PULLED INTO MARKET
• Government Attracted to Technology
• Government Attracted to Investment
• Government Attracted to Management
• Know-How
• Government Attracted to Resolution of a
• Political Issue

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PUSH/PULL APPROACH

• THE LARGER WESTERN COMPANY PUSHES
• TO GET INTO THE MARKET
• Company Wants Market Access
• Company Wants To Close-Out A Competitor
• Company Wants To Re-Activate A Large Dormant
  Proposal
• Company Wants Quick Access to People And A Factory

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SPECIFIC EXAMPLES

• PRC - Push (Market Access) and Pull (Technology
  and Political Issue)
• POLAND Pull (Local Government Wants to Protect
  Jobs and Save Local Companies)
• RUSSIA Push (Company Wants to Lock in Future
  Equipment Sales and Extra Circuits) Doesnt Want
  to Operate a Company Business Case on Market
  Potential Not Assets

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COST ADVANTAGE OR DISADVANTAGE

• Direct Sales and Supply From Large Cost-Effective
  Factory is Normally the Best
• Low Material Cost
• Low Labor Rates
• Low Overhead
• Low GA
• Low Marketing Cost
• Low Sales Cost
• Low RD Costs

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COST ADVANTAGE OR DISADVANTAGE (Cont.)

• Foreign Joint Ventures Usually Excel in 2 Ways
• Import Duty Reductions (20-100 on Components
  and 5 on Finished System)
• Local Labor Rates

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HOW TO GET YOUR

• Infeeding Components
• Technology Transfer Costs RTU Fees
• Training
• Expatriate Costs and Fees
• Patent Licensing
• Split of profit
• Capital Gain Value of the Venture

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NORMAL MATURING OF THE JOINT VENTURE

• Shift from Profit on Infeeding to More
  Manufactured and Bought Locally
• Dividend Revenue
• Services Revenue
• THE PROBLEM IS HOW FAST THE SHIFT DOES OR DOES
  NOT HAPPEN INFEEDING USUALLY EXISTS AS LONG AS
  POSSIBLE

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HOW TO CONTROL THE 50/50 JOINT VENTURE

• You Appoint the Key Management Who?
• Majority of Board Members
• Who Prevails in Tie Vote
• Management Agreement on Day to Day Operations
• License Agreement Controls How Technology is Used
  in Production
• 49/49 with 2 in Hands of Third Party
• Two Kinds of Shares for Voting and Non-Voting

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Five Different Strategic Objectives in Doing MA
(and one Blue Fish)

• Reduce over-capacity (e.g. Chemical Bank merging
  with Chase).
• Roll-up a fragmented industry (e.g. BancOne in
  the 1980s). Expand geographically in an
  industry with local delivery (often a service).
• Use MA as RD (e.g. Cisco) Acquire instead of
  investing in RD to build quickly.
• Build a new industry (Viacom buys Paramount)
  Strategic benefits gained from integration across
  industries.
• Blue Fish This is simply madness

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TELFA - Polish Joint VENTURE

• I. Political Situation
• - Government Wants 3 Company Cartel
• - 3 International Companies Find Local
  Partners
• - ATT
• - Alcatel
• - Siemens
• - Mandatory to Save Local Manufacturing
• Companies and Improve Technology
• - Time Limit Adds Pressure to Negotiations
• - Local Management Stays and Supplemented
• with Key ATT Personnel
• - General Manager or Production Director
• - C.F.O. or Sales Director

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II IMPLEMENTATION

• Telfa company true market value 10 Mln.
• Final bid price was 30 Mln.
• 20 Mln. Extra for Capital Expenditures and
  technology improvement- Total 50 Mln.
• Over 1000 people employed and no lay-off policy
• U-10 central office switch was core product we
  expected 100-130 sold in 1994

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III LOCAL MARKET REACTION

• Local policy of buying Polish technology changes
  as market prices dropped for international
  products
• Local currency for local products was not a local
  decision as promised
• Local sales force was too dispersed in Rural
  Markets and couldnt shift focus as local market
  stopped

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IV ATT REACTION

• Stop U-10 production and software-reduce staff as
  appropriate
• Convert factory to full production of ATT 5ESS
  core product
• Develop local software center and competence in
  RD to bring cost down and use local talent
• Win E.B.R.D. Public Bid for 11 toll switches in
  11 regions by setting new market prices
• Other regions come to ATT for switching
• Position ATT for at least 1/3 of all growth
• Government pleased by ATT commitment to software
  and setting realistic market pricing

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V SITUATION TODAY

• 300 employees
• Most successful joint venture in Eastern Europe
• 1/3 of Polish Market
• Manufacturing Center for plastic parts, cabinets,
  switching and software
• All Polish and Eastern European staff and
  management