Adventures in Joint Ventures

Little business players know expansion is survival in this climate of intense competition, globalization and deregulation. Until recently, for plenty of Canadian plastic companies, it has been a case of have-not-quite-enough. They are large enough to have to outsource yet not large enough to expand independently.

But companies are catching on to the joint venture as a secure and flexible way to unfurl. Small- to mid-sized companies are successfully launching new business partnerships with American, Asian and European companies.

It is the latest and best way to “outsource” claim analysts and venture partners — offering companies the chance to probe new markets while off-loading some of the risk and costs. Joint ventures provide a degree of control and confidence that other business arrangements won’t.

They are also not the answer for every company. Joint ventures require an open, trusting and formalized relationship between all parties, a commitment to change, a willingness to ante up and to share in the risks and payoffs that can surface.

Inline Fiberglass Ltd. in Etobicoke, Ont. was cautiously on guard when approached two years ago by a large Chinese company proposing a joint venture. Inline project manager Michael Levine had a bad taste in his mouth from three previously unsuccessful joint ventures with East European companies. “We had not chosen the right partner,” he says.

Yaohua Glass Corp., one of China’s largest glass producers had been “shopping around” for joint venture prospects in Canada. In addition to approaching Inline, they had requested bidding proposals from several other companies.

International rules and laws can make joint ventures complex, and in Yaohua’s case, could have cost them the relationship with Inline. China’s tendering committee requires Chinese companies to bid to several different companies to ensure competitive foreign investment deals.

Yaohua informed Levine up front that it had approached other companies. Levine says Inline made it clear it was not interested in engaging in a pricing war. “We told them this is what we had to offer, and it was up to them to convince us.”

Levine says Inline conducted its own research on Yaohua. When he and a few staff members went to China, they had the Canadian Embassy there conduct a trade analysis on the company. Turns out it was a long-established company, employing 10,000 people in a number of factories. Yaohua has a few other joint ventures on the go, and Inline also contacted the other joint-venture partners to inquire about the relationships.

“Trust was a big factor, and we had to make sure they would make a good partner,” says Levine.

The two companies formed a separate firm called Qimhuangdao, Yaohua, Inline Energy Savings Door & Window Co. Ltd., enabling each partner to capitalize on its strengths. And, the joint venture gives Inline a foot in the door of the Asian market.

The new company employs 90 people, and cost about Cdn$5 million for start-up. Inline licensed its technology and design to Yaohua and supplies it with pultrusion and fabrication equipment to make windows and patio doors.

Inline’s desire to hit the Asian market was a strong motivator for agreeing to do the joint venture, yet it chose to own only 25 per cent of the new company. “It made sense to be a minor partner. Because we are a medium-sized company, we don’t have the resources they have in China,” says Levine.

Because Inline is, “too small to be sending someone over there all the time,” he says they made sure the managerial skills of Yaohua were up to par.

Naturally, Yaohua knows best how to market and to sell the Asian market, says Levine. Companies naive to a foreign market will have trouble “satisfying one tenth of a one percentage of the demands of the market,” he adds.

“If things turn out to be a success, and we don’t change our opinion of their credibility, we hope to expand and start up more companies in China through the joint venture.

“Or, if it doesn’t work out, at least we have gained expertise and experience. We could go to China and maybe find another partner, or do it on our own,” says Levine.

SHARING THE LOAD

The sharing of skills, knowledge and expertise is only one of many incentives behind joint ventures. Where a company is located is almost more important than which company it is.

When Les Industries Rocand, a Quebec company, and Lamboley Industries, based in France, met at a trade show — one of the best places to find a suitable joint-venture partner — they found they had the same interests in mind. Both wanted to penetrate the American automotive market.

Lamboley already had automotive customers, but felt that a Canadian partner would multiply business. Rocand, a small company with 20 employees, saw a door open.

“It takes time to contact and develop American customers, especially in the automotive industry. (Lamboley) already had customers there,” says Andre Rochette, president of Rocand. And from the perspective of France, says Eric Lamboley, it’s a lot easier to penetrate the North American market from a Canadian base. Six months later they had formed Lamboley Rocand Canada, which has pulled in more than $2 million in the past seven months.

It is not necessary to take on the risks of a joint venture to enjoy the rewards, says Eddie Stancius, general manager of Glendon Mold in Rexdale, Ont. It has had an outsourcing relationship with Dollins Tool Inc. in Independence, ME, for more than five years, which it recently formalized. Each pledge the commitment required by partners in a joint venture, but their loose alliance allows them to maintain flexibility that Stancius says is not possible in a joint venture or merger.

“We are still independent. Each company has its own management,” he says. As part of the alliance, they share workloads on certain projects, always informing the customer of the particular arrangement. “The alliance guarantees additional abilities to handle larger projects.” Besides enabling both companies to capitalize on their strengths, the alliance assures their flexibility and autonomy, says Stancius. In mergers or joint ventures, “If you are a minor partner, you can be forced to do things you don’t want to do.”

Depending on the preference of their customer, either Glendon or Dollins will represent the project. Stancius says certain U.S. customers will not deal with Canadian suppliers and vice versa.

The same bias applies in the global marketplace, he adds. “Some customers tend to go either with Canadian or U.S. companies.” The two companies are currently courting Chinese markets and are using Glendon Mold as the leader, because the Chinese are more favorable toward Canadian companies, he says.

Trust is paramount even in loose alliances such as the Glendon-Dollins arrangement. The partners must be willing to put the alliance first. And if one company has taken on too much, the other must be ready and able to step in, says Stancius.

Even cautious companies are finding themselves entering into tight business partnerships. They are finding the arrangement itself is not as important as the ability to formalize mutual goals to overcome some of the traditional obstacles of outsourcing — and to expand securely. Whether it’s an engagement or marriage, Canadian plastics nuptials will continue to soar because of the flexibility and benefits that joint ventures offer. CPL

Lesley Young is a free-lance journalist based in Toronto

The joint-venture test

A joint venture is not the ultimate outsourcing solution for every company. A successful joint venture is based on a balanced, strategic alliance with repeatable opportunities. The following are questions to ask before starting a joint venture, according to Ernst & Young, based in Toronto, Ont.

Is there an existing long-term relationship between the constituents based on mutual trust and respect?

Do both organizations share a collaborative culture?

Is your potential corporate constituent innovative and open to new ideas?

Is there sufficient capital to back the new company?

Does the joint v
enture mesh with the constituent’s goals and competencies?

Is there experienced management and leadership at the helm of

both companies?

Is there a sense of urgency that will help drive the transformation?

Is customer success the true motivation, rather than cost containment?

Is there a commitment to significant change?

Are there significant value propositions and opportunities to provide an incentive to the new company?

Is the work of sufficient size and scope to achieve the critical mass needed for success?

Are the projected profit levels sufficient?

Are both sides ready and willing to jump in and take on the risks that are inherent in a start-up company?

Easy in, easy out

Joint ventures can offer horizontal, vertical or diagonal business solutions. Horizontal is the application of business processes industry-wide. Vertical focuses on a support for a specific functional process. Diagonal can be the enhancement of a supply-chain delivery.

Joint ventures are adaptable for a number of reasons, including the following:

– the assets from the firm are primarily in the form of cash to provide working funds and help the deal with the usual start-up cost as the company begins to transform itself.

– the contract is securitizable, allowing the joint venture to take on debt, if both owners agree.

– the original client constituent can easily insource the processes back to the client organization by simply buying out the supplier constituent’s interests.