If you are planning to establish a Joint Venture or business partnership of some kind with a third party, there are 13 key questions you must answer - to your own satisfaction at least - before finally committing to the partnership.

Skip any of these ... or assume you know the answer without really checking ... at your peril. This list represents the synthesis of nearly 100 JV/partnerships between western business entities (headquartered in North America, Europe/UK and Australasia) over a 12 year period across the Asian region from India to Japan to Indonesia.

For a western business, establishing and then successfully operating a Joint Venture (JV) in any part of Asia or other regions where language, culture and the business environment differ substantially from the home country can be a great challenge. While the rewards may be attractive, the risks are also not to be underestimated, and recent history is littered with examples of JV’s between Asian partners and Western businesses of all shapes and sizes that have either failed completely, or failed to reach the expectations of the partners.

In many cases, these disappointing results have been the result of careful planning and research by very capable people – whether this is a management team within a large or multinational business, or a wily and experienced entrepreneur – and also the result of large investments of capital, resource, and management time and skill. In this area of business there is clearly a big difference between theory and reality.

What makes one JV succeed and another fail? Are there common traits that successful and unsuccessful JV’s share? Can the experiences of various companies be used to define what may be the common ingredients of success, as well as the features that are shared by those that fail to succeed? Can the likelihood of success or failure be predicted with any accuracy? Can a new entrant use this information to charter a course that avoids the common pitfalls and follows the success indicators, or a JV already in existence use this information as a way of diagnosing its weaknesses and resetting a path toward greater success?

Without doubt the answer is yes to these questions, and the main reason this is the case is that sufficient time has passed to be able to observe and draw reasonable conclusions on the medium term successes of many JV’s that were established across Asia during the 1980’s and 1990’s, and a growing willingness of companies to share their successes and failures.

The 13 key questions represent insights gained from practical, hands-on experience that has been gained at a great price to the companies and organisations concerned, and stems from direct involvement, observation, and 1-1 interviews with the CEO and/or senior leadership team spanning nearly 100 JV’s of varying levels of success. Examples are drawn from the markets of China, Japan, South Korea, India, Thailand, Indonesia and Australia and span insurance, funds management, travel agencies, food & beverage manufacturing, publishing, hospitality, manufacturing, banking, retail, transport and logistics and resources.

It is interesting to note is that practically none of these companies claimed they had done a great job of establishing and operating the JV and almost all said they made many mistakes and would do things differently in future – so there is much to learn.

Joint Ventures – 13 Key questions you must get right before you make any commitments

There are a surprising number of JV’s that run into difficulties or don’t reach their full potential because very basic questions that should have been worked out at the very beginning were brushed aside. one recurring theme is that when the JV strategy is dictated by the CEO or Board before these questions are thoroughly examined there are almost always negative repercussions, and it is surprising how often this is the case, repeated over and over by multinationals who really should know better.

1. Why are you pursuing a JV?

Have you looked at all other structural options and determined that a JV is the best path? Are you obliged to form a JV because of regulation in the market you are considering? If there are other options, why have you discounted them and what do you see as the benefits a JV structure will bring? If you have no other structural option, have you considered the option of doing nothing and not participating in this particular market?

A significant number of the companies surveyed admitted (some with embarrassment) that these fundamental strategic questions had never been addressed, and there was often no common agreement or understanding within the company. Some admitted to pursuing a JV route because it was the only option at the time, or the fastest/cheapest and the company was committed to a flag-planting exercise because of shareholder or market expectations, and no real objective thinking was ever undertaken. Others say they were led to the end result because they had been approached by the local partner with a proposal; because they had historic relationships with the local partner; or because the Chairman/CEO/Owner had existing contacts and it just naturally fell into place. Many of these companies wish they had waited or done nothing at the time, and almost all underscored the importance of having clarity and agreement around this first point.

2. Are you absolutely clear on the legal position regarding the JV?

Do you know for sure what all of the legal and regulatory requirements consist of, and what the ramifications of these are? How does the capital structure, shareholding, and corporate governance operate? What does the JV allow you to do and what does it not allow? What happens if you have a disagreement with the partner, or one of you wants to exit or one wishes to grow and the other does not wish to invest further capital? What accounting and valuation standards exist, what are the implications of your proposed shareholding percentage on your own financial position and reporting, and how do you repatriate profits?

Many companies have been caught out because their homework wasn’t done properly on some of these issues; or assumptions were made that proved later to be incorrect; or trust was placed in statements or individuals that later turned out to have been misplaced. There are numerous cases where the foreign partner has found themselves stranded in a JV; possibly being unable to sell unless it is to the local partner at a knock-down price, or being unable to expand because the local partner does not have the necessary additional capital. Such arrangements often impede subsequent attempts to develop the market because they contain exclusivity or non-competition terms. Some of the world’s largest corporations have found themselves in this position in many markets across Asia.

3. What are your principles and parameters; what is negotiable and what is not?

How negotiable are you on your desired shareholding? The use of your brand and intellectual property? The profile of the partner, including whether you would partner with a company who is a competitor in other areas?

Survey participants stressed the need for a company to clearly articulate what were the boundaries to negotiation, and then to stick to those principles. There were numerous cases cited where, in order to get the deal done, the foreign partner compromised on key issues such as shareholding, corporate governance, brand or other exclusivity and licenses, etc – and in many cases these compromises were bitterly regretted.

4. What are your high level, overall objectives?

Where does this initiative fit in the wider scheme of your company’s strategic objectives? What are the company’s motives for pursuing this JV and this market?

This may seem to be a self-evident question, but is amazing how many companies said this had never been clear and a number stated that it was only after the JV had been formed and was operating that the company’s intent became clear, and perhaps they would have done things very differently as a result. Areas deemed most critical are to be sure whether the company has a long or short term view of the JV; whether the JV is designed to provide service to global clients, or to source products from, or to be quickly built up and spun off; or to help bolster the company’s global image or share price, etc. The greater clarity on these issues, the more likely it is the JV can be designed and operated to succeed in delivering these objectives.

5. What is your time frame?

Have commitments been made to any party, or deadlines been set? Do the Board and senior management agree?

The same message gets repeated over and over: committing to an arbitrary deadline in settling major negotiations or strategic issues in Asia is likely to result in a disadvantageous position. And yet so many of the companies involved, particularly the larger listed entities, spoke of Board or senior executive commitment to a time frame – commitment to the media, to shareholders, to staff, etc, and this in turn was translated into internal deadlines. Few companies who were placed in the position of doing the best they could in the time frame available believed their outcome was ideal.

The CEO of a financial services group, applying for a JV license in China in the mid 1990’s, responded to the demand to fix a time frame on the project with a perfect response to this pressure “… We have been promised by the authorities this will be announced soon. But for a culture as old as the Chinese, their view of soon might be different to ours.”

6. What is the level of Board and senior management commitment?

How high is this initiative on the priority scale? Is there a Board/C-level sponsor/owner? How united is Board/senior management on the strategy? How much commitment are key people prepared to indicate publicly and support in person?

The companies interviewed indicated that the more overt and public the foreign company’s commitment to the market; the level of unity being demonstrated; the level of seniority and willingness of senior people to be engaged actively in the process, the greater the likelihood of a positive outcome. Successful JV’s could point to in some cases many years of demonstrated commitment by senior management to the market before the JV was formed had paved the way and established credibility, market knowledge and sound relationships.

It was also mentioned in a number of cases that foreign partners could expect to have their credentials examined by potential local partners and it was relatively easy to see just how serious a company was by investigating annual reports, analyst presentations, and so on.

7. What sort of investor are you?

Do you want to invest in the JV and take a relatively passive or active role in management? Is this a strategic investment that makes you a financial investor looking for long term capital gain? Do you expect your return to come through operating profits or the value of the business and what are your exit plans?

There are examples of successful JV’s where the foreign partner has adopted a passive role with a minority stake and has exited for an attractive multiple; there are also examples where the foreign partner measures success on the basis of active growth of the business and operating profits. It is important that there is full alignment on this issue so everyone is pursuing the same objectives.

8. What do you bring to the partnership?

What assets, attributes, or strengths will form part of your contribution to the JV? How desirable and unique are they? Do you plan to exclude certain things from the JV or place certain limitations?

A number of companies spoke about the challenges faced with the JV partner or prospective partner when there was lack of clarity in this area, or where the foreign partner had unrealistic views on the value of their contribution or was not able to express this in a way that resonated with potential local partners. An even greater source of difficulty occurred when the foreign partner wished to exclude or charge extra for some things that the local partner thought came with the package. It’s critical to make sure that exclusions or limitations are clearly understood and documented from the beginning.

9. Who is charged with the responsibility of establishing the JV, and where do they fit in the organisation?

How much authority does the individual or group working on the project have? How senior are they and their sponsors? Is this a short term project responsibility or a long term management responsibility?

Respondents indicated that the highest risk of failure occurred when a project team were responsible for the JV establishment compared with an individual; where the individual was on a temporary assignment compared with part of an ongoing management accountability; and the less senior the individual was made a negative impact unless the sponsor was senior and seen to be actively involved.

10. What are your expectations of the local partner?

Expectations of the local partnerWhat are the attributes, capabilities, strengths etc that you hope the local partner will bring to the JV? Which of these are “must have” aspects and which are optional?

Even at the most early stage of developing the strategy, it is important that the role and expectations of what the local partner will bring to the JV are clearly articulated and understood. Failure was almost the inevitable result of forming a JV with a partner who, for example, only exhibited two of the three factors that were deemed critical for success, or in the case of an “arranged marriage” where the fundamentals simply are not aligned.

11. If you are part of a larger organisation, what is happening elsewhere in your company?

Is what you are planning the only activity your company or brand has in the market, and will it be exclusive? If not, is there consistency between various strategies that will not lead to confusion?

A number of large multinationals admitted to failure or poor performance in their JV because their own company had multiple initiatives that lack co-ordination and consistency and confused the local market, leading to false expectations and frustrations.

12. What is your corporate culture?

Are you a company that would be described as entrepreneurial, fast-paced, with quick decisions? Or conservative, methodical, careful? Are you open with information, or hold it tightly? Hierarchical and formal, or informal and matrixed? What are the values of the organisation?

The majority of the companies investigated said it was important at the outset to be clear what sort of culture the company has and where its values lie, as it it really important that there is a level of alignment on these issues between the foreign and local partners in a JV. In a number of cases JV’s struggled or failed because of a mismatch in this dimension and it was mentioned by some as being of great importance.

13. What can you learn from the experience of others in the market?

What parallels can you find either within your industry or similar industries where JV’s have been formed within the market, and what can you learn from these? What can you glean from both formal and informal networks in the market? What qualified and experienced advice can you engage to provide you with deeper insights and perspectives?

One of the saddest admissions from a number of companies whose JV’s failed or didn’t live up to their expectations was “we just didn’t listen”. Themes that emerged around this point included Head Offices that were too remote from the market and lacked understanding of the issues and complexities particularly in Asia; over-dependence on corporate advisers long on theory but short on practical experience; and corporate arrogance that took the view that it was unnecessary to listen to advice.

In conclusion, you must take care to resist the temptation to push the go button when you are satisfied on the majority of these questions ... after all, surely those other thing will fall into place once some momentum is reached.

Maybe you will get away with it, but to do so is taking a big and unknown risk, which to me is analogous to making the decision to dive a submarine on the basis that the majority of the hatches are closed.

'Close enough' when diving a submarine - as with forming a JV - is not good enough. Water under pressure - like the business environment under pressure - invariably exploits gaps and weak points such as hatches not securely closed and unless you are lucky or quick acting the submarine will take on enough water to ensure this dive will be its last and there will be no survivors.

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About the Author:

David Christensen is a highly experienced Asia Pacific business executive and consultant who has lived and worked in 14 different countries and is presently based in Bangkok, Thailand. He writes on a variety of subjects which are consolidated in his business blog site, InversionPoint.com.