International Joint Ventures: 5 Steps to Ensure Success
Expanding your middle market business through international joint ventures is worth consideration. With market demand relatively flat in the U.S., looking outside is one way to maintain and grow your revenues. According to a recent survey done by the National Center for the Middle Market, about 60 percent of U.S.-based middle market companies are active outside their national markets. When it comes to future sales growth, that same NCMM survey showed that 82 percent of middle market companies believe a significant portion (more than 20 percent) of their future sales growth will be coming from international markets. Additionally, the U.S. government has begun a policy of aggressively supporting export-led growth, with the ambitious goal of doubling U.S. exports in a five-year time frame.
International joint ventures (IJVs) are among the most common ways for middle market companies to expand their reach overseas, finding new customers, business partners who can open doors globally, and more opportunity to share ideas. That said, the obstacles to successful IJVs are many, including lack of knowledge about the overseas market, lack of trust in potential international partners, and the difficulties of structuring a complex business relationship across different cultures. The NCMM report "Global Alliances" offers this sobering statistic: "roughly half of international joint ventures fail." So while there's huge opportunity with IJVs, there's also huge risk. Here are five steps you can take to lessen that risk.
1. Have a granular understanding both of the target international market and the available partners. You'll need to first find markets that are willing and eager to purchase your offerings, but that's not enough. If you find a great market and a lousy business partner, you won't achieve the results you anticipated. Perform your due diligence on both the market and potential partners and take your time finding a good fit. As the proverb says, "All that glitters isn't gold." So be sure to proactively protect your interests from the beginning. You'll need to find business synergies with your IJV partner in the same way you'd look for synergies from a business partner down the street.
For example, Grand Rapids-based automobile parts maker Firstronic formed an IJV in 2013 with Chinese auto parts maker Maxway Technology. The IJV's production is being done in Maxway's Chinese production facility, giving Firstronic more production capacity, a better cost structure, and access to a large network of Chinese suppliers (and potentially new customers). As Firstronic's CEO John Sammut explained, "the new JV gives Firstronic a scalable manufacturing footprint in China," adding that "we chose to partner with Maxway because our company strengths complement each other well."
2. Find an IJV partner larger than you are. As the NCMM "Global Alliances" report puts it: "middle-market firms are better off with larger local partners" who can offer you "economies of scale, market power, and organizational image." Moreover, larger IJV partners will have know-how and relationships related to the regulatory climate and also bring "significant expertise in how to modify goods and services for those markets."
3. Understand that the size imbalance is OK. You might worry that your larger IJV partner might ignore its middle market partner due to its relatively smaller size, but you'd be wrong. "Mid-sized joint ventures perform as well as large ones," according to NCMM's "Global Alliances" report. "They have sufficient heft to garner attention and resources from their corporate parents. But they are small enough to respond quickly to changing circumstances, innovating and adapting on the fly." The key is to integrate the inherent agility and flexibility that middle market companies are renowned for with the large resources of your IJV partner.
4. Structure the IJV relationship carefully. Clearly define how the value generated should be distributed, how (inevitable) disagreements should be resolved, how communication and reporting will be conducted, and under what conditions the parties are permitted to exit the relationship. Like any important business relationship, you'll need to formalize things on paper and maintain regular communication to ensure that expectations are being met. If they're not, you'll need a dispute-resolution mechanism in place and an exit strategy prepared beforehand.
5. Develop cross-cultural skills. Your leadership team must prepare to minimize misinterpretations that can become obstacles to deeper trust, the key to any successful business partnership. Cross-cultural skills will need to be developed, and will surely be put to the test, on both sides of the IJV. Be careful about making assumptions regarding how your partner communicates or does business, and try to understand where the assumptions of you and your partner differ. You can certainly learn all this through painful trial and error, but a proactive approach to cross-cultural issues will save you time and money, as well as show respect for your partner.
By following the five steps listed above, you'll vastly reduce your chances of being among the 50 percent of IJVs that end in failure. The key, as in so many business ventures, is to take your time and find the right business fit, then to adapt as you go along.
Boston-based Chuck Leddy is an NCMM contributor and freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.