28 NOVEMBER 2001

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Basis for successful joint ventures

By Adrian Sciberras

Due to intense competition, technological innovation and increasing capital requirements, companies are increasingly resorting to co-operative arrangements as a strategic means for reaching their objectives.

There are several forms of co-operative arrangements in today’s business environment. These include joint marketing agreements, research and development partnerships and joint bidding activities. But the major form of co-operatives consists of joint ventures. These involve shared ownership of a new separate entity in which loss is risked in the hope of profit.

One of the ways to promote industrial development in Malta is the encouragement of precisely such joint ventures. The article attempts to outline the basic elements necessary for joint ventures to succeed right from the start.

Usually there are a number of strategic needs that would have to be satisfied for a joint venture to be conceived and the ideas put forward and eventually succeed. These strategic ideas needs could include moving faster into new markets, gaining access to new technology, sharing risks and costs, overcoming trade barriers, creating synergy, obtaining finance and exploiting natural resources amongst others. The project idea has to fall within government policies; otherwise it would be difficult to promote further.

Feasibility stage
Once the strategic needs of the potential partners, or promoters, are identified and can be fulfilled by the joint venture and the project idea falls within government policies, the promoters could then move to the feasibility stage to see whether it is a practical and workable one. This is necessary to ensure viability of the project under the environmental conditions in which it would operate once it is set up.

At this stage, study teams from the promoters could be identified so that they could be designated to carry out the necessary feasibility study. This, in itself, will serve as a test as unless the designated managers could not work together at this stage, hey would not be able to see the joint venture through once it is set up. In other words, the ‘chemistry’ has to be right and tested from the start.

This is especially important when it involves international companies or companies from different industries. In the feasibility study, the promoters have to ensure that the basic needs of any business would be satisfied and that when they are put together in financial terms, they would meet the criteria that are pre-set for feasibility.

The basis needs for any business are:

a) Availability of a market for the products or services to be produced;
b) Availability of adequate technological means to carry out the project.
c) Availability of fixed and working capital through equity financing, and if necessary loans and/or other financing facilities (going public)
d) Availability of competent management and manpower in all, or at least most areas and skills.

At this stage one might have to carry out a specific market survey, obtain terms for a licencing agreement of a product or service, test-market a product, try out a production process or even put up a pilot scale project for observation or other management tool that could help in indicating feasibility or otherwise. Aspects such as infrastructural, port and other facilities would have to be dealt with at this stage although in today’s free market this may not really be an issue.

The criteria for feasibility of a project vary from promoter to promoter. Some have purely economic considerations while others could have social considerations on top of their list. Whichever the case, the feasibility study should be clear and detailed enough for the promoter to assess it in line with their ‘expectations’.

Some promoters tend to ‘skip’ this feasibility exercise or parts of it and go straight to promotional stage or even directly to the implementation stage. It does not mean that the project would not succeed because it might still fulfil all or most of the basic needs and feasibility criteria.

Carrying out a feasibility study, however reduces the risks of failure as, even in the feasibility study, certain aspects might be overlooked or miscalculated and conditions might change. In other words, doing a feasibility study develop the project into a ‘calculated’ risk.

Co-operation agreement
Once all promoters are satisfied with the feasibility study, they can move on to the promotion stage by the creation of a co-operative agreement or as it can be better called pre-incorporation agreement. Detailed operating plans are also important at this stage.

This pre-incorporation agreement would embody the initial configuration of the joint venture. This agreement often represents a compromise and it should reflect the mutual understanding and openness of all parties. Just as parents give their necessary resources to survive and prosper to their offspring, the promoting firms in the joint venture should assist by providing the necessary information, personnel, technology and market access.

It should also include all the other legal aspects such as a memorandum and articles of the new company, arbitration clauses, contribution by each promoter, share ownership, voting rights, appointment of board and management of the new company and other aspects.

Concurrently with the pre-incorporation agreement, the study teams or prospective managers should establish operating plans that would detail how the venture should be operated on a day-to-day basis. This should also be approved by the shareholders to ensure that the venture’s objectives are reached and it is directed to the way the promoters intended it.

Autonomous entity
After the pre-incorporation agreement has been signed and implemented by the setting up and registration of the new company, the joint venture then becomes an independent entity, which may require to reconfigure itself from time to time depending on changing needs. As an independent entity, the promoters should grant the venture a fair degree of autonomy with influential board members and top quality managers backed by a strong and capable chief executive with diplomatic skills, to head the operation.

There should not be confusion or conflict about who is operating the entity. In a competitive and volatile business environment, managers need flexibility to move quickly without having to go through a bureaucratic decision making process to ensure that everyone approves every detail. The need for properly defined co-ordination with contributing partners such as supplies, or availability of markets is just as important. Usually joint ventures are confined are confined to single suppliers, maybe through a licencing agreement or single market, which could be the scope of one of the promoters – say to overcome trade barriers. Therefore, this relationship should be properly defined so that management would avoid disputes and misinterpretations that could lead to unnecessarily lengthy renegotiations of the joint venture agreement.

However, after judging the performance and the new entity’s experiences changes in industry, in competitors’ strategies, in the need of more (or even less) co-ordination with contributing promoters, the joint venture should be reconfigured by redefining linkages, changing organisational forms, increasing or decreasing scope or even ending the joint venture if felt necessary.

Finally the promoters also have to be prepared for their project success, as jealousies among personnel with the promoters’ own firms might try to undermine the venture when it is succeeding. Venture managers having been put in an outside position, vis-à-vis the promoter firms, usually feel under great pressure to succeed. Once they go, if they are not appreciated they might try to take the firms away from where the promoters wanted it to go.

Some people might argue against the existence of joint ventures and even challenge their contribution to the economy. One could argue that joint ventures are usually single product companies, depending on one supplier and one market, and thus they are very fragile and risky in a developing economy.

That could be quite true but one has to judge joint ventures within the framework on which they would have been set up. Unless that framework existed, the joint venture would not have been created and contributed temporarily until it, say, lost its market or became uncompetitive or completed its objective.

Furthermore, even if it starts with one product, one supplier and one market, it may very well be the case that new products, new markets, and new sources of supply are developed on the strength that at a point there were the favourable conditions that led to the joint venture formation in the first place.

The existence of joint ventures, as long as they are conceived on a solid basis for success is amply justified even with certain ‘drawbacks’ that might crop up from time to time. Locally there are a number of companies, public and private, who look for joint venture opportunities and their existence helps in attracting more investment in Malta.

There could be national, cultural or even religious differences between partners but the most important fact is that there should be shared valued and mutual respect at the work place which once they are attained, one finds they are fascinating to live with.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt