JointVenture

Case:HeroHondaMotors(India)Ltd.: IsitHondathatMadeitaHero?

JointVentures
Separatebusinessentity

Participantscontinueasseparatefirms Organizedaspartnership,corporation,oranyotherformof business LTcontractof8to12yearsduration

JointVentures
Jointproperty interestinsubject matterofventure Rightofmutual controlor managementof enterprise Righttosharein cashflowsofthe enterprise Limitedrisk

Timingsimilarto mergerand acquisitionactivity

Limitedscopeand duration

Generallyinvolve onlytwofirms

Involveonlysmall fractionof participants'total activities Neednotaffect competitive relationships

Eachparticipant offerssomething ofvalue

Jointproductionof singleproducts

Nosharingof assets/information beyondventure

ObjectivesofJVs
Risk sharing
Eachparticipantdiversifiesrisk Reducesinvestmentcostofentering riskynewarea Realizesbenefitsofeconomiesof scale,criticalmass,learningcurve effectssooner

Entryinto new, expanded, Foreign Markets

Augmentsfinancialor technicalcapabilities Reducesrisk Foreigncountrymay requirejointventurewith localpartner

Knowledge Acquisition

Learningexperienceforboth partners Sharedtechnology Sharedmanagerialskillsin organization,planning,andcontrol Successiveintegration joint venturingasawaytolearnabout prospectivemergerpartners

Financing

Shareinvestmentexpense Smallcompanyhas productideabutnocash Jointventurewithlarge companythathascashto developproduct

ObjectivesofJVs
Distribution /marketing Toobtaindistribution channels Toobtainrawmaterials supply

Longrun Strategic Planning (Spider's Web Strategy)

Foreignventures More favorable Antitrustissues joint venturesincrease tax/political ratherthanreduce treatment numberoffirms

Provide countervailing poweramongrivals Smallfirmsina concentrated industrydo multiplejoint ventureswith dominantfirmsto formselfprotective networks

WhatCausedSplit?
HMCannouncedthe settingupofasubsidiary inIndiatomanufacture scooters Subsidiarywouldenter themotorcyclemarketin 2004

Causedseriousconcerns forHerosinceHMCs entryintothemotorcycle marketwouldthreaten itsverysurvival

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ObjectivesoftheJointVenture ForHero
Herohadbuiltastrongpresence inthemopedsmarketand wantedtofulfillitsdreamto enhanceitsstatureinthe motorizedtwowheelersegment Itwasalreadythelargest manufacturerofbicycles Hondacouldconsiderablyhasten thepaceofHerosriseamongthe ranksofthetwowheelermarket bycompressingthetimeneeded fornewproductdevelopment IntenttodethroneBajajasthe leadingtwowheeler manufacturerinIndia

Believedinthevalueproposition toofferafuelefficientvehicleat areasonablylowcostandsaw HMCashavingthetechnologyto deliverthatpromise

Hondanamewouldadd considerableattractivenesstothe productline

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ObjectivesoftheJointVenture ForHMC
Herohaddevelopedavery powerfuldistribution networkforbothbicycles andmopedswhichcouldbe readilyusedtopenetratethe market Herohadanestablished networkofsupplierswho couldbeutilizedascheap manufacturingfacilities

Herohadlocalmarket knowledge,havingbeenin operationforaconsiderable periodoftimeinIndia

EnteringIndiawasnotan easytask,asHonda perceivedrisksintheformof newmarket,culturalissues, laborunions,andthelike

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ObjectivesoftheJointVenture ForHMC

Therewasalsogovernment regulationgoverningthe decision,astheforeignpartner couldnotholdamajoritystake

Hondawaslookingtoexpand internationallyintohighgrowth markets,andtherecent liberalizationinitiativesbythe Indiangovernmentoffereditan opportunitytoenterthe untappedIndianmarket

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CompetitiveGoalsofHeroandHMC

Hero

wasfocusedontheIndianmarket

HMC

Lookingattheglobalmarket ProbablynotlookingattheIndiamarketasanendinitself, butmoreasabasetoconsolidateitsworldwideshareand keephometownrivalsatbay

Convergenceofstrategicgoalsanddivergenceofcompetitivegoalswasclearlyan 66 importantingredientinmakingtheventurework

ComplementarySkillsThen!
Hero
Marketingandmanagementknowhowinthecontextof theIndianmarket Accesstoawellpenetrateddistributionnetworkthat coveredbothurbanandruralmarkets Priorexperienceinthetwowheelermarketwitha presenceinmopedsaswellastheleadershippositionin thebicyclemarket

HMC

Expertiseindesignandmanufacturingtechnology

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ComplementarityNow!

Hondahasalreadylearnedabout IndianmarketsthroughthisJV

Standstogainmorefirsthand experiencebysellingscooters throughitssubsidiary,HMSI

Itwouldalsohavebuiltupitsown distribution/servicenetworkfor scootersby2004

So,HondamaynotneedHeros marketingskillsandaccessto theirdistributionnetwork

Herowouldcontinuetoneed Hondasproductdevelopment expertise,makingthisa dependencyrelationshiprather thancomplementaryrelationship

Becauseofthisdependency,Hero willforeverhaveasworddangling overitshead,andintheevent theJVisrenewedpost2004,this inequitymaygiverisetotensions betweenthepartnersresultingin itseventualdissolution

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ConvergenceThen!
Hero
Wantedtoupgradefrommopedstomotorcycles Seekingaccesstotechnologyinordertoofferfuelefficient motorcyclesintheIndianmarket,andeventuallygainleadershipin themotorcyclesegmentinIndia

HMC

WantedafootholdinthegrowingIndianmotorcyclemarketto consolidateitsglobalposition Wantedtosharetheriskofenteringanewcountry Willingtopartwithitssuperiorfuelefficienttechnologyinorderto getleadershipinthismarket

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ConvergenceNow!
Goalshaveprobablydiverged AlthoughHMChasrepeatedly statedthatitdoesnotwantto exittheventure,stayingdoesnot seemanattractiveproposition unlesstheproductlinesare considerablyrevamped

Withthemajorgrowthcoming frommotorcycles(10%15%)as opposedtoamere4%in scooters,itisonlyrationalto expectthatHondawillwantto haveitsshareofthepiein motorcycles

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CommitmentThen!
Hero
Commitmentwasquitestrongbecauseithadalwayswantedto achieveadominantpositioninthetwowheelermarket Havingassumedworldwideleadershipinbicycles,thisseemedlike alogicalnextstep VisionandforesightofMr.Munjal werealsoinstrumentalinthe successoftheJV Indianconsumerwantedafuelefficientmotorcycleandwas confidentofbeingabletosatisfythisneedwithHondasassistance ConveyeditscommitmenttothelongtermsuccessoftheJVby takinganequitystakeandnotjustrestrictingitselftoa technologytransfertypeofagreement ShoweditswillingnesstotrusttheIndianpartnerandforthe mostpartallowedthefamilyownedsuppliernetworksto continue

HMC

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CommitmentNow!

Heroisalsonotcompletelyinthe clearinallthissinceithasshown signsofsteppingoutofboundsin therelationshipbytryingalternative partnerssuchasSteyrPuchand BMWinventureswhereHMCmight havebeenagoodprovider

Mightbeconstruedassleepingwith theenemyadangeroussignalof lackofcommitment

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CompatibilityThen!
Quitecompatiblewithoneother

Hero

Broughtasymmetricskillstotheventure Clearnonoverlappingresponsibilitiesforeach partner Rolesandresponsibilitieswereverywelllaidout

HMC

Hondamanagementdidnotinterfereintheday todayoperationsbutleftthosetotheIndian managementteam,whounderstoodtheIndian contextandrantheshowonadailybasis

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CompatibilityNow!
Compatibilityislikelytostay positivebecauseboth partnersarenowfamiliar withtheothersworking styleandcorporatecultures Bothpartnersappeartobe quitevocalabouttheir supportforeachotherand arewillingtoexpresstheir admirationofoneanother publicly

Hondahaslearnedto operateintheIndian context,understandsthe Indianconsumer,andcan handledistributionchannels

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TrustCreation FromHMC
HMCallowedHerotocontinueits strategyofbuildinganetworkof supplierslargelycomposedof Munjalfamilyrunorganizations andfirmsthatwererunbytheir closefriends HMCwaspersuadedbyHeroto scrapitsoriginalplansofstarting theventurewitha70ccvehicle Itagreedtointroducethe100cc fourstrokevehicleasdesiredby Mr.MunjalandtheHeroteam Willingtosharetheirbest technologywithdeveloping countrypartners

HMCwaswillingtosettleforless thanfavorabletermswhenthe contractwasrenegotiatedin 1994,agreeingtotakeapaltryRs. 200pervehiclesold

HMCwasalsowillingtonegotiate lumpsumpaymentsfor technologytransfersafterthe renegotiation

HMCdisplayedsignificanttrustin itspartnerwhenittransferred designsfortheStreetmodelof motorcycles,amodelthatwasa bestsellerworldwideevenwhen itwastransferredtoHHM

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TrustCreation FromHero

Herowaswillingtostandbyitspartner andworktowardbuildingshareina marketwheretheproductwasinitially seenashazardous

Herodidnotshowanyobvioussignsof beingupsetwhenitwasspurnedbyHMC ontwoseparateoccasions,oncewhen HMCsignedadealwitharivalIndian grouptomanufacturepowergenerators, andthesecondtimewhenHMCdecided togowithadifferentpartnerinitsventure tomanufactureandmarketautomobiles

CarventurecouldhaveunderminedtrustbecauseMr.Munjal hadpersonally cherishedadesiretoentertheautomobilesector

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TrustDestruction FromHonda
HMCsloweddownitstransferof technologywhenthecontractwasnearing therenegotiationdeadline
Herofoundithardtoevengetroutine engineeringdesignchangesapprovedbyHondas R&D

Herowasforcedtocontinuemanufacturing andmarketingproductsbasedonthesame engineplatformforalongperiodoftime

HMCconcludedajointventureagreementwith anotherIndiangroupforthemanufactureof motorcarsinIndia

Forcedthecompanytositonthesidelines whenthemarketwaswitnessingitsmost significantboomandwhenitscompetitors wereintroducingseveralnewmodels

HMCdidnotofferHHMtheopportunityto exploreamergerwithKineticHondaaspartof HMCsefforttoconsolidateitspositionintwo wheelers,despitethefactthatHHMwasamong themostsuccessfuljointventuresthatHMChad atthatpoint

Duringthecourseofevolutionofthejointventure,bothpartiesengagedinsomemoves 77 thatunderminedtrust

TrustDestruction FromHero
Heroenteredintoalicensing arrangementwithaDaimler Benzsubsidiaryforthe manufactureoflowpowered bikes,arangethatHonda couldhaveeasilyprovided Herowasattemptingto interestBMWinalicensing arrangementtomanufacture high poweredmotorcyclesin India

BMWwasakeyEuropean rivaltoHMCinthesame categoryofmotorcycles

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RationaleforBehavior
HHMinitsdecisiontopursue SteyrPuch formanufacturingthe lowpoweredtwowheelers FeltthreatenedthatHMCmight drawouttherenegotiationin 1994,andthismighthavebeen asignaltoHMCtoplayfair

Hondainitschoiceofanother Indianpartnerinitsmotorcar venture HMCdontwanttoput allitseggsinthesamebasket

Verysuccessofthejointventuremightrequirethepartnersto trustbeforeyouverify,andthatimplicittrusteveninsmall degreescanactasasignaltotheotherpartnerthatyouintend tostayforthelonghaul 79

LearningAsymmetry ForHonda
Hondaisthepartythathas probablylearnedmorethanHero inthisJV Sincetheventure specifiedthesourceof technologyinputsasoriginating fromHMC

HHMhasbecomecompletely dependentonHMCfornew productdesigns

Hondahasconsequentlybeen abletocontrolandguardits technicalskills,whichwerea criticalelementinHHMssuccess story

Honda,ontheotherhand,has thetechnicalcompetenciesand, thankstoHero,theyhavealso learnedalotabouttheIndian consumer,markets,and marketingtotheIndianconsumer

Nowhavetheentirecomplement ofskillsrequiredtogoitalone

CreationofHMSI(HondaMotor ScootersIndia)appearstobea manifestationofthatintent

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LearningAsymmetry ForHero
Herodoesnotseemtohave consciouslymadean attempttoacquirethese skills,thoughadmittedly littleisknowninthepublic domainaboutthis Herolearnedalotregarding manufacturingskills,but theyarestillmissingallthe elementsrequiredto competeontheirownifthe needsoarises

Theysimplydonothavethe resourcesorskillstodesigna completelynewproductfor theIndianroadsthatcould competesuccessfullywithan equivalentHondaproduct

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WhichAlternativeisBetter? Whatismostlikelytooccur?
Fullscale divestitureof HHM Alternative Forcedselloutto HMC Peacefulco existence
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AlternativeActionsthatHHMCan Pursue
HHMmight optnottodo anything InvestinHMSI asaminority partner
RelationshipdoesseemtobebackontrackwithHMC,with HMCsharinglatesttechnologyinputs PublicannouncementbytheCEOofHMConavisittoIndiaalso mightbolstertheconfidenceofMr.Munjalthattheventurewill survive Problemwillresurfaceafter2004andmightmaketheworkof theproductoversightcommitteedifficult

HMChasinvitedHHMtojointheventure However,thiscouldbeamuchmoreinvolvedsetof negotiationssincetheideahasjustbeenofferedbutnever discussedatlengththusfar

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AlternativeActionsthatHHMCan Pursue
Startpreparing foraselloutof Herosintereststo HMC EngageHonda fromthisstageto prepareforthe entryofHMSIas acompetitor
ObviouslydistastefulalternativetoHHM HHMisobviouslyunpreparedtogoitaloneintheareaof newproductdevelopment Therefore,thebestitcandounderthisoptionistogeta favorableprice

Thisproactiveapproachcouldbequitefruitfulbecause HHMcanstartchannelingitsinfluenceovertheproduct linesthatHMSIintroduces,thinkofsharingdistribution channelsshouldtheproductlinesreallybenoncompeting andthusofferacompletesuite,and,mostimportantly, workwithHMCtobluntthenegativeeffectonHHM

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EnsuringJVSuccess
Keepcommunicationopen andconstant Identifyproblemsearly onandlookforsolutions
Celebratemilestoneswhen theyarereached Donotcompromisethe relationshipbygettingintoother potentiallyconflictivealliances

Makethebusinessplan adaptabletothefuture Proactivelylookfor improvements

Onfailures,donotblame,buttry tosolvetogether

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JVsandComplexLearning
Goalofatleast50%ofjoint venturesisknowledgeacquisition

Classroomsetting inappropriate

Complexknowledge, embeddedwithin technological/organizational systems

Mayrequiresuccessive adaptationstochanging circumstances

Learningbydoing,teachingby doingtotransfercomplex knowledge

Jobincumbentsmaybe abletoteachtaskskillsonly inoperationalsetting

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JVsandRestructuring
Jointventurescanbeusedastransitionalmechanisminabroad restructuringprocess

Buyercanusejointventureexperiencetobetterdetermine valueofseller'sbrands,distributionsystems,andpersonnel

Riskofmakingmistakesisreducedthroughdirectinvolvement withbusiness

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AdvantagesofJvs

Customersaremovedtobuyer overaperiodoftimeinwhich bothsellerandbuyercontinueto beinvolved

Buyerbuildsexperiencewithnew lineofbusiness

Buyerreceivesmanagerialand technicaladviceandassistance fromsellerduringtransition period

Experienceandknowledge developedduringlifeofjoint ventureenablebuyertoobtain betterunderstandingofthevalue ofacquisition

Sellerisabletorealizehigher valuefromsalethanitcouldhave underimmediate,outrightsale whenbuyermustnecessarily discountpurchasepricebecause oflackofknowledgeaboutassets beingpurchased

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InternationalJVs
Maybelegal requirementoflocal jointventurerinsome foreigncountries

Widelyused

Reducerisksof expandingintoforeign environments

Localpartner's contributionlikelytobe intheformof specializedknowledge aboutlocalconditions

Subjecttoclashesof differentcultures

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FailureofJVs
Inflexibilityproblemssimilartootherlong termcontracts
Inadequatepreplanning

Implementationrequiressubstantial commitmentsofmanagerialresources

Technologydidnotdevelopasexpected

Disagreementbetweenpartiesonapproachesto jointventureobjectives

Jointventuresdonotlastaslongas planned

Refusaltoshareknowledgewithcounterpartsin venture firmswantstolearnasmuchas possiblebutnottoconveytoomuch

About70%aredisbandedbefore scheduledmaturity

Inabilityofparentcompaniestosharecontrolor compromiseondifficultissues

Onaveragetheydonotlastaslongasone halfthetermofyearsstatedinagreement

Publicpolicyconcerns conflictwithfirms'longterm strategies

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EmpiricalFindings
Industryjointventureparticipationincreaseswith
Averagefirmsize(onlypervasiveinfluenceacrossall industries) Averagecapitalexpenditures Averageprofitability

LongtermR&Dsubstitutioneffectstrongerthan shorttermeffect

Significantnegativeimpactonlargefirms' ratesofreturninchemicalsand engineeringinshortrun,althoughlongrun effectonrateofreturnnotsignificant

Jointventureparticipationriseswith averageR&Dintensity

StrongpositiveeffectsonR&Dintensity jointventuresandR&Darecomplements atindustrylevel

JointventuressubstituteforR&Dinchemicalsand engineeringindustries,butnotinresourcebased industries

Jointventureshavesignificantnegativeeffecton industryaverageratesofreturn

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EmpiricalFindings
Gainsfromtakeoverscouldbefromsynergyorimproved management;sincejointventuresinvolvenomanagement change,gainsmustbefromsynergy

Abnormalreturnstobusinessalliancepartners averageabout2%duringthe60daysprecedingthe alliancesannouncement

Whilethenumberof alliancesisgrowingrapidly, abouttwothirdsfailto meetparticipant expectations

Partnersharepricesoftenincreasepriorto announcementforalliancesinvolvingfirmswithin thesameindustryaswellasindifferentindustries increaseisgreatestforfirmstothesameindustry involvingtechnicalknowledgetransfer

Alliancesoftenaccountfor615%ofthemarketvalueoflarge firms

Financialreturnson investmenttendtobe higherforthosefirmswith significantexperiencein formingalliances

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TypesofInternationalJVs
Traditionalequity jointventure Trinational Intrafirm Crossnational
Twoparentsfromtwodifferentcountries

Twoparentsfromtwodifferentcountries, setupaventureinathirdcountry

TwoforeignsubsidiariesofthesameMNE

Twoparentsofsamenationality,venture locatedinadifferentcountry
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