CHAPTER THIRTY-EIGHT

The Trend Toward Alliances for Progress

WHILE MERGERS AND TAKEOVERS, imports and exports grab headlines, business alliances rarely do. Nor do they generally show up in statistics. Yet for small and medium-sized businesses they are increasingly becoming the way to go international, and for big business, they are the way to become multi-technological.

Alliances of all kinds are becoming increasingly common, especially in international business: joint ventures; minority holdings (particularly cross-holdings, in which each partner owns the same percentage of the other); research and marketing compacts; cross-licensing and exchange-of-knowledge agreements; syndicates, and so on. The trend is likely to accelerate. Marketing, technology and people needs all push it.

The Only Way

In Japan in the ’60s and ’70s a foreign business could gain access to the domestic market only with a joint venture with a local company. Increasingly, such joint ventures are needed in Europe and the U.S. as well.

A few years ago AT&T entered an alliance with the Italian telephone monopoly to reach a European market dominated by government monopolies. Even more often an alliance is the only way to obtain new, distinct, and foreign technology. Large computer makers buy into small software houses; large electronics manufacturers buy into small designers of specialty chips; large pharmaceutical companies buy into genetics start-ups; large commercial banks buy into bond traders or underwriters.

More and more, such alliances are also the way to get access to people with the know-how. The many research pacts between American universities and large European, Japanese, (and American) businesses are good examples.

And then there are the international alliances within industries. Two years ago, two medium-sized manufacturers of specialty machinery—one Japanese, one American—sealed their agreement to exchange research results and to sell and service each other’s products in their respective home markets by swapping 16 percent of each other’s stock. All three big U.S. auto makers have substantial minority holdings in independent Japanese and Korean car makers and sell on the U.S. market, under their own name plates, cars made by these Asian “friends.”

These are all dangerous liaisons. While their failure rate in the early years is no higher than that of new ventures or acquisitions, they tend to get into serious—sometimes fatal—trouble when they succeed.

Often when an alliance does well, it becomes apparent that the goals and objectives of the partners are not compatible. Each partner may want the “child” to behave differently now that it is “growing up.” Each partner may have a different idea of what kind of people should run the successful enterprise, where they should come from and to whom they owe allegiances. What makes it worse is that there usually is no mechanism to resolve these disagreements. By that time it is usually too late to restore the joint enterprise to health.

But the problems can be anticipated and largely prevented:

Before the alliance is completed, all parties must think through their objectives and the objectives of the “child.” Do they want the joint enterprise eventually to grow into a separate, autonomous venture? Do they agree from the start that it will be allowed, perhaps even encouraged, to compete with one or all parents? If so, in what products, services, markets?

Failure to think this through was the main reason, for instance, that one highly successful investment company, formed to find and develop promising industries in Southeast Asia, ultimately was liquidated by its parents. It had grown to the point where it had to do some commercial banking for its industrial clients. But while the three of its four parents that were European banks were not active in Asia, they still felt that their child going into commercial banking made it an ungrateful brat—and they killed it off in short order.

A similar failure to anticipate that success would—and should—make a joint venture a potential competitor explains the failure of a highly promising Spanish partnership between a German and an American chemical company. When the venture became competitive in a product line that, while minor in Northern Europe, was likely to be quite big in Spain and Portugal, the European parent withdrew its support and slowly throttled the child to death. (The objectives must be revised every three to five years for each parent and for the joint enterprise, and more often if the joint enterprise does really well.)

Equally important is advance agreement on how the joint enterprise should be run. Should profits, for instance, be plowed back? Or should they be remitted to the parents as fast as possible? Should the joint enterprise develop its own research? Or should it contract for its research exclusively with one or both parents? In whose name will research results be patented—in that of the university that furnishes research scientists and lab, or that of the company that pays the bill?

Does the American company that markets the specialty products of its Japanese minority partner in the U.S. have the right to specify product designs and prices that fit the U.S. market? Or does it act solely as distributor for whatever the Japanese produce? This was the issue over which the partnership between the specialty-machinery makers broke up only a few months ago—after the Americans had gained a 26 percent share of the U.S. market for their Japanese partner’s products.

Next, there has to be careful thinking about who will manage the alliance. Regardless of what specific form it takes, the joint enterprise has to be managed separately. And the people in charge have to have the incentives to make it successful.

Nummi, the joint venture of Toyota and GM, makes the same car for each parent in the same plant (in Fremont, California) with the same workers. The car is a success under the Toyota name in the U.S. but a near-failure as a Chevrolet. For the Toyota people, this car is their main U.S. product; their careers at Toyota depend on its success. But no one at Chevrolet is going to make a great career selling the Nummi car. For a good many people at Chevrolet the car, despite its Chevrolet name plate, is probably a competitor to “our cars.” For the same reason, the other cars made for American manufacturers by their Asian partners are also doing poorly in the U.S. market. They are orphans.

The alliance, whatever its legal form, has to be managed by one of the partners. It cannot be managed by committee. And it has to be clear from the beginning that the people who manage the joint enterprise are measured solely by its performance. Their individual responsibility has to be to the joint enterprise, not to one of the parents. The one thing that must never be said about an executive working for a joint enterprise is: “John doesn’t do too well in the assignment; but he sure looks after our interests in any disagreement with our partners.”

Each partner needs to make provisions in its own structure for the relationship to the joint enterprise and the other partners. Even if the joint enterprise is quite subordinate for one of the partners—a small underwriting venture in Luxembourg, for instance, in which a major commercial bank holds a one-sixth interest—its management people must have access to someone in the parent organization who can say “yes” or “no” without having to go through channels.

The best way, especially in a large organization, is to entrust all such “dangerous liaisons” to one senior executive.

An Arbitrator

Finally, there has to be prior agreement on how to resolve disagreements. Orders from the top do not work in an alliance. The best way is to agree, in advance of any dispute, on an arbitrator whom all sides know and respect and whose verdict will be accepted as final by all of them. He should be empowered to go beyond the specific issue in dispute. He should be able to decide, for instance, that each party is entitled to buy out the other according to a prearranged formula. He should also be able to recommend that the joint enterprise be liquidated or that it become a separate business independent of its parents.

These are radical measures. But for this reason arbitration will be seen as a last resort. Such provisions make each party realize how much it has to gain by subordinating its individual interest, opinion, and pride to the perpetuation of the successful alliance.

[1989]