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Beat the Odds in Cross-Border Joint Ventures

Beat the Odds in Cross-Border Joint Ventures

By Anil Gupta & Haiyan Wang

It’s proving to be an eventful year for AirAsia, the Kuala Lumpur-based airline that has emerged as Asia’s most successful low-cost carrier in recent times.  The last 12 months have seen the collapse of AirAsia Japan, a once-promising joint venture between AirAsia and Japan’s ANA, and the birth of AirAsia India, an alliance between the company and India’s Tata Group.

AirAsia’s experience is instructive.  The history of joint ventures is filled with stories about failure.  As happened at AirAsia Japan, partners often find it difficult to reconcile their views about how they should manage a new venture.  Even if strategic visions align, cultural differences and the inability to build trust often torpedo partnerships.

Despite the low odds of success, though, the urge to set up joint ventures remains strong.  That’s because either government regulations dictate joint ventures — for example, in the auto sector in China and multi-brand retailing in India — or because two companies believe they need each other’s complementary strengths, as in the case of AirAsia Japan.  It’s therefore important for corporate leaders to be smart about how they can improve the odds of success.  Five contemporary guidelines:

  • Define a  joint venture’s charter narrowly.  Doing so provides focus, reduces complexity, and enables companies to collaborate with different partners to meet their goals.  When Honda entered India in the early 1990s, the Japanese company struck three focused alliances: One with the Hero Group for low-end motorcycles, one with Siel for cars, and a third with Siel for portable generators.
  • Choose a partner that embodies a low risk of conflict in the long run.  The chances of breaking up are high if partners’ long-term ambitions are in conflict, and each sees the joint venture as a stepping-stone to learn from the other before competing with it.  Several joint ventures in China, such as the alliance between General Motors and Shanghai Auto, are beset by this underlying tension.  AirAsia has made a smart choice by tying up with the Tata Group; that alliance is high on complementarities and low on conflicts.
  • Allocate decision rights based on the context and logic.  Who has the final say in functional areas, such as R&D, operations, and human resources, does matter.  For instance, in Japan, ANA ceded control to AirAsia on key decisions such as customer service levels.  Given the differences between the expectations of the Japanese low-cost traveler and his counterpart in the rest of Asia, it may have been smarter for ANA to have retained the final call on those decisions.
  • Consciously over-invest in building mutual understanding and trust.  All joint ventures are mixed motive games; value creation requires cooperation while value capture requires focusing on what’s best for one’s shareholders.  Since it isn’t feasible to anticipate every contingency and build them into a contract, it’s important that partners  focus their efforts on cultivating mutual understanding and trust.  An excessive or premature focus on value capture will leave them fighting over the crumbs instead of striving to make the pie bigger.
  • Agree upfront on the terms that will guide a break-up.  As happened at AirAsia Japan, all joint ventures eventually end.  Upfront clarity on how the end game will play out often has unintended positive consequences.  It will help partners devote their efforts to the motive that brought them together in the first place, viz. to maximize the synergistic benefits from their complementary strengths.

After all, the partners in a relationship usually realize intuitively when to end it.  What they don’t know is how to make a joint venture work.

Anil K. Gupta is a professor at the Smith School of Business, The University of Maryland, and a visiting professor at INSEAD. Haiyan Wang is managing partner of the China India Institute, a Washington-DC based research and consulting organization. Gupta and Wang are also the co-authors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).

 

This post first appeared in the Harvard Business Review.