Joint Ventures – Gaining Benefits and Avoiding the Unexpected

If you want to have your own operation in another country, but lack the resources to do it all on your own – or, for country legal reasons, you’re not able to open a 100% subsidiary – a Joint Venture company can be the answer. Done right, it can get you launched very quickly and bring huge benefits. You just have to avoid the unexpected pitfalls.

In this article, our host Oliver Dowson writes from his own experience.

Many SMEs have lots of paperwork or admin or customer service activities that have come to account for a high proportion of their staff costs. There’s an obvious advantage to doing that abroad, is that it can be much cheaper than with labour in your own country.

I’ve set up JVs in several countries, including India, China and Brazil.  By moving work offshore, the cost savings saved my business, and exploiting the international presence not only gained new business but, in the end, a much higher company valuation.

Of course, one could just start up a new company of one’s own – and bigger companies often do, terming them “Shared Service Centres”. For an SME, though, that’s going to be a lot of investment in time and money. Especially where the reasoning is to reduce operational costs – implying that company finances aren’t as strong as they need to be – that probably makes that a non-starter.

Outsourcing – the easy option

So, how about outsourcing? Costs are lower, start-up time is quick, there’s no need to manage anything, and one just pays a monthly bill.

However, for most companies – particularly smaller ones – the disadvantages outweigh the benefits. Critically, there’s no ownership and limits to Quality Assurance – no control over day to day operations or choice of staff. In the worst case scenario, issues like badly treated staff or even the use of child labour could be discovered too late and backfire on you.

But even when everything goes well, outsourcing is actually relatively expensive. Outsourcing companies have very high mark-ups, and rely on their customers not knowing or caring about the true costs of their business.

It’s always better to open your own operation

It’s definitely much better to open your own operation. The problem is that getting started can be a hassle, and you may not be willing to dedicate the time you would need to managing a foreign operation in a far-flung land. In any case, in some of the most cost-effective countries you may not be allowed to have 100% ownership of a company there.

The solution, if you can find a good and enthusiastic partner, is to start a JV. You achieve most of the cost savings that you’d get with a wholly owned Shared Services Centre, without most of the hassle.

The local partner you need will be an established business person with the experience and contacts to get started quickly and economically. Be careful to take the lessons discussed in our previous article and podcast “Finding a Business Partner abroad” to heart!

Advantages of a Joint Venture

Apart from the cost savings, done well, a JV also brings many of the advantages you’d get from opening a wholly owned subsidiary.

The greatest is business credibility – customers are always impressed by international expansion, and since your name will be over the door, they don’t need to know if it’s a JV or wholly owned. It significantly increases your company valuation, and, once it’s established, you can use it as a base for other activities, such as selling your products and services or doing more skilled activities. If your JV partner already has an established and compatible business, you may be able to trade off their customers and contacts.

You need the right Joint Venture partner

Of course, JVs are not without their risks and difficulties. Even before you start, you need to look at the company from the point of view of your JV partner.

They’ll just be in it to make money – which, of course, is probably the same reason that you’re in business.

But if the JV is not directly selling something – it’s just a Services Centre, so your home business is its only customer – then their only source of increasing their own wealth is through  increasing the amount of work (and therefore money) that you bring to the JV, or through subterfuge.

Increasing the work is fine. Given the carrot of “make this operation work and we’ll transfer more  need to work here”, a good JV partner will definitely put in huge effort and become your new best friend.

The risk of subterfuge in a Joint Venture

But subterfuge? What does that mean? Essentially, it means disguising what we might call “kickbacks” into business costs – the costs that you will pay from your home company.

Whatever else you don’t do, you do really need to “get into the weeds” with the accounts of the JV.

That means examining in detail all the lines that you’d probably only ever review in aggregate in your home business, or that you don’t normally consider as “controllable costs” that are worth spending time on.

You’d may not be surprised that service providers like lawyers and accountants, introduced by your partners, are giving them kickbacks. In getting the JV set up in the first place, you’ll probably have been happy to find that those local professionals charge a whole lot less than the international firms that you may have chosen had it been left up to you. But that doesn’t mean their prices – or their services – are the best.

Get involved, stay involved

You need to reduce the risks here by getting involved with their selection right at the start, and, if they’re going to provide ongoing services and represent a significant cost, have a meeting with them every time you go out to the country. You can read a lot into body language even if you don’t speak the language.

However, beware of other tricks that you may never have countenanced and which can add up to much more on an ongoing basis.

The worst was a JV partner who made staff pay him a percentage of their salary for some mythical HR services he said he was providing them with. Another put pension contributions and health insurance into the accounts – and so into the costs paid by the Western partner – but put the money into his pocket instead.

In one country where the JV had a legal obligation to provide lunches for staff, it took a long time to find out that the caterers were also feeding the partner’s extended family for all their meals – and, of course, charging the home country partner for them.

Protect yourself with a Joint Venture contract

So you need to ensure that the initial JV contract with your partner protects you if you find out that bad things are happening – which might not be until several years down the line. Most importantly, you need to have the contractual ability to gain total control of the JV – or at least majority control – in the event of discovering malpractice – and without having to pay your discredited partner a fortune to do so.

Assuming all goes well, though, that initial JV contract should also include the ability to buy out the partner’s share for a reasonable calculation of value at some time in the future.

Even more importantly, you need ways of keeping on top of the business and a way of discovering problems.

I found the best way – and the most enjoyable and motivational – is to engage with the staff on every single visit to the JV.

I’ve met plenty of business people from the UK and US who go on trips to see their JV in India or Vietnam or wherever and spend their entire time in meeting rooms. As long as all on the surface looks well, they assume everything is fine and keep their visits as short as possible.

Make time for everyone

That’s foolish. Make sure you have the time not only to walk round and say hello every day, but to sit down individually with each member of staff, on your own, without the JV partner being present. Remember that when you’re not there, the JV partner is their boss.

All you need is a social chat. The first time or two, most staff will be reserved – shy or suspicious – but once they get used to you, they’ll open up, and you will find out things you’d never otherwise know. Better still, once you’ve gone, if they trust you they will email you if things go wrong.

Every business owner needs discreet whistleblowers.

I’ve discovered lots of things that way and been able to manage many risks as a result. I’ve been told of bosses who are sweetness and light when you’re there, but aggressive and bullying when you’re not.  Bosses who are mysogenistic and harass staff, sexually or otherwise. Ones who run their other businesses instead of managing the JV – or, worse, use your staff (in time you are paying for) for their other business.

One learns good things too. You discover hidden qualities in staff whose skills are underused or simply ignored, who could be doing far more useful things for you.

You’ll need to filter what you hear, of course, but you’ll be told a lot. You may not make friends, but you’ll gain a lot of respect, the JV staff will be happier and work better, and you’ll be able to nip problems in the bud, or at least manage them more intelligently.

Of course, there’s a lot more to Joint Ventures. If you wonder if it might work for you and would like to discuss with Oliver, get in touch using our contact page – he’d be happy to talk with you and offers free initial consultations to growinternational.org subscribers.

Listen to the podcast version

In this GrowInternational podcast our host, Oliver Dowson, talks from his experience about the benefits and perils of starting Joint Ventures abroad. Whilst Oliver’s specific experience relates to creating operations to carry out administrative services, the lessons he learnt are equally relevant to those looking at JVs as a route to selling or manufacturing goods in a new overseas market.

Click here to listen to the podcast