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Going East

Posted 15/12/2010 by KatieJ

With a projected slowdown in the developed world in 2011, chemical producers are looking to Asia for possible markets to support their profitability, especially with the burgeoning middles classes that are creating major new markets in India and China.

While India is seen as an attractive market that should be easier to enter, particularly with the common use of English, China still presents challenges for the new entrant, particularly if the proposed entry is through a joint venture with a Chinese partner.

The management consultancy McKinsey has recently looked at the challenges and past lessons that do perhaps need to be revisited. AS McKinsey points out, the appetite for joint ventures waned in the early 2000s as foreign investment restrictions loosened, and many companies found the establishment of their own entirely new Chinese companies or the outright purchase of an existing Chinese company was more attractive.

Recently, however, McKinsey believes that Chinese companies are less willing to be acquired as a result of China’s rapid growth and joint ventures have once again become the attractive entry route. There are of course some provisos – and they should come as no surprise as they are generally relevant to the formation of any joint venture.

One of the most important aspects of any joint venture is that both partners share the same strategic or commercial ambitions; without this common purpose, different priorities in terms of investment and lack of cooperation, for example, can result. It is all about the careful selection of potential partners, but this can be difficult without expertise based on working in China and many Chinese companies now have global ambitions themselves.

The safeguarding of intellectual property (IP) is an issue that is always raised and McKinsey has some suggestions about its handling. For example, only bring older technology into China, but it will still have to be competitive in the Chinese market and there is the possibility of making the wrong signals to the potential partner about trust. The alternative is not to include critical IP in the venture at all, but this can often only be possible when local innovation lags behind global standards, which is becoming increasingly unlikely, or the critical IP can be separated out of the value chain.

Of course, another possible alternative is to sell the critical IP to the joint venture, but there is the risk that the partner company will only be willing to pay a discounted price.

Management of the joint venture is also critical, including the recruitment and management of local talent; in the past, the dispatch of executives from the developed partner was the only alternative considered, but this is now unacceptable, as credible, high performing leaders are needed to manage strong local teams. Change is inevitable and joint ventures cannot be set in stone just the same as other activities; relationships, markets and even technology are now subject to rapid change and joint ventures must be structured to embrace change. The list is not exhaustive, but the management of companies that are considering joint ventures of any kind would do well to think carefully about their approach.

Neil Eisberg - Editor

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