Joint ventures with foreign markets can bring new frontiers in technology and management.
It's possible to crack a foreign market on your own, but you may live to regret it
OK, so you're thinking about manufacturing and selling your company's wares abroad, but you're more than a little daunted by the risks. Why not join forces with a foreign partner? That way, you can split the start-up costs and divide up any losses. Not to mention gaining quicker international credibility, smoother distribution, and a better flow of information.
Then again, maybe you'd rather not share your potential profits -- or the secrets of your company's success -- with anyone. That's fine. But don't be surprised if, after trying to crack a foreign market on your own, you develop a new enthusiasm for joint ventures.
Ask Gordon Lankton. "For us, it was a negative experience that led to some positive results," says the president and chief executive officer of Nypro Inc., a plastic injection-molding and industrial components manufacturer in Clinton, Mass., recalling his first overseas venture a decade ago.
Today, Nypro has a presence in six countries, as well as four new factories in the United States -- all resulting from joint ventures with foreign partners. Such ventures account for around one-quarter of the company's revenues, which should hit roughly $85 million this year. More important, the partnerships have changed the company in completely unforeseen ways. "Without these foreign ventures, we'd be very limited in terms of our knowledge, our technology, our people, and our markets," says Nicholas Aznoian, Nypro's vice-president of finance. "We'd be a smaller company in every sense of the word.'
Back in 1979, when Nypro was a $25-million business, it was getting smaller in the worst sense of the word. Three of Lankton's biggest U.S. customers had urged him to set up a factory in Lyon, France, to supply their European operations with a constant and reliable flow of plastic components for such items as cameras and disposable lighters. But the French factory was losing about $700,000 a year. In response, Nypro tried to trim its payroll, and instead got caught up in a bureaucratic web from which it couldn't seem to free itself. A government labor board, whose machinations baffled everyone at Nypro, would allow the company to cut only a third of the workers it needed to let go. And, should Nypro decide to pull out altogether, union leaders vowed to block the doors.
Lankton wanted out. We can abandon the equipment, he finally told his managers, but we can't leave our customers' molds behind. So he dispatched a "hit squad," as he calls it, to sneak the 2,000-pound steel blocks out under cover of darkness. Right then, with the molds sitting in a warehouse, and his men holed up in a motel awaiting further instructions, Lankton became a devotee of joint ventures. From that point on, he decided, "I didn't want to go into new territory without a partner who is familiar with the local rules.'
He managed to locate a plastics company in Ireland that was interested in setting up a joint factory within its walls. So, lugging its molds from France to Ireland, Nypro soon launched Nypro Solus Ltd. Two years later, the parent company went bankrupt, but thanks to its general manager, Lankton learned how useful a foreign partner's knowledge can be. The manager suggested that Nypro could get a good deal on the company's 35 injection-molding machines and some leased space. Fine, Lankton said. A year later, the general manager reported that the banks, starved for cash, might be willing to part with all 100,000 square feet of the company for next to nothing. Lankton gave him the go-ahead.
Carefully negotiating with the banks and the government, the Irishman orchestrated the entire deal. Lankton concludes, "I saw the advantage of having a partner who knew all the tricks.'
Just finding a knowledgeable partner for a joint venture isn't enough, though. You have to make sure that partner's long-term goals are in sync with your own. That was another lesson Lankton learned the hard way. Around the same time as the Irish deal, a customer suggested that Nypro start a factory to supply components for the customer's Japanese subsidiary. With the help of one of his managers, Lankton lined up a contract for another $2 million in business in Asia, then set about finding a partner with whom to construct a manufacturing facility in Hong Kong. He finally settled on Chen Hsong Machinery Co., a maker of molding machines.
In retrospect, Lankton admits that when he signed the deal he hadn't taken the time to understand his new partner very well. "But," he says, "I figured I hadn't known the Irish partner all that well, either.'
This time, his ignorance proved damaging. He knew that the company's machines weren't technologically up to snuff; they were fine for serving, say, the low-quality Hong Kong market, but not for Japanese, U.S., and European customers. What Lankton didn't realize -- ``We've been arguing it for several years now' -- is that Chen Hsong's management did not intend to bring in computer-controlled molding machines. Eight years after they first joined forces, Chen Hsong has made no moves to build a more sophisticated customer base.
"We're not able to attract good business," Lankton says, "and we're losing the business we have. Unless they yield, one of us is going to have to buy out the other's share of the venture.'
Until then, Lankton had viewed joint ventures as a way of entering and keeping abreast of new markets. But when foreign companies started coming to Nypro, he learned that a different kind of partnership could push the company to new frontiers in technology and management.
Lankton was thrilled when he got the call from Netstal Machinery Ltd. We want to find a partner to help us enter the U.S. market, Netstal told him, so we're sending a team to visit 15 molding companies. Can they come see you? Lankton was flattered that the Swiss company, known for making high-end molding machines, had even heard of Nypro.
He was even more excited after his visitors outlined the plan: Netstal would ship eight machines and own 40% of the new venture, which would be managed by the U.S. entity. "By concentrating on our growth, we had lost some ground on technology," says Lankton. "Now, we would get access to their technology." Lankton soon got the word that Netstal had chosen Nypro.
For the first two years, Swisstech Inc., which was set up in a garage near Nypro's main plant, lost money -- it took operators some time to adjust to the computer-controlled technology, but as workers grew to like the machines, so did Lankton. He replaced 40 of Nypro's 66 molding machines with equipment made by Netstal. "In about four years, we went from an ordinary level of technology to number one," he says.
Unlike the experience with Chen Hsong, Nypro and Netstal share a commitment to using the latest technology. "We've hit it off," says Lankton -- so much so that Nypro and Netstal have taken on two other ventures.
In 1987, they launched a factory in North Carolina. Then Netstal asked if Nypro would be interested in setting up a joint venture in Singapore. Yes indeed, answered Lankton. He turned the Singapore factory, which opened last December, into a three-way deal by bringing in Cosamold, a premier Swiss toolmaker. "It's just another way for us to keep up with technology," he says. "We know what's happening in the world as it happens."
Keeping abreast of technology has been important, but Lankton's joint ventures have taught him some cost-saving, Japanese-style management skills as well. In 1981, an acquaintance who was a principal at Mitsui & Co., the large trading company, told Lankton about a Japanese concern called Enplas that needed a U.S. source for videocassette parts. Nypro agreed to set up a factory with Mitsui in Atlanta to serve Enplas.
Soon, Nypro and Enplas were arguing bitterly over price and quality control. Enplas was willing to pay only 80% of what Nypro wanted for the components. After some "yelling and screaming," says Lankton, Enplas sent its representatives to examine the factory's efficiency. You have twice as many workers as you need, they told Lankton, and your processes should be more automated. "We didn't want the deal to blow up, so we decided to listen," says Lankton. "The crux of the matter is that they were right. By following their prescriptions, we could make the part for the price they wanted.'
Enplas also taught Nypro some hard lessons in quality control. Why did you reject this shipment? Lankton would ask. The label on the box, they would answer, was crooked. "We eventually learned," says Lankton. Now, Nypro's Atlanta plant is its most productive, with sales per employee averaging $2,000. By comparison, most of Nypro's other nine plants hover around $1,250.
Becoming a successful Japanese subcontractor has led to Nypro San Diego Inc., another partnership with Mitsui, and Nypro Iowa Inc., another three-way venture that includes a Japanese pen company.
Joint ventures have also provided opportunities for Nypro's employees. Each of the ventures needs a manager, as well as a board of directors. "We can put different people on the board, and get them exposed to international business," says finance vice-president Aznoian. "It gives more middle managers an opportunity to participate in upper-management decisions." Recently, Lankton even came up with a way to use joint ventures as a lure to keep employees.
Late in 1987, three of Nypro's mold makers told Lankton that they were thinking of leaving to set up their own business. Hmm, said Lankton, how about you stay here and we launch a 50/50 joint venture? They shook on it. The result, NyproMold Inc., is in the same building as Lankton's office. Has Lankton carried his love of joint ventures to an absurd extreme? "All I can say is this," he replies. "I didn't lose those guys, and NyproMold has been profitable every month since it opened last January.'* * *
SIZING UP A JOINT VENTURE
Five questions you should ask yourself
You'll improve your odds for a successful joint venture if you consider the key issues in advance. For example:
* Are you compatible? It's unwise to form a joint venture overnight. Before signing anything, spend a good deal of time just sitting and talking with your prospective venture partner. Where do its managers see themselves in five years? How does the agreement fit into their long-term strategy? Also, examine the company's past performance by using a reference-checking service or talking to other people in the industry yourself.
* Is the deal structured soundly? This doesn't mean just planning for the worst case by ensuring that one partner can buy out the other should the relationship falter. It also means lining up commitments from your customers before you break ground on a jointly financed manufacturing plant. While it's easy to get caught up in the excitement of taking on a venture, you should still always have a business plan.
* Do you have a fallback position? What will you do if those customers you've lined up pull out at the last minute? Long before the new factory is up and humming, send out a sales team to line up additional prospects.
* Is your manager up to the task? Managing a joint venture takes uncommon sensitivity and communications abilities. Don't hesitate to put your best manager on the job. If you have to hire from outside, screen carefully for these skills.
* Are you ready to open your company to scrutiny? As prospective venture partners, the Japanese are notorious for rattling off questions about your business. What do your 10-year projections look like? What are your personnel policies?
Other foreign partners may not be quite so curious, but you'll still have to open up your company more than just a crack. The best strategy is complete honesty.