International: Deciding When a Joint Venture Makes Sense
John Shoffner, president of Dura-Line, a $40-million manufacturer of plastic-tubing products based in Middlesboro, Ky., has pursued an intensive international growth strategy for the past five years, initially in Western Europe and, most recently, in Eastern Europe and the Middle East. "Thirty percent of our sales now come from outside the United States. I would like to see that grow to 50%," says Shoffner.
Since Dura-Line's products are used in telecommunications construction, Shoffner sees opportunities "in virtually every underdeveloped country. We concluded we would have at least six major expansion opportunities every year -- if we could only figure out the right way to take advantage of them."
The key issue has been deciding whether to expand into each new foreign market through a joint venture or by setting up a wholly owned subsidiary. Here's how Shoffner analyzed his options:
1. Analyze your own company's capabilities. "With only 250 employees and a fairly lean professional staff, we can't afford to deploy too many key people overseas without hurting our U.S. growth." In 1989, when the only expansion being contemplated was into the United Kingdom, staffing a subsidiary proved manageable; last year with expansions planned in the Czech Republic and Israel, those staff demands seemed too high.
2. Gauge how foreign the foreign market is. "The United Kingdom was a relatively simple market to understand, which made us think we could run our own operation. But the Czech Republic presented language and cultural barriers, as well as the difficulties of sorting out a market that was changing rapidly." That made a joint-venture partner more appealing.
3. Assess each expansion with market timing in mind. "Setting up your own subsidiary is very time- and management-intensive. My goal now is to get involved in as many countries as possible at a time when tax incentives are being offered and funds are being furnished by the World Bank. Doing joint ventures now has allowed us to pursue more prospects."
4. Be realistic when assessing possible partners, especially in developing countries. "We define qualified local partners as companies that have had prior exposure to our type of product and can bring to the partnership assets like a building or some production equipment. We often don't worry about their previous cash flow because their past experience in, say, a communist economy might have no relevance to what we can expect when working together."
5. Put in whatever time is necessary to make the right deal happen. Shoffner says it takes "six months just to find the right partner and come to a basic letter-of-intent understanding. Then it might take another 12 months to set up the joint venture, build or revamp production facilities, agree on a marketing strategy, and finally bring your product to market."* * *