Joint Venture in China Essay

IN CHINA INTRODUCTION XYZ Limited deals in the manufacture and sale of various food products as well as other home products. Owing to sound management practices the company has made a breakthrough, manufacturing and selling a wide range of high quality products. Because it wants to capture a wide market, it has decided to enter into a joint venture in China. This has associated opportunities and threats. ANALYTICAL EXAMINATION OF THE OPPORTUNITIES AVAILABLE WITH THE VENTURE 1) SYNERGESTIC EFFECTS Obviously the joint venture option would result in synergy. The end result would be enhanced output since the two companies shall have pooled their resources together. These are machines and man power (expertise). The resultant production would surpass the individual production capacities of the two joint ventures. 2) WIDENED INTERNATIONAL MARKET The joint venture would enable XYZ to acquire additional markets for its products across the Asian countries. While operating alone, XYZ could only sell its products within Europe. But with the joint venture in China, and with a well co-ordinated marketing for their products, they are likely to capture a wider international market. 3) HIGH QUALITY PRODUCTS Chinese enterprises are well known for their high quality products. This is owed to the possession of and continual innovation of new technologies and new ways of doing things. They also have enviable workforces who are renowned of their expertise in the manufacturing sector. The Chinese enterprises are companies which practice total quality management as their key strategies. This is a management technique that dwells in improving the needs of the customers. It also aims at ensuring that every member of the organization fully participates in the affairs of the organization. The joint venture enables all and sundry to recognize the fact that quality is inevitable as an ingredient to success. Total Quality Management leads to the generation of policies that are of high quality and also the effective dissemination of such policies to every member of the organization. 4) BUSINESS LOCATION The location of the joint venturer i. e. at the central of the globe would also be a very good opportunity for XYZ Company Limited. This would make the two companies operate from a central point with the advantage being that one of enhancing the marketability of their products. 5) PUBLIC EXPECTATION The public associates a joint venture as a step geared towards satisfying their needs more effectively. This is due to pooled resources including manpower. 6) DIVERSIFICATION The other opportunity inherent in the small enterprise’s joint venture in China is that of diversification. They would be able to produce a wide range of products owing to vast resources. 7) FINANCIAL BACKGROUND OF THE CHINA VENTURER The small enterprise (European) has the opportunity with entering into a joint venture with a financially sound Chinese enterprise. The effect of the financial soundness of the Chinese enterprise on the small European enterprise is that the joint venture as a whole will not suffer from financial constraints. With a strong financial background, they will be able to even open up new branches and initiate new viable projects. In the year ended 31st December 2006, the Chinese company made a profit $ 700 million after taxes. The venture is also likely to benefit the shareholders as the dividend per share is likely to increase. THREATS ASSOCIATED WITH THE VENTURE. 1) LOCAL LANGUAGE KNOWLEDGE A problem will arise when formulating policies, implementing the policies and evaluation as a result of differential in languages. Whereas the staff and management of the small European Enterprise recognize the English language as the official spoken language, the Chinese company does not. The staff and management of the venture in China can only effectively communicate in Chinese. This would greatly hinder effective communication that is essential in decision – making and policy formulation. 2) DILUTION OF CONTROL. Shareholders of XYZ Limited would be faced with this threat of dilution of their control. After the joint venture exercise they may not continue enjoying some if not all of their powers and rights. This is as a result of the joining of the other shareholders of the Chinese venturer in the entity. 3) COMBATING COMPETITORS Competitors of both the European small enterprise and of the Chinese enterprise would definitely react to the intended joint venture of the two companies. And they would do everything to ensure that they have countered the stiff competition that is likely to come out of the venture. The rival companies would improve the quality of their products as well as improving on creativity and innovation. This will pose a great challenge / threat on the European country because they will have to work on improving on their products in addition to being more innovative to avert such competition from rival companies. GOVERNMENT INTERVENTION /LEGISLATIONS Government intervention can be a real threat to the joint venture. These can be in the form of ultimatums from either the European Union or from China itself. The legislations can also be in the form of changes in tax laws which may not favour the intended joint venture. 4) INADEQUATE EVALUATION OF THE CHINESE COMPANY The small European country has not evaluated the Chinese company to see if it is worth entering into a joint venture with it. Evaluation can be in the form of trend and industrial analysis, taking note on profitability trends, changes in turnover over the years, dividend payments, the company’s earning per share. They have not also evaluated the Chinese company on its level of activities using such activity ratios as stock turnover ratio to determine how the company changes finished goods to sales. Other relevant ratios would be creditor’s turnover, fixed assets turnover. The other very important evaluation that they have not carried out on the Chinese company is to establish how geared the company is. If the company is highly geared i. e. it has more of borrowed capital than owner’s capital in it capital structure it runs the risk of being insolvent any time which would ultimately affect the European Enterprise. The European enterprise has also not established the real reputation of the Chinese company in the capital market. They need to do this through an evaluation of its price earnings ration vis–a-vis that of other companies in the capital market who intend to invest in the company. ACCOUNTING PROBLEMS A serious problem is going to be encountered in the preparation of the final accounts as a result of the joint venture. The accounting staff of the European enterprise must change /adjust to the new approach of preparing their accounts. The accounts must be prepared in accordance with the international Accounting standards on the treatment of a joint venture. In a joint venture, every transaction is recorded on a 50- 50 basis. Even the minority interest on each of the company’s operation will be based n the stake of every venturer in the joint venture i. e. 50%. b) The International Environment of Business enables one to know the culture in the environment that the business is operating in. the idea of IEB here is to bring to the awareness of the companies, the cultural environment and how this will affect their business. Cultural factors like religion will greatly influence demand of products. As some products may be liked by other religious groups, they may be an abomination across other religious groupings. A wider international market can be an opportunity to XYZ Ltd but owing to IEM models which stipulate in changes in the political and social – economical changes of the Business Environment, the widened international market may not be a reality. Economically, the joint venture may be operating in a relatively high inflation economies which might stagnate profitability. There is also likely to be a change in the tax laws of the foreign country and XYZ Ltd will have to experience such changes. Other economic changes that the two companies would be influenced by IEB are economic growth and employment. Economic growth has an influence on the demand for products whereas employment influences the supply of labour. The International Environment of Business also focuses on the Technological environment. Technology is a question of inventions and new techniques in processes, tools and machines. According to the IEB models, technology is an important area that need not be overlooked as it enhances efficiency through a reduction of the production costs, selling and marketing costs as well as administration costs. The joint venture must also emphasize on technology if they have to conquer the opportunity of high quality production that will satisfy customer demands. Technology would also provide better services to their customers. The International Environment of Business again focuses on the need of businesses to practice business ethics within the environments they are operating. Ethics commands that the business entities employ fair advertising and marketing practices, adherence to the laws are regulations governing a certain foreign nation and the observance and maintenance of high standards of conduct and integrity. Much as the joint venture will be enjoying the centrality of their business location and a sound marketing network, they have to put into contemplation the essence of practicing ethics in their place of operation. In conclusion therefore, the management of both companies would have to review their opportunities as well as threats and establish how the International Environment of Business models /ideas would affect their business operations. References Brandenburger, A. M. and Nalebuff, B. J. (1995): The Right Game: – Use Game Theory to Shape Strategy†, Harvard Business Review, July-August, pp.57-71 Coyne, K. P. and Subramaniam, S. (1996): Bringing discipline to strategy, the McKinsey Quarterly, No. 4 Gordon, I. (1989): Beat the Competition: – How to Use Competitive Intelligence to Develop Winning Business Strategies: Oxford, Basil Blackwell Publishers Hunger, J. David & Wheelen, Thomas L. (2003): Essentials of Strategic Management. New Jersey, Pearson Education Inc Kotter, J. P. (1996): Leading Change: – London: Harvard Business School Press McGahan, A. (2004): How Industries Evolve: – Principles for Achieving and Sustaining. Superior Performance, Boston, Harvard Business School Press Menon, A. and Menon, A. (1997): Enviropreneurial marketing strategy: – the emergence of corporate environmentalism as marketing strategy: Journal of Marketing. Vol. 61, pg. 51 – 67 Porter, M. (1980): Competitive Strategy: New York, The Free Press. Porter, M. (1998): Competitive Advantage (with a new introduction): New York, The Free Press. Peteraf, A. (1993): The Cornerstones of Competitive Advantage:-A Resource-Based View: in Strategic Management Journal, Vol. 14, pp. 179-191.