When investing in Joint Ventures in Asia, it is of vital importance to actively manage risk. As has been so clearly demonstrated by the recent experience of Fonterra in China, a lack of control can lead to devastating results. The NZ based co-operative owns 43% of SanLu, a Chinese Dairy company accused of causing the death of 4 babies and the of illness of over 54 000 others. The babies consumed milk powder contaminated by melamine, an industrial chemical used to hide the watering down of milk. The SanLu Board and Fonterra were made aware of the contamination of the formula on August 2, however did not announce a trade recall until September 9. Fonterra had three directors on the Board of SanLu, only one of whom spoke Mandarin. The company has been widely criticised for its lack of understanding of the Chinese business context, and the dependence of the local Chinese distribution network to expedite a recall.
The control of activities by joint ventures is always challenging, and particularly in Asian cultures with different approaches to governance and transparency. Successful investors are actively involved, for example: MacDonalds has created its own closed supply chain in China to guarantee quality of beef, fries, bread and pickles; and Unilever ensured it has full control of all domestic Chinese operations by dumping joint ventures years ago.
Key Tips to manage the risk of Asian Joint-Ventures:
- Invest in thorough due diligence prior to committing
- Don’t assume the same profit motivations will drive business activities
- Closely monitor activities of the parent company and the supply chain
- Ensure multiple sources of information flow, don’t rely solely on documented formal sources of information from the local partner
- Actively engage with Joint Venture partners and management at multiple levels of the organisation to enable deep and functional relationships
- Don’t assume it’s possible, or advisable to take a ‘passive’ stake
- Ensure the Board includes members who understand the Asian business context