Joint Venture in the Construction Industry in Spain

An estimated 20,000 joint ventures have been formed worlwide over the past two years. Such strategic alliances can provide business owners with long-term security, new revenue channels, and , often, the anchor needed to maintain stability in otherwise turbulent waters. A successful joint venture can open the door to a wold of future partnership opportunities (Robert L.Wallace 2004)

Factors now at play in our economy make it more feasible and more critical than ever for small business owners to leverage the power of joint venturing. These factors include:

• The emergence of the customer economy
• Advances in technology that have neutralized time and space contraints
• Change brougt on by shifting demographics
• More entrepreneur- and more oportunities- as a result of downsizing

In the midst of these world-changing trends, what is often missing from a succesffull business strategy are the critical alliances and strategic partnerships that will help leverage the strenghts and minimise weaknesses. Forging joint ventures and strategic alliances will allow business to win millions contracts as the partner with large companies to offer with, breadth, and depth demanded in the marketplace.

Done well, joint ventures provide both participating businesses with a chance to learn and benefit from each other, and to achieve results neither could achive alone. In this dissertation will be explained- how to enter into joint ventures well so a company can prosper in ways it never could by doing it alone

CONTENTS

Page

ACKNOWLEDGEMENTS i

ABSTRACT ii

CONTENTS iii

LIST OF TABLES v

LIST OF FIGURES vi

INTRODUCTION 1

1.1 Introduction 2

1.2 Objectives of Dissertation 2

Contents 3

JOINT VENTURE EXPLAINED

2.1 Joint Ventures Explained

2.2 The Rationale of Joint Venture Formation

2.3 Joint Venture Formation

2.4 Management and Implementation

LITERATURE REVIEW

3.1 Forms of Joint Venture

3.2 Motives of forming a Joint Venture

3.3 Selection of Partners

3.4 Preliminary Agreement and Negotiation

Research Methodology

4.1 Research Approach 40

4.2 Research Ethics 41

4.3 Interviews 42

4.4 Survey 46

FINDINGS AND DISCUSSION

5.1 Basic Conflicting Interests

5.2 Loss of Autonomy and Control

5.3 Findings

CONCLUSIONS AND RECOMMENDATIONS

LIST OF TABLES

LIST OF FIGURES

Chapter One

Introduction and Objectives of Dissertation

Introduction

‘Business once grew by one of two ways: grass roots up, or by acquisition. Today business grow through alliances- all kinds of dangerous alliance, joint ventures, and customer partnerign, which by the way, very few people understandâ€?

(Peter F.Drucker 2007)

Experiences of joint venture management in the construction industry traced back to the early 60´s. It appears that characteristics of this industry favor the proposition of joint ventures formation. Although statistics are not available, this is obviously true in relation to the infrastructure development of Spain at the present moment

The determination of the .

1.1 Objectives of Dissertation

This paper attempts to review the existing literatures on management of joint ventures its merits and problems, particular issues arisen and suggested management techniques to cope with such obstacles in operating a joint venture.

Interviews were conducted with two senior staffs of one of the partners of a joint venture formed by four construction firms. The joint venture is currently undertaking one of the Train Station Core Projects to be completed before July 2011. It is hoped that hand-on experiences of these senior staffs, at the level of Management Committee of the joint venture, as well as the operational level of the joint venture, would provide us valuable insight and opinion on the art of joint venture management, as a reflection and complement to the general review of the literatures.

The key objectives are:

• To critically appraise the existing literature to Corporative alliances issues and the role of International Strategy in applying these issues.
• To establish the importance Strategic alliances with competitors in the international market.
• To evaluate the purposes of strategic alliances as well as to what extent might be successful a company.
• To determine other factors that influences companies in seeking Joint Ventures.
• To assess the sources of value creation.
• To study possible pitfalls in doing a Strategic Alliance.
• To draw conclusions upon a joint venture in a case study.

1.2 Contents

In Chapter 2, the organization of interest is described in detail along with an explanation of its forms. In Chapter 3 the literature in relation to joint venture and strategic alliances in general and its application within the company is critically reviewed. Chapter 4 describes and justifies the research methods employed and includes a section on the ethical considerations of the project. In Chapter 5 the findings of the one-to-one interviews, In Chapter 6 the findings are analyzed and evaluated in relation to the published research literature. In Chapter 7 a joint venture framework for the SMART Services is presented along with a plan for its implementation. Finally, in Chapter 8 conclusions are drawn and recommendations are made for future work.

A list of references is provided and the appendices contain pertinent information, documents (including, the survey questionnaire) and collated data.

Chapter Two

Joint Venture Explained

2. Joint Venture Explained

A joint venture is the coming together of two (or more) independent business for the sole purpose of achieving a specific outcome that would not have been achievable by one of the firms alone.

(Source: Wallace 2004)

2.1 The Rationale of Joint Venture Formation

The form of joint venture provides benefits and a skeleton, based on which the management philosophy of the joint venture builds up. . (See Figure 1)

Figure 1: Joint Venture. Business Benefit

Source: Trendsetter Barometer, PWC

In respect of share of management, there are dominant parent ventures, share management ventures and independent ventures. Degree of involvement of parents in these types of joint ventures differs, and in turn these joint ventures face different types of nature and management problems. At operational level, there are approaches of integrated structure and non-integrated structure. The nature of the business and the share of responsibilities in various aspects of the business will be the determination factors of choice

Generally speaking, the choice of form of joint venture should be made in accordance to what contributions are required of the parents in order to achieve the purpose of forming the joint venture. Companies forming joint ventures basically intend to develop markets and products. Common reasons are: to suit government policies, pooling resources, risk sharing, building business relation and to reduce competition.

The first step to form a joint venture, after realizing that such tactics is desirable, is to select a partner. Consideration on selection of partners concentrates on three major themes: shared objectives, mutual trust and co-operation, and abilities of the potential partners.

Appropriate partners should be compatible in their objectives of forming the joint venture and their expertise/Knowledge on the business. Right partners also should possess similar management styles normally. Lastly it is important that potential partner’s real intention is realizes, to avoid future major disagreements.

2.2 Joint Venture Formation

When the partners have reached initial agreement to form a joint venture, often a preliminary agreement is signed. It forms a basis for the drafting of the detailed agreement, and provide framework for the partners to work together and proceed to more detailed planning works. But subsequent negotiations following for the preliminary agreement often provide good chances for the partners to understand more thoroughly the expectation of potential partners. It is not uncommon that a final agreement cannot be reached because major conflicts are revealed in the process of subsequent negotiations after preliminary agreement.

It is always intended to write agreements to cover all contingencies. But some managers consider that it is not so practically possible in view of the rapidly changing environments nowadays. Instead, emphasis should be placed on building up mutual trust and thus it is important to incorporate a sense of fairness into the joint venture agreement. Generally defined, well understood mutually, and respectful to each other´s rights in return to their contributions committed.

It is suggested that the best solutions should be an agreement covering all possible contingencies, together with the design of a flexible mechanism allowing changes to be agreed between efficiently while promoting cooperation and mutual trust.

A very important aspect in drafting the joint venture agreement is the design of reward system for the partners. Pay-off in the form of product flow between the parents and the joint venture is often the source of major management problems and conflicts. Such product flow diverts attention of the parents from the joint venture´s benefits. Again, fairness and willingness to co-operate are the keys to resolving such problems. If at all possible, market comparison is a useful guide to fix the transfer price in a fair sense.

The primary concern of a partner in forming a joint venture is probably the degree of control over the business. In respect of split of ownership, majority-minority shares are sometimes preferred, as the majority of partner can act as leader for the joint venture and thus gives direction in a less ambiguous manner for the operation of the joint venture. On the other hand, come companies prefer equal shares to ensure willingness of all partners to contribute efforts as required and they may also feel more comfortable that all partners have equal ‘statusâ€? in the joint venture.

Ownership distribution is less important than how operation control is actually apportioned. There is no rule on thumb on allocating operation control. General guidelines are that each parent should be motivated to make necessary commitments continuously in accordance to their abilities, and that each parent should be protected in its interests. To enhance long term co-operation, exploitation of other partner´s interests must not be attempted. It must be emphasized that full equality in operating control requires much more efforts from all partner, and the joint venture would have to be operated in day-to-day on-going negotiations and compromise among the partners.

2.3 Management and Implementation

Standard joint venture organization consist of two components – the management board and operation organization. The management board is the highest authority of the joint venture. The composition of the board and jurisdiction of the board determine largely the share of power among the partners. To build an effective board, board members should be delegated enough and necessary authority by their own companies in making decisions and vote in the board. They should endeavor to maintain mutual trusts among the partners, to sustain the common goal and objectives of the partners and to the exercise effective control over the joint venture. This is better to clearly separate the operation organization independently from the management board, to avoid biases or perceived biases towards one particular partner.

As mentioned earlier, staffing is a possible and often effective way of controlling the joint venture operations. But overact may generate resentment from other partners. It will be extremely difficult to build up cohesiveness of the operation organization from all the partners. The organization will possibly segregate into groups of their own companies. Theoretically, secondly is desirable only if considered necessary for the needs of the joint venture. Otherwise recruitment from outside can more easily maintain the independence of the operation organization.

The joint venture manager is an important role, as the leader for the operation organization, the bridge between the child and the parents, and sometimes as the ‘mediatorâ€? for the parents if disputes arose among them. He has to possess negotiation skills, people skills, and selling skills to bring together mutual co-operation form all parties concerned. He is often found to be involved in ambiguous relationship, with his sub-ordinates and supervisors, and wit the parent companies. In order to achieve his task of pleasing everybody and avoiding conflicts and tension between the parties concerned, he has to be highly tolerant and ambiguity.

The joint venture manager should be loyal only to the joint venture, not to any of the parents. He has to be perceived as neutral, otherwise his opinions will never be convincing to other people. Biased loyalty of the joint venture manager will arouse other parents taking harmful measure against smooth operations of the joint venture. Being neutral is an important qualification of the joint venture manager in order to gain autonomy and trust, which in turn makes the joint venture more likely to succeed.

The joint venture agreement implied an independent operation organization separated from the parents to be fully responsible for daily management of the business and that the operation organization enjoyed a high degree of autonomy. In practice, the independence and autonomy were granted to the operation organization, only if all parents, in particular the joint venture manager, will act truly neutral. Without such belief, parents were able to exercise disruptive negative measures to hinder the normal implementation of management for the joint venture operations.

The case also supported that the quality if the joint venture manager in negotiation skills and human relations, and its relationship with the parents was a paramount importance of the success of the joint venture. A strong leader might be harmful for a joint venture, but a practical and flexible manager surely is very useful.

Chapter Three

Literature Review

3.1 Forms of Joint Venture

3.3.1 Share of management

The fundamental question in management of joint ventures is the degree of involvement of partners in decision making processes on major policies as well as day-to-day operations of the joint ventures. In this respect, joint ventures are often categorized into three types:

(Stephen I. Glover and Craig M. Wasserman 2003)

Dominant parent ventures: in which management decisions are dominated by one parent, either formally by majority voting rights in all major aspects or informally by management settings to control key decisions makings without significant involvement from the other party.

Shared management ventures: in which management of joint venture operations are shared between the parents, either shared by each providing resources in certain functional areas or shared by pooling resources at most levels of the joint venture operations. Characteristics of this type of joint venture are the necessity of frequent negotiation and agreement between the partners at most all levels and aspects of the business management.

Independent ventures: in which parent´s involvements in the management of the joint venture is very little, as it is left almost entirely to an independent group of personnel employed under the joint venture. The roles of parents are not too much different from shareholders, except that they may be providing other distinct types of resources as well as capital and there are only a few shareholders.

Dominant parent ventures and independent ventures are thought to be more trouble free, as they require less interaction and thus less potential conflicts between the parents. However, there are no concrete evidence to suggest that these two types of ventures will be more likely to succeed than shared management ventures. Obviously the choice of joint ventures types is dependent on the situation and nature of the business and the parent’s ´characteristics.

Circumstances often call for shared management but no other choices, simply because joint efforts are required to achieve what is intended. Pooling of resources, and thus a mixed input of management efforts from both parents, may be the fundamental desire of forming the joint venture. In such cases, dominance of one parent certainly cannot fulfil the purpose of the strategic alliance and the question is to overcome the difficulties of shared management on joint ventures operations.

Legal Form

In terms of the legal form of the joint venture, there can be three choices: (Dennis Campbell and Antonida Netzer 2009)

Consortium: it refers to a grouping, formed on a one-off basis, which is governed by a contractual agreement. The contractual agreement is made to define clearly the position of each of the parents, including a specification of the authority, responsibility, liability and power of each party.

Parnership: it can take a form of formal partnership. The parties are then effectively recognised in law as partners. The joint venture is considered as a business entity on its own, in legal terms, separated from the individual parties. As partners, each of the parties is legally liable for any debt or default committed by other partners on behalf of the joint venture, which may not be the case if formed as a consortium depending on details of the contractual agreement of constituting the consortium.

Incorpotation: joint ventures which are intended to be a permanent business are usually constituted as an incorporate entity. This would enable the parties being insulated from the risks of the business of the joint venture, as a limited company. The major disadvantage is that the profit and loss sustained by the joint venture as incorporation cannot be set off against that of the parent companies for tax purpose.

3.1.3 Operational Structure

The two extreme categories of operational structure of a joint venture are integrated joint venture and non integrated joint venture (Dennis Campbell and Antonida Netzer 2009)

Integrated Structure: the parties agree on a certain proportion of capital and resources investment and a prescribed profit or loss sharing formula, and they both participate on every level of execution of the joint venture business.

Non-integrated Structure: in such case, the joint venture usually provides for general management machinery, which looks after overall administrative and coordinative roles for the joint venture business. The whole business is then divided into packages or portions which are assigned to the parents to execute and operate such packages or portions as designated in the joint venture agreement (Appendix A)

In practice joint ventures are usually a mixture of these two approaches. The question is the degree of integration to be adopted for the given set of circumstances faced by the joint venture. For that joint venture business that can be divided into clear cut portions and such divided portions will suit the capability and resources of different partners, non-integrated approach will usually be adopted. While the joint venture business is complex and it requires a centralised management of all aspects of the business, the management will be integrated.

Integrated approach is more difficult to manage. Conflicting interests and ideas between the partners can arise more often than non-integrated approach. But it is often unavoidable as the nature of the joint venture business mar not is possible to be divided neatly into portions.

On the other hand, for non-integrated approach, complicated contractual argument can arise between partners. In case of joint venture agreement in a basis of joint and several responsibilities, it is not uncommon that the partners lodge contractual claims against each other on non-performance or default of the other parties in executing their portion of the joint venture business resulting loss to the whole joint venture from third party claims.

The Case Study

The parents attempted to adopt a mixture of shared and independent management for the joint venture under study, as implied in the conditions of the joint venture agreement. The management committee of the joint venture, which was the highest level of decision making and policy setting, were composed of one representative each partner.

In respect of operational structure, a mixture of integrated and non-integrated approach was adopted. While a separate joint venture organization supposedly independent from the partners managed and operated the whole joint venture business integrally, the project was divided into portions and packages which were then subcontracted back to the partners under the joint venture

3.2 Motives of forming a Joint Venture

Companies forming joint ventures basically intended to develop markets and products i.e. to strength the firms’ existing business, to take the firms existing products to new market, to obtain new products that can be sold in the firm´s existing markets, and to diversify into new businesses (Mark de Rond 2003) These objectives can be achieved through various ways, as shown in figure 1.1

But why choose a joint venture to try to achieve these objectives? Common reasons are: (Das y Teng 2000)

Government Policies: because of licensing requirements of the government for undertaking a certain type of business in a country, e.g. for construction works in Spain many foreign companies may wish to form joint ventures with local companies who have the required licenses at hand in order to enter the market first, while they at the same time apply for the necessary licenses which may take months or even years in some cases. Many governments, who attempt to protect the development of certain industry of their countries, establish regulations that prohibit foreign companies to set up wholly owned subsidiaries. If foreign companies wish to explore the market of those countries, they have no choice to form joint ventures with local companies.

Risk Sharing: in very large and risky projects that companies feel uncomfortable to bear but unwilling to give up the business opportunity, several companies share the risk by undertaking the project jointly. These risk may be commercial risks (finance, source of materials, technical uncertainties, etc) or political risks (change un government policies, unstable political status of the country, etc)

Figure 1: Motives for joint venture formation

New Markets

Existing Makets

To Take Existing Products To Foreign Markets

Open Markets

Closed Markets

To Diversify into New Business

Learning from your partner

Learning with your partner

To Strengthen the Existing Business

Achieving economies of scale

Acquiring technology

Reducing financial risk

To Bring Foreign Products To Local Markets

Marketing and distribution

‘Screwdriver ‘assembly

Developing local technology

Technology flow back to parent

Existing Products New Products

Source: (Das y Teng 2000)

Pooling of resources: companies often join to develop business that requires a combination of different resources (finance, technology, market access, local experience, etc) that none of these companies possess all of them, e.g. a combination of market access by one company and technical knowledge of a product by another, combination of different technical skills that are necessary to develop a product, or a combination of several companies ‘resources to achieve economies of scale.

Building business relation: some companies form joint ventures with in order to build up wide business relations among the industry. They believe that this will enable them to widen their networks of business and that it may be helpful for their further business developments in long term.

Reduce competition: joining with your competitor automatically reduce the degree of competition. This is particularly useful if there are only a few potential competitors only. It is not uncommon to find in certain industry that formations of joint ventures effectively create monopolistic or oligopolistic conditions.

The Case Study

In the construction industry inherent risks involved in the projects are the major concern of a company´s business strategy. Sharing of commercial risks (financial burdens on the company, source of raw materials, technical uncertainty involved with the works) for large scaled projects is the major reason of forming joint ventures. Because of the huge amount of resources involved and the multi-disciplinary nature of the projects, pooling if resources from several companies is necessary to gain sufficient competence in order to tender for the works. Not a single company may have all the necessary skills and sufficient amount of resources that are required for those Train Station Core Projects. Formations of joint ventures become the most common tactics for the construction firms to undertake those projects.

Political risk is also a major concern especially for foreign firms who are not familiar with the policies. Most foreign firms conceive that formation of joint ventures is an effective way of securing the safety of the business, particularly when undertaking infrastructure development projects of payment terms. Large construction firms (both local and international firms that were interested and had potential to undertake these large projects) gradually formed into groups of consortium to tender for these jobs. As a result, the industry transformed into competing allied groups, instead of competing among individual firms. Although such transformation might be unintentional at the time these companies first formed joint ventures, they now became aware of such advantage and might use this again as one of the useful tools in future when considering the company’s strategy competitions in the industry.

3.3 Selection of Partners

3.3.1The Criteria of Choosing a Partner

Considerations on selection of partners concentrate on three majors themes: (Lynn Krieger 1991)

Shared objectives

Mutual trust and willingness to co-operate and

Having necessary skills/resources

The task is to find a compatible partner in respect of these three major themes. The right pair or group of partners often implies an asymmetry of partners, i.e. the right partners often have different quality and characteristics so that they will complement with each others on the need of the business. Basic consideration is whether the potential partner can provide what you need and the confidence of the potential partner´s willingness to co-operate.

They may not have the same objective but their co-operation should fulfill each other´s objectives. They may not have the expertise on the same area, and they should possess different knowledge so that when combined together their competence will be strengthened. In fact two partners having expertise on the same area often is the source of conflicts as both will consider their own approach is superior without due respect on the other partner´s expertise on the field.

But right partners should desirably have similar management styles and outlooks so that their overall business strategy would go along the same direction. Otherwise, conflict on major business policy that is originated from the incompatibility of the partners expectation on what the joint venture should achieve eventually arise someday Lyn Krieger put forward two prepositions:

The more similar the culture of firms forming a shared management joint venture, the easier the venture will be to manage.

The more similar in size are the parents of a shared management venture, the easier the venture will be to manage. A significant size mismatch between a venture´s parents can create a lot of problems for the venture.

Culture here refers to both corporate culture and the culture of the country from which the firms are based. These propositions are based on the principle that managers, to be effectively working together, need to be able to evaluate each other´s judgment and the way of working before they can build up a cohesive team. The second proposition is an extension of the first one as size of the company can contribute to difference in corporate culture.

One should also be alert on any hidden agenda of your potential partner (Kathryn Rudie 2003). Confidence on the observation of your potential partner´s real intention and objective to form the joint venture is a pre-requisite condition before a decision can be made on the choice of partners. The classic tragic case of Beijing Jeep is a good example of hidden agenda. Both partners did not spell out clearly their real intention of what was to be achieved, and both partners did not understand thoroughly the other partner´s real intention before signing the joint venture agreement. Unreasonable conflicts arose not long after formation of the joint venture, when both parties realized that they were expecting something beyond the wishes of the other party. The tragedy ought to be avoidable if both parties made clear of their expectations before signing on the joint venture agreement.

3.3.2 The Process Selection

It is suggested that a step-by-step approach should be adopted to develop relationship with potential partners (Kathryn Rudie 2003):

Prepare a checklist desirable quality of the partner

Searching out for potential partners based on the checklist

Prepare proposals and issues to study and negotiate with the potential partner

If possible, try out a joint venture of small scale before committing long term and large scaled joint venture business

Theatrically, this process enables the partners to develop faith and mutual trust and allows better mutual understanding before placing large financial stakes on joint ventures with unfamiliar partners. Obviously, this takes a long time and in practice the ever changing business environment often does not wait for such long process of partner selection. Business opportunities simply slip away before the good partner relationship can evolve in this way.

In real life, it is often founded that good joint venture partner relationship is assumed at the time of signing the joint venture agreement, and the assumption is often based on personal relationship between the CEOs of the companies.

The Case Study

Major consideration in selection of partners was what resources the partner could bring in to supplement his shortages and strengthen the competence of the company to successfully tender for the job. Reputation and track record in the international construction industry was the first item to check on, particularly as the potential partner was new-comers to Spain.

It was admitted that the other partner’s intention of choosing the company was not fully known at the time of forming the joint venture. At that time, it was only understood that the company was chosen by other partners because of its local experiences in Spain and the feeling of political security that the firm could provide as a whole owned company. It was now gradually revealed that