Lessons from a small gun battle in Brazil
CZECH ARMS-MANUFACTURER Česká Zbrojovka (CZ) recently announced the termination of its Brazilian production joint venture after years of mounting delays in building a local factory. “Unfortunately, our original partner did not prove to be ideal, because it was unable to carry out our goals to a successful conclusion,” claimed CZ CEO Lubomir Kovarik. The root cause? A shoulder shrug and a comment from the CEO that this “is not unusual” in emerging market ventures “where the local mentality differs completely from the European mentality.”
He is right that cultural mismatch leading to joint venture failure is not unusual. But it should be.
Too often, JV deal teams lock into a preferred partner, get excited about the strategic concept, and drive ahead without confirming that the partner passes the six ‘Cs’ of partner screening:
- Compatibility: Do we and the partner have similar culture and values? Do we evaluate options using a similar thought process? Would we make the same choice when faced with an ethical quandary or a risky decision?
- Competence: Does the partner actually have the resources and expertise that are required for the joint venture to be successful?
- Complementarity: Just how well do they fit our gaps? Even if they have certain resources or expertise, is that enough for this business to succeed – or will there continue to be holes?
- Congruence: Does the partner have goals that match ours and a view of the market that is similar? Are we likely to be competitors outside the venture, and will this venture make them stronger against us?
- Chemistry: Can our teams work together? Do our senior executives mesh well and have a basis for trust?
- Circumstances: Does our partner have a set of challenges that should be concerning (e.g., capital constraints, legal or regulatory problems, labor unrest, etc.) and might impact their performance as a partner?
Companies across industries, geographies, and scale know that this is a problem. Well over half of dealmakers Water Street surveyed in 2015 admitted that their firm has significant room for improvement in screening potential JV partners for capabilities, alignment, fit, and values (Exhibit 1). This weakness leads to a steady drumbeat of high-profile venture failures that can find their roots in poor partner screening. Just ask the partners in music JV Sony-BMG, oil production JV TNK-BP, or food and beverage JV Danone-Wahaha if they wish they had paid more attention to warning signals about cultural mismatch and partner behaviors.
In some cases, these warning signals should act like Aspirin to a deal fever. After all, if a partner’s technical resources are found lacking upon further review, or their management team has a reputation for ignoring health and safety regulations and collecting fines as the cost of doing business, why go forward with a deal?
But most of the time, good partner screening finds shades of gray – some strengths, some weaknesses – that provide a map of potential cross-cultural speed bumps and potholes that can be avoided with good planning during JV negotiations.
In CZ’s failed cross-border joint venture, the presence of “different mentalities” between Czech and Brazilian partners was entirely predictable in robust partner screening, but the outcome was not. Such screening should have forced the partners into discussing whether there were ways to proactively manage those cultural differences, rather than letting them consume the JV from within.
For example, one of the most common cultural differences we encounter during JV deals is...