Cross Border Alliances-Opportunities & Challenges

<p style="text-align: justify;">Cross-Border Alliance (CBA) is a strategic partnership between two or more entities from different countries to pursue a mutual interest. &nbsp;</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Why Cross-Border Alliance?</span> &nbsp;</h2><p style="text-align: justify;">The alliance leads to the pooling of resources like people, technology, and capacities. While each party shares risk and reward, they get access to the other's markets. Overseas partner receives the advantage of labor arbitrage. &nbsp;</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">How does it benefit both partners? </span>&nbsp;</h2><p style="text-align: justify;">CBA helps Indian Companies, particularly those in manufacturing, to improve quality, processes, and productivity at the plant level and get access to Global Supply Chain (e.g., Toyota Kirloskar) &nbsp;</p><p style="text-align: justify;">It leads to progressive learning, transfer, and internalization of specialized knowledge, e.g., Tier-I companies in the Auto Sector have adopted Japanese Mfg well. Practices and immensely benefitted (e.g., Minda, Motherson, Amtek, Sona) &nbsp;</p><p style="text-align: justify;">Indian Managers have learnt the work culture, which is essential for being a global company. &nbsp;</p><p style="text-align: justify;">On the other hand, an overseas company gets a reliable partner who can manage local scenarios, offer market access, and handle HR. &nbsp;</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Structured Process for Cross Border Alliance (CBA) </span>&nbsp;</h2><p style="text-align: justify;"><strong>Identification&nbsp;</strong></p><p style="text-align: justify;">Strategy Development, Partner Screening &nbsp;</p><p style="text-align: justify;"><strong>Evaluation</strong>&nbsp;</p><p style="text-align: justify;">Leverage Assessment, Opportunity Definition, Stakeholder Assessment Negotiation&nbsp;</p><p style="text-align: justify;">Bargaining Power Assessment &nbsp;</p><p style="text-align: justify;"><strong>Implementation</strong>&nbsp;</p><p style="text-align: justify;">Integration Planning, Implementation &nbsp;</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Different Forms of Alliance Organizations</span> &nbsp;</h2><ul style="text-align: justify;"><li>It can start with a simple vendor-buyer arrangement and evolve into a full-fledged JV. As said, 'equity brings in commitment showing skin in the business'.&nbsp;</li><li>JV can take the form of :<ul><li>Company&nbsp;</li><li>Limited Liability Partnership (LLP)&nbsp;</li><li>Unincorporated Partnership&nbsp;</li><li>Strategic Alliance or Cooperation Agreement&nbsp;&nbsp;</li></ul></li></ul><p style="text-align: justify;">&nbsp;&nbsp;</p><p style="text-align: justify;">The decision is based on factors like tax implications, cap on liability, and life of the JV &nbsp;</p><ul style="text-align: justify;"><li>JV can be 50:50 or any ratio depending upon the partners' objective. As per available data, in most cases, the JV finally ends up with one partner going for a 75% stake (e.g., Yamaha-Escorts started as 50: 50 JV. Finally, Yamaha took a 100 % stake in JV)&nbsp;</li><li>In some cases, the acquisition is the only route when one partner is far more significant and time is of the essence (e.g., Walmart acquired Flipkart to take on Amazon)&nbsp;</li><li>There are instances when strategic alliances are preferred over acquisition because trust building becomes difficult due to 'cultural' differences. Sometimes best people leave when acquisition happens&nbsp;</li><li>Some partners start with a technology licensing arrangement and then finally invest (e.g., LML-Piaggio)&nbsp;</li><li>Another option is non-equity-based long-term contracts as a distribution partner and co-branding.&nbsp;&nbsp;</li></ul><p style="text-align: justify;">&nbsp;<br />&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Operationalizing the Alliance-Must do by the Partners</span> &nbsp;</h2><p style="text-align: justify;">The challenge is to create a new organization across diverse entities with varying cultures, goals, and stakeholder pressures. Both partners &nbsp;</p><ul style="text-align: justify;"><li>Must align strategically</li><li>Must build a robust governance system</li><li>Finalize resource allocation upfront&nbsp;</li><li>Create the right organizational structure&nbsp;</li><li>Build a robust business model&nbsp;</li><li>Create a working relationship despite cultural differences, if any&nbsp;</li><li>Must commit at the Senior Management level, not just ownership and control&nbsp;&nbsp;</li></ul><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Spirit of Partnership is key for success of CBA</span> &nbsp;</h2><p style="text-align: justify;">Both partners should make a combined commitment for the business in India to be profitable based on the following elements of 'Partnership Spirit'. &nbsp;</p><ul style="text-align: justify;"><li>Transparency&nbsp;</li><li>Integrity&nbsp;</li><li>Concern for mutual gain</li><li>Flexibility&nbsp;</li><li>Reasonableness&nbsp;</li><li>Long-Term Perspective&nbsp;&nbsp;</li></ul><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Pitfalls to Avoid </span>&nbsp;</h2><p style="text-align: justify;">Both partners must avoid pitfalls like &nbsp;</p><p style="text-align: justify;">Need to carry out due diligence before choosing a partner. Must understand partner's capabilities, culture, behavior, and bargaining power&nbsp;</p><p style="text-align: justify;">Not factoring possibility of periodic re-assessment of alliances. Partners should be open to the re-assessment, e.g., because of change in Govt Policies, the business may become unsustainable.&nbsp;</p><p style="text-align: justify;">Not spelling out clear arbitration processes, deadlock mechanisms, penalty clauses, and exit clauses.&nbsp;</p><p style="text-align: justify;">Not planning for the eventuality of a 'divorce'. Termination may create a competitor, and customers/suppliers/distributors may get alienated. &nbsp;</p><p style="text-align: justify;">Given below are the examples of CBAs which have shown good performance &nbsp;</p><ul style="text-align: justify;"><li>Bharati Axa(Bharati Enterprises and AXA of France)&nbsp;</li><li>ICICI Prudential Life Insurance (ICICI Bank &amp; Prudential Corporation Holdings Limited, UK)&nbsp;</li><li>Starbucks (Tata Sons and Starbucks Coffee)&nbsp;</li><li>Air Asia (Air Asia Berhad and Tata Sons)&nbsp;</li><li>Vistara (Tata SIA and Tata Sons) is now getting merged into Air India o Network 18-CNN (Network and CNN of US)&nbsp;</li><li>HDFC Ergo (HDFC Ltd and ERGO International AG of Germany)&nbsp;&nbsp;</li></ul><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">Despite sincere efforts, the commitment by both partners following CBAs was called off &nbsp;</p><ul style="text-align: justify;"><li style="text-align: justify;">Hero Group-Honda Company, Japan-Called off after 26 years because of misalignment of strategies</li><li style="text-align: justify;">Mahindra-Ford (51: 49) pandemic took a toll o Mahindra-Renault (51:49) low sales volume&nbsp;</li><li style="text-align: justify;">Nissan-Ashok Leyland-disagreements at partners' level&nbsp;</li><li style="text-align: justify;">Hero-BMW for cars-recession in the automobile industry&nbsp;</li><li style="text-align: justify;">Godrej-P &amp; G-Differences over treatment of Godrej Soap brands by P &amp; G&nbsp;</li><li style="text-align: justify;">Godrej- GE-Sales off-take was not as per expectation&nbsp;</li><li style="text-align: justify;">Godrej-Sara Lee-Mismatched perception and shifting interests&nbsp;</li></ul><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="" target="_blank" rel="noopener">Pramod Kelkar</a></em></span><br />&nbsp;</p><p style="text-align: justify;">&nbsp;</p><h3 style="text-align: justify;"><span style="font-size: 18pt;">Frequently Asked Questions Answered by Pramod Kelkar&nbsp;</span></h3><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;" data-preserver-spaces="true">1. What is the most important factor in a strategic alliance?</span></h2><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">The most important factor in the strategic alliance is the commonality of goals for both partners.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;" data-preserver-spaces="true">2. Why have strategic alliances grown in popularity in recent years?</span></h2><p style="text-align: justify;">For an entity, growth needs bringing in resources, skill sets/expertise, and access to a wider market. It is only sometimes possible for a single entity to manage this independently. Two entities with common goals can bring together what they are best at to achieve them.</p><p style="text-align: justify;">Sometimes there are &lsquo;cultural differences&rsquo; between the two entities wishing to form an alliance. In that case, it is best to have a &lsquo;Strategic Alliance&rsquo; wherein entities stay independent of each other.</p><p style="text-align: justify;">It is like a &lsquo;Virtual JV&rsquo; with more informal agreement.&nbsp;</p><p style="text-align: justify;">In case of unforeseen circumstances, legally, if they need to call off the alliance, it is much easier than a formal JV.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;" data-preserver-spaces="true">3. What is the importance of cross-border strategic alliances as an international cooperative strategy?</span></h2><p style="text-align: justify;">In today&rsquo;s scenario, technology movement across borders is much faster. Cross Border Alliance brings the two countries closer by transferring technology and better processes. This is more true for Indian Companies as compared to overseas entities. For Indian companies, it also helps in connecting to Global Supply Chain.</p><p style="text-align: justify;">It removes the &lsquo;cultural barrier&rsquo; because both countries do not know enough about each other, be it the availability of technology, dynamics of the market, or level of manpower expertise.&nbsp;</p><p style="text-align: justify;">It also opens up newer areas of collaboration between two countries hitherto unknown.</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p>
KR Expert - Pramod Kelkar

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