International Business- Failure of Joint Venture as a Result of Culture Essay
International Business- Failure of Joint Venture as a Result of Culture
1. Joint venture between TCL and Alcatel
In 2004, TCL Technology Holdings Limited, a multinational electronics conglomerate from Huizhou, China entered into a mobile phone manufacturing Joint Venture with Alcatel, a global corporation in telecommunication equipments, services and applications from Paris, France, in a bid to foray into the global market. The joint venture company – TCL and Alcatel Mobile Phones Ltd (TAMP) – managed research and development (R&D), sales and distribution of mobile handsets and related products and services (TCL 2011).
TCL invested 55 million euros to garner a fifty five percent stake while Alcatel put in 45 million euros along with its mobile handset business for the remaining forty five percent share (China Daily 2004). The two corporations each possessed individual strengths that they believed, when joined in partnership, would establish their stronghold in the competitive mobile phone industry and further their geographical reach in sales. TCL is a distinguished brand that fronts the China market and has a vantage point as a low cost manufacturing base in Asia.
Alcatel is a leading player in Europe and Latin America and has operations in more than 130 countries. It could contribute an extensive sales network as well as its high aptitude in R&D (TCL 2011). Alcatel also provided patents to TCL, who did not own its own technology, to enable its entry into markets that have intellectual property (IP) rights requirements (Zhu 2005).
TCL at that time had faced a waning domestic market and needed Alcatel to help it expand into newer international markets while Alcatel believed that TCL’s lead in manufacturing would improve its product offering that would better meet the varying needs of its customers worldwide. According to Morgan Stanley, a multinational financial services provider, the joint venture (TAMP) had enormous potential to place seventh to become one of the global leaders in the industry (TCL 2011).
TAMP began operations in September 2004. However, only 8 months into the joint venture, by the end of the first quarter of 2005, TAMP had reported a loss of 36 million euro (Li 2011). As a result, TCL bought out Alcatel’s 45 percent share in TAMP to solely take over the venture. The TCL-Alcatel (T&A) collaboration had failed.
The transaction took place in the form of an exchange of stocks where Alcatel transferred its TAMP shares to TCL in return for a 5 percent share in the latter’s firm. Because the venture had ended prematurely, Alcatel also paid 20 million euros in compensation to TCL for the withdrawal of IP rights it had rendered to TAMP (Zhu 2005). After the termination of the joint venture, TCL began to draw profits again in the following year (Li 2011).
2. Problems of the joint venture
The failure was attributed to high inherent production costs of managing an international corporation and the underlying financial problems of Alcatel that existed prior to the joint venture that impeded TAMP’s profit goals (Zhu 2005) therefore made it hard to revive the business. Ernst & Young’s (2011) financial reports revealed that Alcatel suffered net operation losses of 400 million euro in 2001 and is a plausible reason why it had been eager to sell its shares to TCL in the first place – to rid the loss making assets (Zhu 2005).
But to a large extent, stark cultural differences in working styles between the Chinese and French had a role to play in the lead to its eventual failure. Despite their industrious attempt at internationalizing the business, the Chinese had a perennial lack of understanding of the European culture and were inexperienced in managing international human resource (Monks 2012). This caused friction amongst the employees, who are the building blocks of a company, thus eventually eroded the viability of the collaboration.
3. Culture in IB
Culture is an integral part of international business. Every country exhibits a unique set of culture that is distinct from another and has a considerable effect on the way people work and function in their workplace. It is a basis upon which organizations strategize and shape their operations and decisions (Reis, Ferreira and Santos 2011) as well as influence the way they negotiate (Graham, Mintu and Rodgers 1994).
Therefore it is critical to learn and understand the cultures of the countries in which you are interested to do business because differences in culture potentially give rise to misunderstandings in the workplace where people have inaccurate perceptions of each other (Wursten,Lanzer and Fadrhonc 2012), so when managers have awareness of differences, they can alter the way they manage their foreign employees. This is supported by Luo (1999), who found that an understanding of host country culture improved overall business performance.
Entering into joint ventures with local firms is an advantageous mode of entry that allows foreign MNCs to acquire local knowledge (Makino and Delios 1996) and this was the strategy taken by TCL in its entrance into France. However, the Chinese firm still faced huge problems of ‘culture conflict’ (Yao and He 2005, p.34).
4. Why it faced difficulties
Over the past decade, China had been aggressive in reaching out to the world through its outward foreign direct investment (FDI) policies. Figures from the 2006 Statistical Bulletin of China’s Outward Foreign Direct Investment show that outward FDI of China increased 18.5 billion from 2002 to 2006 (Ministry of Commerce of China 2007). Declining domestic demand and ailing revenues had been a motivation and the confidence from having many years of international experience from foreign MNCS operating in its country had primed China for its own global advance (Lyles and He 2008). Yet there lay fundamental problems in the execution.
4.1 Cultural Differences between TCL and Alcatel
There are distinct differences in working styles of employees in Alcatel and TCL due to the intrinsic cultural differences between these two countries. How will management adapt to it is specific to culture as managers are products of their own culture with its own set of beliefs and values and manners of expression and will go on to organize its people effectively according to this very culture so it follows that what works for a particular culture might not necessarily work for another (Wursten 2008). Some friction was observed in the interaction between TCL and Alcatel employees and cooperation between the two managements due to personal perceptions of each other.
In an interview conducted by Li Jing (2011), associate professor at Simon Fraser University, for the vice presidents of TCL – Well Lu (TCL) and Laurent Labbe (Alcatel) -, the issue of cultural differences between the two firms was discussed.
4.1.1 Conservatives v Risk Takers
The French adopts a more conservative approach when it comes to decision-making. Conservatism is associated with the uncertainty-avoidance (UAI) dimension ( Doupnik and Riccio 2006) and France has one of the highest UAI index at 86 indicating that they are not comfortable with ambiguous situations and will take measures to avoid them (Hofstede 2001). They ‘think a lot before doing something’ (Li 2011, p.3), because in their country, mistakes are unacceptable (Bowie 2008). As a result, Frenchmen are averse to risk (Bowie 2008).
Out of 500 employees from Alcatel, only 70 remained in the joint venture company because the perception is that there will be no job security and they cannot afford taking this risk (Li 2011). High turnover rates lower the productivity of a business (BizFilings 2012).
Conversely the Chinese are more willing to take risks. This is reflected in their low UAI score of 30. They accept ambiguity, are adaptive to change and make decisions based on a pragmatic approach (Hofstede 2001). However a point to note is that, although China is generally open to risk taking, it tends to embark on lengthy considerations that can notably delay decision-making (RSM International 2010).
This would test the patience of its French counterpart and frustrate the relationship. This divergence in attitude and multi-faceted culture causes a struggle in reaching decisions when both parties are set in their own ways about an approach.
4.1.2 Individualists v Collectivists
Alcatel’s is a predominantly individualist culture where work relationship is upon the basis of a contract, which underlines the concept of professionalism and have marked definition of an employee’s job
responsibilities (Li 2011). TCL, in contrast, is primarily a collectivist culture where people work in the interests of the group (Hofstede 2001). This is reflected in its corporate culture where it wants its employees to feel belonging to the company, to treat it like home (Li 2011).
But during the joint venture, as the company grows at an accelerated pace, the nature of the jobs became vague and necessitated a TCL working style. The French are a high-minded group so competition typically prevail teamwork (Kenna and Lacy 1994) at the work place which meant many Alcatel employees were removed from their comfort zone.
4.1.3 Varying degree of acceptance of power
Moreover, as France is also an uncertainty avoidance society, there was further disorientation when there was no clear example from top management how they were supposed to work (Li 2011).
France and China are both large power distance societies but employ different types of power (Zheng 2010). The French are more accustomed to legitimate power, which is the power that imposes a sense of responsibility or obligation on them (Zheng 2010) and value strong leadership and tight controls (Bowie 2008).
But this was not the approach used by the TCL as it tended to be more abrasive and did not agree with a very important aspect of Chinese culture – Harmony. Chinese people manage work relationships with harmony in mind and also the concept of giving everyone ‘face’ (Zheng 2010) so the difference in styles puts the French in discomfiture, and the Chinese in confusion as to why the French was being less than efficient therefore affecting the company’s productivity that would affect the bottom line of the business.
4.1.4 ‘Lazy’ v Driven Individuals
Lu admits that he ‘used to subscribe to the stereotype that Frenchmen are lazy’ and ‘are more relaxed’ when it comes to work attitudes (Li 2011, p.3). Laziness is perceived as a negative characteristic and might draw disapproval from other co-workers. However it must be understood that the French are not really ‘lazy’ but are Polychronic people (Hall 2000). Polychronic people are described in Hall’s cultural theory to have a tendency not to keep a tight structure on their time and work at their own pace, also preferring not to make elaborate plans so (Suntsova 2009) therefore giving the impression of being lazy.
The Chinese are, like the French, Polychronic (Hall 2000). But to a large degree they are also a masculine society, according to Hofstede’s cultural dimensions (2001), with a high score of 66. In masculine societies, people are motivated to be the best they can be, where great emphasis is placed on achievement and success. Labbe (Li 2011) had described the Chinese as workers with tremendous drive and ambition. On the other hand France is a more feminine society scoring 43, which implies that they are more concerned about the quality of life.
For example, France has a liberal welfare system in place that entails short 35 hour work weeks. Labbe (Li 2011, p.3) agrees that the Frenchmen are ‘satisfied with just working for a base salary’. Thus TCL (Chinese) employees who are more masculine, will be disposed to think that their Alcatel colleagues (French), who are feminine and polychronic, are lazy and unmotivated workers, which is a careless observation, because eventually the work is accomplished, only the work is done in a different manner. This misconception leads to resentment amongst employees.
4.2 Lack of international management experience
To add to the problem, TCL, like many Chinese firms lack real experience in managing an international business. MNCs’ operating in external markets face liability of foreignness (LOF) where they are at a disadvantage to local firms due to unfamiliarity of host country conditions (Hymer 1976). They have to overcome the liabilities by forging competitive advantages against local firms or fine-tune managerial learning about host markets to reduce LOF while local firms do not have to make as much adjustments in comparison (Petersen and Pedersen 2002).
Therefore while many years of having foreign MNCs in China allowed these MNCS to accrue experience from their overseas ventures, the Chinese firms, who although to a large measure were part of the internationalization process, were only at the receiving end and had not really garnered real managerial experience in operating internationally. When it was down to the actual initiation into international markets such as the US and in this case Europe France, China was confronted by its own set of LOF and was unable to reconcile the divergent national and corporate cultures (Thomsen and Nicolas 2008) between the two countries so it faced difficulties in managing its French employees in TAMP.
The general idea one gets from reading related literature about culture in international business is that, differences in culture is a source of misunderstandings and miscommunication that will invariably present itself as a threat to the productivity of business. And the solution would be to understand these differences in culture, to have knowledge of them, so that we can reduce some of these problems (Pilhofer 2011). While it is very useful for us to gain cultural understanding, conventional literature conveys a negative notion in relation to it. It seems to be implying an obligation and necessity to learn about culture to avoid failing the business.
Essentially there is nothing fundamentally wrong with this notion but this would only lead to people withdrawing from interaction with other cultures altogether if they fear failure and negative situations (Pilhofer 2011). If I were in charge of the joint venture, I would ensure that the employees gain an appreciation and respect for culture. They need to view cultural learning positively, see it as learning how different others’ cultures are from theirs and use it to adapt accordingly so as to achieve the business objectives (Ferraro 2009).
Learn that negative situations such as misunderstandings are inevitable, but even those can be regarded positively in terms of a new experience (Pilhofer 2011). It is not as much the knowledge than what you do with it. To achieve this, management must first introduce this idea of openness to its employees to gradually overcome their innate ethnocentrism (Ferraro 2009). With inculcation and education, over time I believe it will form part of the company’s corporate culture.
When work is done in a more positive and respectful atmosphere, performance can be more productive (Ferraro 2009), than in a stressful environment.
Going forward, TCL needs to gain more experience in managing people internationally by undertaking more international endeavors. However they cannot enter heedlessly and will need to study the new markets and their cultures and create a plan. Some difficulties would still be faced but they could learn from it.
The joint venture between Alcatel and TCL failed chiefly due to its existing financial situation. However for the most part, the friction experienced by employees from both companies because of 1. lack of understanding of cultural disparities in work styles and 2. inadequate international experience of TCL’s management had undermined the potential effectiveness of the joint venture, inevitably leading to its failure. Culture is a very elemental factor in International Business today. Business partners face challenges in working with people from other cultures.
If there is no knowledge and understanding, firms would not be able to make adjustments accordingly to best achieve their business goals. But cultural knowledge should be learned with a positive motivation rather than attaching negative consequences to it. People need to gain an appreciation and respect for other cultures to be able to work in them effectively.
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