(Nov. 26, 2002) — Those worries about your polymer business shouldn't be keeping you awake at night. After all, your marvelous patents, know-how and other technology (not to mention your state-of-the-art manufacturing facility) enable you to provide your customers with the highest-quality products.
So why are you worried?
You're worried because foreign competitors are tempting some of your longtime customers with products that are not as high quality as yours, but are lower priced — very near your cost.
You're also worried because some of your largest customers have moved some of their own manufacturing and assembly to facilities offshore to be nearer their foreign markets — and disturbingly close to some of your foreign competitors.
Finally you're worried — perhaps frustrated is more accurate — because you know that you're missing out on the rapidly growing foreign market for your products because you don't have a meaningful foreign presence.
It sure would be nice if you had the capital, personnel and experience to establish your own offshore facility to lower your average production costs, lower your freight costs and improve your delivery capability by being closer to some of your customers' foreign operations. A foreign presence could also enable you to help turn those potential foreign customers into actual ones. In fact, the more you think about it, putting your existing technology advantages together with a foreign component would make you a force to be reckoned with in the market for your products. Consider some of the more traditional approaches:
c You could extend yourself financially and try to buy or build a foreign manufacturing facility and hire a work force. But what if you misjudge the market, or locate in the wrong place, or get surprised by the local business practices? What if the work force doesn't work well, or the managers don't manage well, or the sales force doesn't sell enough? The bottom line is that although such a foreign expansion could have an enormous upside (and may even be necessary for your business's long-term survival), there is also plenty of downside. You could do all of the due diligence in the world and, at the end of the proverbial day, you would still be risking much of what you have for what you need or want.
c Another possibility is identifying an existing foreign business and combining or merging with it. Taking this course might avoid a number of the pitfalls, but it certainly does not eliminate them. It also adds some risks and uncertainties. Who will have ultimate control? How will the combining and integrating of different business cultures and management styles work? And, what about the proverbial determination of “how do we unscramble this egg if things don't work out?” At the greatest risk could be the patents, know-how and other technology that are among the crown jewels of your business.
There are structures and relationships for helping you achieve most of your objectives — with a smaller capital investment, without risking your entire existing business. This may reduce (but, unfortunately, not entirely eliminate) the risks and problems of combining and integrating people and operations, and can help to safeguard your intellectual property if things don't work out. These structures and arrangements are often referred to as strategic alliances and joint ventures.
Strategic alliances can take the form of a series of contracts that deal with the licensing of technology, manufacturing and brand labeling, supplying raw materials, components or finished products, joint or reciprocal distribution, joint or reciprocal marketing, noncompetition and nonsolicitation, loaning and exchanging employees, and as many other kinds of business matters as might require attention in connection with the alliance.
Joint ventures often closely resemble strategic alliances except that they are one step “more intimate” in that they usually involve the formation of a separate joint venture entity. This entity is owned by the two or more partners in whatever proportion they agree.
The partners also agree on capital contributions, allocation of profits and losses, governance, unwinding the venture and other matters.
In addition there are often contracts of the kinds associated with a strategic alliance except that the contracts are usually between the joint venture entity and one or more of the partners (or with third parties).
Strategic alliances and joint ventures do require that a range of legal, tax, accounting and other requirements be considered and managed. However, they are first and foremost business vehicles that can, in appropriate circumstances, help owners and managers of polymer companies continue to grow and compete in an increasingly unforgiving marketplace.
Allan Goldner is a partner in Benesch Friedlander Coplan & Aronoff LLP, a Cleveland-based law firm.