Building technology companies, Cross-border innovation

Building A Global Technology Business In China

Anik Bose, General Partner at Benhamou Global Ventures (former SVP Corp Dev @ 3Com and Investor/Board Member of H3C) shares his perspective on building a global technology business in China. Building a successful Joint Venture in China requires one to recognize the opportunity but also to be able to mitigate the inherent risks.  This John F Kennedy quote captures the inherent tension eloquently – “The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.” Within 3 years of it’s inception, H3C (http://www.h3c.com/portal/About_H3C/)  a Joint Venture between 3Com and Huawei had captured 31% market share in China and developed a R&D platform of 2,000+ engineers at 1/6th the cost of competitors like Cisco, Foundry and Extreme.   Within 6 years of it’s inception H3C was operating at a revenue run rate of $1Bn+ with 20%+ operating margins and representing $2Bn+ in shareholder value for 3Com.  H3C is one of the most successful technology JV’s of its kind based on most metrics.  Established in late 2003 the JV’s strategic objectives were: a) TAM expansion – Capture a significant market share of the China enterprise switching and routing market; b) Establish a high quality low cost R&D platform for worldwide enterprise switching and routing products. The strategic reasons for building a Joint Venture (JV) in China for technology companies often range from TAM expansion in China, transforming their R&D and supply chain cost structure and or both.   But even with the best intentions the failure rates among cross border JV’s is high.  According to a report on JV’s and Alliances by the Tuck School in 2006 over 50% of JV’s fail. I have often been asked – “What was the secret ingredient behind H3C’s success?”  People often expect a simple answer.  In reality the answer is that the secret ingredients were a combination of : i) A carefully crafted formula that addressed several critical success factors; ii) An exceptional JV leader – Zheng Susheng (then H3C President and now close friend) and; iii) A tremendous amount of hard work by all the parties involved.  If it were easy then successful China JV’s would be the norm not the exception.   In this blog I will outline the key elements of the formula behind H3C’s success – see diagram and details below. 1.  Pre Deal – A big domestic market combined with the presence of local engineering competencies with the required skill set is a pre-requisite condition for success.  Next Partner selection must be based on a clear alignment of longer-term vision and goals, in addition both partners must bring complementary competencies required for the JV’s success.  Deal structure must be carefully crafted to address JV scope, align value expectations, minimize operational overhang of “minority investor protection rights”, establish an appropriate Board structure for governance and managing conflicts while providing a clear mechanism for exit.  All these tasks must be accomplished within the context of understanding the Chinese culture, a few examples: –        Local partners often tend to have global aspirations for the JV, often a source of conflict with multinational partners –        Furthermore legal contracts cannot be a substitute for relationships – strength of relationships are often the basis for conflict resolution not contracts alone –        Local business practices tend to be relatively opaque – limited business and financial transparency –        Board meetings tend to be primarily ceremonial with all the critical work occurring a few days prior to the board meetings. –        Finally the Chinese culture tends to be “operational excellence” and “customer intimacy” oriented NOT innovation – consequently “fast follower” JV product portfolio/roadmap have the best chances for success Once the above ingredients are in place then the next most important element is the selection of a JV leader, one who possesses the relevant industry knowledge/relationships as well as a proven leadership and execution track record.  A strong JV leader is the glue that builds the team, the business and can manage the conflicts between the JV parents – a rare skill set.  Multinational companies often tend to focus on the wrong skill sets when selecting JV leaders such as English language skills because they feel more comfortable with a bi-lingual executive but this should be a secondary criteria not the primary. 2.  Post Deal – An important execution task is to create goal alignment – this requires understanding parent core business cannibalization risks from the JV; investing time in building multi level senior relationships between both parents and aligning interests through the creation of a compelling operating plan, one that is tied to an aggressive JV incentive plan that rewards management and employees for exceptional performance.  A highly variable compensation structure creates an entrepreneurial culture that avoids the Multinational Corporation “salary inflation trap” while rewarding exceptional performance.  Maintaining goal alignment requires creating transparency through process linkages between the JV and the parents, building trusted relationships with JV executives and ensuring commensurate ongoing value contribution from both parents to the JV’s success.  Finally preparing for exit requires navigating through the landmines of valuation expectations, creating a compelling go forward vision and role for the JV team and creating a retention plan for the management team and employees. In summary, the potential for creating value from cross border investments can be significant but realizing the potential requires addressing both pre and post deal critical success factors.  Companies often fail to unlock this potential either because they fail to address critical pre-deal issues or they declare victory after signing the agreement and do not invest time on de-risking the important post deal issues.