Hunan China Sun Pharmaceutical Machinery Co and ACIC Fine Chemicals Inc Agreement - Case Study Example

Executive Summary The report analyzes the joint venture agreement Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc and highlights the different benefits and losses that the venture will lead towards. It is seen that the different risk like different culture, objectives and exchange rate risk are present but the benefits outweigh the negatives. The different benefits identified are ease to raise finance, better operational network and cost reduction. It is also seen that the joint venture should be carried out through the finance of new stock so that the present financial condition doesn’t gets altered and the process helps the business to maximize the different gains through which better operational gains can be received. Table of Contents Introduction 3 Joint Venture 3 Risk of the Venture 3 Return from the Venture 5 Mode of payment for the Venture 7 Recommendations 8 Conclusion 8 References 9 Introduction This report looks at analyzing the joint venture agreement Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc which are based in different countries. The report will look to analyze the joint venture with regard to the potential risk and return which the venture would provide. In addition to it the report will also look to present the mode of payment which needs to be used to carry out the joint venture and based on it will look to provide recommendations so that steps can be taken accordingly. This will help Hunan China Sun Pharmaceutical Machinery Co to take steps and decide the future course of action with regard to the joint venture. Joint Venture Joint Venture is one when two or more countries come together and put their different resources together so that different projects can be executed together as expertise and other skills help to carry out the projects in the most efficient manner (Agarwal and Ramaswami, 2012). The China-based Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc which is a Canada-based firm is looking for a joint venture of CNY 25 million, of which Hunan China Sun Pharmaceutical will inject CNY 20 million, representing 80 per cent interest in the joint venture; ACIC will inject CNY 5 million, representing 20 per cent interest in the joint venture. Analyzing of the different risk and reward will help them to take correct steps and reduce the risk which could be apparent in the future. Risk of the Venture The joint venture agreement would give rise to the following risk which needs to be properly addressed Difference in objectives: The venturing parties can have different objectives and not being clear and communicating the objectives clearly could lead towards issues as the organizations will look to work in different directions. This would lead towards wastage in resources and reduces the gain which are expected from a joint venture Imbalance in expertise: This will lead towards one party dominating the other as the organization with the required expertise will look to dominate. This will create differences among the top management and working together will become difficult (Backman, 2005). In addition to it the level of investment which partners have brought will also state the organization which will dominate and at times might make it difficult to carry on with the joint ventures due to ego issues Different culture and management style: Joint venture which takes place between different cultures raises doubts and questions regarding cultural integration. The lack of cultural integration would make it difficult for people to mix freely and would have an impact on the performance. In addition to it the difference in the management style would also makes the employees unclear about their roles and responsibilities. This would lead towards clashes within the organization and coming together and working as a common unit becomes difficult Country Risk: Different countries have different political, economic, and social risk associated with the manner in which they work. Dealing with the different country risk which the joint venture present is another issue which needs to be dealt in a proper manner so that the work culture doesn’t gets affected and the risk pertaining to different partners are marginalized (Quer, Claver and Rienda, 2007) Exchange Rate Risk: The venturing partners have to face risk associated with change in the value of the currency in relation to currency of another country. This might thereby make the currency of one country cheaper or dearer meaning that the payout which has to be made while entering the agreement would be either more or less (Berg and Friedman, 2007). This could lead towards differences and would make it difficult for the venturing parties to come to an agreement with regard to the manner in which it will be dealt. Geographical distance: The distance between the countries has an impact on performance. The venture agreement is between China and Canada which are very far off which will thereby result in increasing the cost associated with the transfer of knowledge and information (Chan, Kessinger, Keown and Martin, 2007). This would mean additional cost for the business and sustaining the business despite the additional cost is an issue which needs to be addressed and dealt before the agreement. Return from the Venture The joint venture agreement would give rise to different risk which are as Help to acquire new clients: Joint venture provides an opportunity where clients can be acquired or at least leads about new client can be provided at no additional cost. This provides a prospect for the future and increases the opportunity that the customer might get attracted to the joint venture and work with the organization sometimes in the future thereby creating new opportunities. Improved Credibility: Entering into joint ventures with a reputable and trustworthy organization improves the credibility and provides an opportunity where people have more faith in the organization (Tatoglu, 2000). This helps to find new suppliers, garner easy investment and improves the overall brand image of the organization Increases breadth of services: Joint ventures provide an opportunity where new and more products can be provided to the existing and new clients. This thereby multiplies the opportunity to tap new customers and retain the old ones (Hyde, 2006). This increases your value in the eyes of the customer as the customer or the client is able to get different services at a same place and doesn’t have to look for different players Improve in conversion rates: Chances of making new customers and converting the leads into potential customers’ increases as both the organization tries to endorse the product of both partner (Liu and Nguyen, 2007). This thereby increases the opportunities and ensures better conversion rates as when more and more people work for the same thing the chances of achieving it increases. Access to new markets: The joint venture will provide an easy access to new market and thereby improve the overall chance of carrying business. This will help to distribute risk and ensure that the business will be able to grow from different regions thereby distributing the risk over different regions Increased Capacity: Joint venture will also increase the capacity of the business in all regard. It will help to provide easy accessibility to capital, have more human resources and skills, provide new customers and develop the production and other capacities as well (Flanagan & Norman, 2003). This will thereby help to ensure that the business becomes bigger and is able to be productive in different ways Access to greater resources: The joint venture agreement will provide access to wide resources like technology, finance, human resource, skills and others. This will transform into better opportunities and efficiency through which the business will be able to grow Mode of payment for the Venture The mode of payment which needs to be selected for the joint venture should be new stocks. The reason for choosing new stocks is that it will provide an opportunity for raising new finance from the market and reduce their reliance on the organization. This will ensure that the present financial condition and stability won’t be altered and raising new finance will provide an opportunity to carry on with the present in the present form (Berg and Friedman, 2001). The process of using new stocks will also help to ensure that the risk associated with exchange rate and inflation is dealt in the proper manner. Since, raising new stocks would mean that people subscribe to the new shares of the organization it will help to reduce the exchange rate risk (Choy, Yew and Lin, 2006). The overall business as a result will be managed in a better and efficient manner thereby helping to gather easy finance for the business. Not using the mode of cash will also reduce the overall risk and will multiply the different opportunities through which overall effectiveness can be achieved. The joint venture as a result will be able to function in an effective and efficient manner and will be able to deal with the differences which are present. Recommendations The China-based Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc which is a Canada-based firm can look towards entering into a joint venture as the benefits which the business will get outweighs the negatives associated with it. The process of joint venture should be further looked towards raising the new finance through new stocks as it will help to reduce certain risk and will ensure that the normal proceedings of the business is not hampered. This would help the joint venture to be developed on a new framework and will help to multiply the different gains. Conclusion This report analyzes the joint venture agreement Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc which are based in different countries. The report analyzes the joint venture with regard to the potential risk and return which the venture would provide. In addition to it the report also presents the mode of payment which needs to be used to carry out the joint venture and based on it will look to provide recommendations so that steps can be taken accordingly. References Agarwal, S. and Ramaswami, S.N. 2012. Choice of foreign market entry mode: impact of ownership, location and internalization factors. Journal of International Business Studies, 23(1), 1-27. Backman, J. 2005. Joint Ventures in the Light of Recent Anti-trust Developments: Joint Ventures in the Chemical Industry. Antitrust Bulletin, 10, 7-24. Berg, S. V., and Friedman, P., 2007. Joint Ventures Competition and Technological Complementarities: Evidence from Chemicals. Southern Economic Journal, 43, 130-1337. Berg, S. V., and Friedman, P., 2001. Impacts of Domestic Joint Ventures on the Industrial Rates of Return: A pooled Cross-Section Analysis, 1964-1975. The Review of Economics and Statistics, 63, 293-298. Choy, C.S., Yew, W.K., and Lin, B.S. 2006. ‘Criteria for measuring KM performance outcomes in Organizations’, Industrial Management & Data Systems, 106(7), 917-36 Chan, S., J. Kessinger, A. Keown, and J. Martin, 2007. Do Strategic Alliances Create Value? Journal of Financial Economics 46, 199-221 Flanagan, R., Norman, G. 2003. Risk Management and Construction, Oxford: Blackwell Science, Hyde, P. 2006. Managing across boundaries: identity, differentiation and interaction. International Journal of Innovation and Learning, 3(4), pp.349-62 Liu, J. and Nguyen, V. 2007. Key issues and challenges of risk management and joint venture in China's construction industry: An empirical study. Industrial Management & Data Systems, 107(3), 382-396. Tatoglu, E. 2000. ‘Western joint ventures in Turkey: strategic motives and partner selection criteria’, European Business Review, 12(3), 137-147. Quer, D. Claver, E. and Rienda, L. 2007. 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