Partnering with the Japanese: Threat or opportunity for European businesses?

European ManagementJournal Vol. 13, No. 3, pp. 304-315, 1995

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'Partnering with the

Japanese:

Threat or Opportunity for European Businesses?

JOHN BURTON, Professor of Business Administration, University of Birmingham A prominent diagnosis in Europe and America is that alliances between Western and Japanese businesses are systematically manipulated by the latter to effect a strategic colonisation of the value chain in their favour. The various elements in this sombre analysis are elaborated here for inspection by John Burton. A detailed examination of the important case of the Rover/Honda alliance, however, reveals a

somewhat different picture. Wider evidence also suggests that there is no set structure of outcomes resulting from cases of Japanese-European business partnering. The implication for European businesses is that they need not necessarily fear and avoid all Japanese 'entanglements'. The real problem that they face is how to select carefully from alliance prospects with Japanese partners, and then how to jointly manage them to mutually satisfactory benefit. Distilling a large body of experience, the paper erects four precepts for European-Japanese business alliances that are conducive to the attainment of these goals.

Introduction One of the most notable developments in the world today is that of the dynamic impetus of, and continued prospects for, economic growth in East Asia generally. Current forecasts suggest that the region -- including Japan - is likely to account for around 40 per cent of the growth in global production and purchasing power in the years 1992 to 2000. The further liberalisation of international trading regulations under the Uruguay Round agreements is, moreover, likely to add to this East Asian economic momentum considerably (World Bank, 1994). 1 Another significant trend in contemporary international economics concerns the prominence of 'partnering' agreements between (otherwise autonomous) businesses across the world -- variously referred to as strategic alliances, international joint ventures, and collaborative business arrangements (CBAs). Crossborder joint ventures are, of course, not a new feature of the international business scene. There is, however, every indication that we are witnessing currently a growth in CBAs of an extremely rapid nature (Hegert and Morris, 1988; Krubashik and Lautenschlager, 1993; Glaister and Buckley, 1994). 304

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These two trends -- the impressive pace of economic growth in East Asia generally, and the almost feverish development of transnational C B A s - - might be described as two of the key features of the contemporary era of international business. What are the implications for European businesses of this confluence of developments? How should firms in Europe view the conjuncture -- as a threat or an opportunity?

everywhere. The first people to suffer from this cut-throat competition were US manufacturers 2

Two Poles of Western Thought: The 'Locomotive' vs. 'Juggernaut' Views

Another CEO in the same Western European industry, Jacques Calvet of PSA, which produces Citroen and Peugeot cars, puts the juggernaut view even more dramatically:

Two poles of thought on this, and related transnational t r a d e and investment issues, may be detected in the West generally. One, views the contemporary economic boom in East Asia as a major (net) opportunity for Western businesses. In a nutshell, this camp of thought views East Asia as the 'locomotive' of the world economy for the foreseeable future -- to which Western firms would be wise to hitch their own business endeavours. At the business level, the implication of this locomotive view is that European enterprises, and Western firms generally, need to grasp proactively the prospects variously opened up by the ongoing rapid economic development of East Asia -- via appropriate trading, investment, and collaborative arrangements with Asian partners. The associated implications at the level of public policy of the locomotive view are that there needs to be a conscious and serious Western eschewal of the incipient propulsion of (American and EU) policy in the direction of inward-looking regionalism/the erection of barriers against trade and transnational collaboration, both by explicit means and via the backdoor of industrial strategy (Oppenheim, 1991). As all will be aware, there is a rather more vociferous -- although not (yet?) dominant -- camp of thought in the West that views East Asian economic progress not so much as a locomotive on which all may ride via trade and collaboration but rather as a 'juggernaut' that is crushing and devouring Western businesses and industries in its path. The implication for business policy in Western firms, that are in competition with Asian 'tigers', of this juggernaut view is that for (much?) chance of survival they must lobby their government(s) for protection -at least of the 'breathing space' variety . . . which may extend for a decade or more. This reactive stance is becoming, for example, especially prominent in parts of West European industry. Amongst the many examples that could be cited, the following could be taken as indicative of the juggernaut view. On the car industry, consider the argument of the (previous) Chairman of BMW Eberhard von Kuenheim;

Through their aggressive policy of conquering markets, the Japanese have created a scenario of ruinous competiton

The unstated implications of von Kuenheim's remarks are that the Western Europeans are likely to be next -and this, it should be underlined, comes from the Chairman of a European company that has been not unsuccessful in penetrating the domestic Japanese car market over the past decade.

The Japanese don't resemble us. They have a feudal system, and Dr Toyoda [CEO of Toyota] is a samurai of modern times. The Japanese can destroy a large part of our industrial fabric and destroy us socially and economically. 3 The public policy stance that such prominent European business leaders are urging is explicitly a protectionist one -- some variant of the 'Fortress Europe' scenario. There are, of course, major Western European political figures, and civil service advisers, who are sympathetic to these protectionist urgings of their industrial constituencies. Overall, then, Western and specifically Western European industrial and political thought is split between the locomotive view and the juggernaut view of East Asian business. Perhaps this division is most prominently characterised in Europe by the contrasting policy positions of the British and French Governments over the last decade. There has been a tendency (of varying strength) in French foreign economic policy over this period to accede to the juggernaut view, highlighted by the then French Prime Minister Madame Edith Cresson's highly acidic remarks on Japanese business and trading practices in mid-1991 (Channon, 1991). In considerable contrast, the stance of British industrial policy over the past ten years or so has been to encourage the inward flow of East Asian investment to the UK -- both of a go-it-alone sort e.g. Nissan and of a collaborative nature e.g. Honda -- as much as possible. This article is concerned with a subset of the issues involved in the clash between these polar Western views. Much of the general debate on the topic in the West has formerly concerned trade flows (e.g., the EU and US trade deficits with Japan and other East Asian countries), and more latterly the impact of the direct establishment of subsidiary plants and operations from East Asia within Western economies (i.e., the controversies over transplant manufacturing facilities and 'local content' as regards their sourcing for components). 4 With the rapid growth of commercial strategic alliances over the last decade, however, these poles of thought are increasingly being pitted against each other as regards the relatively new arena of EastWest business partnering. It is with this particular topic -- of the threats and opportunities embedded in the

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growth of West-East business alliances -- that this article is specifically concerned. A second restriction on the scope of this article is that from the Eastern end it will focus upon Japanese business partnering, rather than East Asian firms more generally. The simple reason behind this is that Japan is the largest and currently most developed of the East Asian economies, and its businesses have (inevitably) developed more extensive, and intensive, sets of strategic networks with Western counterparts than others in East Asia. It is, therefore, partnering with Japanese business that has attracted most attention -and controversy -- in Europe and America to date. (As, however, the businesses of other 'Asian tiger' economies catch up with Japan in this respect, we may be sure that the same level of attention and controversy will follow in Western media, political and business circles.) plan of the rest of this article is as follows. The second section sets out the business level aspects of the juggernaut view, drawing upon a number of prominent American and European diagnoses. The third section focuses upon a particular, high-profile case of strategic partnering between a European and a Japanese firm t h e Rover/Honda alliance -- to examine whether, and to what extent, the arrangement ended up as a locomotive or juggernaut for this prominent European partner. The fourth section then will draw some broader implications for the conduct of partnering developments between European and Japanese (by extension, East Asian) businesses. The final section offers some brief final reflections on the general topic.

tends to widen over time into a continuing downgrading of the Western collaborator to the ongoing benefit and eventual supremacy of the Japanese partner - and indeed may end in the usurpation or elimination of the former by the latter. In this dynamic setting, the juggernaut diagnosis thus is that partnership by Western firms with Japanese businesses is -- to use another metaphor -- a Trojan Horse, leading to the undermining of Western business from (virtually) within rather than by direct competitive assault. Breaking down the Juggernaut view into its main elements as it applies to Japanese-Western CBAs, four main features are highlighted by the exponents of this position: Strategic colonisation of the value chain Unintended skills transference The dependency spiral Unequal market entry barriers

The

The Juggernaut View of Japanese Partnering with Western Firms It is useful to elaborate the Juggernaut View in some depth as it is the enunciation of this position by some well-known Western political and industrial leaders that has fired more general concern and debate in Europe and North America about the implications of embracing Japanese business. This section presents a composite version of the juggernaut view, drawing upon a number of sources, and a prominent analysis by two Harvard scholars, (Reich and Mankin, 1986) in particular. The importance of the latter diagnosis is underlined by the fact that Professor Reich is currently Secretary for Labor in the Clinton administration. Adherents of the view are, as noted above, also both vocal and prominent in the European Union. The general theme of the juggernaut view as applied to CBAs is t h a t ' . . , alliances between Asian companies and Western rivals seem to work against the Western partner' (Hamel, et al., 1989). In other words, the gains from collaboration tend to be very unequal, with the Japanese/Asian end of the alliance obtaining the lion's share of the benefits from such partnerships. Moreover, it is argued, this one-sided pay-off structure is not simply a once-over, static, unrepeated phenomenon: it 306

Strategic colonisation of the value chain On this point, the central argument of the 'juggernautists' is that:

The Japanese reserve for themselves [in CBAs with Western partners] the part of the value-added chain that pays the highest wages and offers the greatest opportunity for controlling the next generation of product and product technology (Reich and Mankin, 1986, p. 79). The inference is that Western firms and their employees typically end up in the partnership specialising in two low value-added ends of the value chain c.f. their Japanese collaborators: some involvement in the 'front end' of basic research in some cases, and the 'back end' of assembly, marketing and distribution in many cases. The Japanese, meanwhile, get the (alleged) lion's share - - colonisation of that part of the value chain involved in component design, and the control of the next generation of technology/products/design. I expand upon each of these in turn below.

Unintended skills transfer Juggernautists tend to see the value-chain specialisation diagnosed above as leading over time to an unequal transfer of skills and experience as between the Western and Japanese partners:

Through these coalitions, Japanese workers often gain valuable experience in applications engineering, fabrication and complex manufacturing -- which together form the critical stage between basic research and final assembly and marketing... The big competitive gains come from learning about manufacturing processes -- and the result of the new multinational joint ventures is the transfer of that learning from the United States [and Europe] to Japan (Reich and Mankin, 1986, p. 79). Others s e e t h e unequal transference of skills/experience typically involved in Japanese-Western CBAs as being

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even wider in scope than that of manufacturing skills alone:

Consider one technology-sharing alliance between European and Japanese competitors. The European company valued the partnership as a way to acquire a specific technology. The Japanese company considered it as a window on its partner's entire range of competences and interacted with a broad spectrum of its partner's marketing and development staff ... Over time, it developed a sophisticated picture of the European market that would assist its own entry strategy. The technology acquired by the European partner through the formal agreement had a formal life of three to five years. The competitive insights acquired informally by the Japanese company will probably endure longer (Hamel, et al. 1989; emphasis added). The dependency spiral According to the more trenchant of juggernautist analyses, the one-sidedness of Japanese-Western alliances does not stop there: The problem snowballs. Once a company's workers fall behind in the development of a rapidly changing technology, the company finds it harder and harder to regain competitiveness without turning to a more experienced partner for technology and production know-how. (Reich and Mankin, 1986). The implication is that an initially unequal attribution of value-chain specialisations by collaborative agreement eventually flips over into an ever-deepening dependency of the Western partner upon the collaborative inputs of the more dynamic Japanese concern:

Many so-called alliances between Western companies and their Asian rivals are little more than sophisticated outsourcing arrangements ... These Original Equipment Manufacturer deals offer Asian partners a way to capture investment initiative away from Western competitors and displace customer-competitors from value-creating activities •.. But a [Western] laggard that forges [such] a partnership for short-term gain may find itself in a dependency spiral (Hamel, et al., 1989).

from mounting such entry operations by Japanese law, the extensive cross-shareholdings in both Japanese 'horizontal' industry groupings and 'vertical' keiretsu effectively preclude acquisition and take-over as entry modes. The remaining alternatives are thus go-it-alone --a tough option given the nature of the Japanese market, even according to those of the locomotive persuasion (e.g., Oppenheim, 1991) -- or, alliance formation. Thus, Western companies cannot, it is alleged, directly buy-in to hi-tech companies in Japan in the way that Japanese firms can do in the US or the EU. In surmnary, the juggernaut view is a set of propositions about business operations that depict Western-Japanese collaboration as essentially one sided, working in the latter's favour.

The Japanese have access to a large home market controlled by highly diversified keiretsu groups ... The Japanese carefully shield their market from competition. [Meanwhile] cooperation with foreign firms is aimed at acquiring knowhow for Japan, (Wright and Pauli, 1987, p. 102). The other side of the coin, according to the juggernaut view, is that Western firms in collaboration with Japanese ones typically become little more than assembly, distribution and marketing arms for Japanese hi-tech products in America or Europe. These limited roles are, moreover, ultimately replaceable, if/when the Japanese partner decides to move downstream in the West. Moreover, through strategic colonisation of the development component of the value chain, the Japanese partner controls the next generation of products -- and thus controls the future.

Honda's Alliance with Rover: Locomotive or Juggernaut? This section focuses upon a specific case of a partnership between a Japanese and a European firm -- the evolving saga of the relationship between Honda and the Rover Group since 1979. While this specific focus cannot, obviously, describe the totality of experience regarding Western-Japanese CBAs, the Honda-Rover case is highly symbolic, in that (a) it represented the first major alliance between a Japanese and a European car manufacturer, and (b) this alliance has commanded widespread industrial and media attention since its very inception towards the end of 1979.

Unequal market entry barriers In the standard Western setting, a company considering entry to a different national market other than its home base faces a choice between four alternative routes of entry: stand-alone establishment of a subsidiary; (friendly) acquisition of a foreign operator; (hostile) takeover; and the formation of a strategic alliance/joint venture with an existing player in the targeted national market.

The Honda-Rover Partnership: Background and Evolution

These alternatives generally exist, for example, for a Japanese company entering the US or EU markets. This is not so, however, the juggernaut diagnosis runs, for an American or European company considering entry to the Japanese market: they typically cannot acquire/take-over a Japanese company by acquisition of shares. Although Western companies are not debarred

Rover (previously part of BLMC; and after that, British Leyland, before assuming its present title) is a wellknown British-based car group. In the mid-1970s, however, the company was seriously floundering, and it was rescued by the British government. 5 The key objective of its management in the late 1970s was to turn around the company's performance. One avenue explored to this end was that of possible collaboration

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with major Japanese car manufacturers - specifically, Nissan and Honda. (The British company had a long previous history of international alliances, dating from 1921 -- only half of which had proved successful.) Honda at the time was still largely considered to be a motorcycle manufacturer, despite its earlier entry into cars (and it remains, indeed, as not yet in the very first league of the car industry in terms of global sales). Moreover, in the 1970s it had an extremely small presence in Europe as a car manufacturer (despite its good showing in the US). It felt especially weak as regards this market:

Honda felt insecure in this area, and although it knew European tastes differed from those in America, it did not trust its understanding of those differences. Furthermore, Honda did not believe it had time to develop its own European arm from scratch. The development costs of new European models would be too great at the stage of Honda's development, and the time scale too long to be acceptable. (Faulkner, 1995, p. 149)

From the outset there appeared to be a real prospect of mutual gains from partnering between Honda and Rover. Simultaneously the Rover Group -- it was then still titled the British Leyland Motor Corporation (BLMC) -also felt it had specific weaknesses. On the product side, it needed something to offer in the lower-to-medium market segment -- but it did not have the resources, including finance and time, to tackle this product portfolio lacuna without external help (even given substantial UK government aid). On the operations side it centrally lacked, as then also with other European car producers, knowledge, let alone mastery, of the Japanese-initiated m o d e r n m e t h o d s of 'lean production', 6 includIng total quality control, just-intime, and roboticisation of the manufacturing process -- fields in which Honda had much management knowhow, epitomised in the phrase, 'the Honda Way'. There were, however, strengths that BLMC could offer a Japanese partner such as Honda; it

had access to an acceptable UK and European network of component suppliers and subcontractors. It had ample spare capacity in its factories, and could manufacture as many cars for Honda as the Japanese company could manage to sell. Rover also had an understanding of European tastes. (Faulkner, 1993, p. 593). In short, there was a significant prospect of mutual gains from partnering between Honda and Rover. A collaborative agreement between the two was duly signed at a meeting between the two companies in December, 1979. This was initially a somewhat limited licensing arrangement of an 'arm's length' nature, allowing BLMC to assemble the Triumph Acclaim model -- based upon the Honda Accord -- from kits supplied by Honda 308

(the Acclaim fitting the detected gap in BLMC's product range). The story-so-far could be read as being consistent with the juggernaut view. Here we have the picture of an ailing Western manufacturer forced to jump into bed with a dynamic Japanese company in order to survive. It takes on assembly functions for the Japanese partner, rebadging a Japanese product. The latter also gets the benefit of experienced marketing and distribution in the European market for its product. The relationship, however, was to deepen beyond this narrow focus with the launch of the Rover 200, a Hondadesigned car, but with major Rover components such as interiors and wheels, in 1984. This was more than an arm's length licensing deal. Rover not only had the styling input necessary for European markets in this project; it also had the agreed right to change the basic design for its own version of the car, and to manufacture the Honda version, (the Ballade). The partnership intensified yet further with the production of the Rover 800 (the Honda Legend) in 1986 these models being the result of even closer joint development work. In 1989, furthermore, there was a new project -- a combined development of the Rover 800 (the Honda Legend) in 1986 -- these models being the result of even closer joint development work. In 1989, furthermore, there was a new project -- a combined development of the Rover 200/400 and the Honda Concerto. This collaboration extended, moreover, beyond development to co-production, and to cross-sourcing of components. Rover and Honda, indeed, together erected an impressive joint supply base and system of supply chain organisation -- effectively, a jointly-managed vertical keiretsu -- for their European operations. This rising curve of collaboration culminated in a 20 per cent exchange of equity between Honda Manufacturing (UK) Ltd and the Rover Group in April, 1990 as a positive statement of mutual commitment. -

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Some commentators (e.g., Hamel, et al., 1989) read into this Honda-Rover story one of a deepening dependency spiral for the latter; and indeed, in 1990 Rover's (then) Director of Strategic Planning admitted that 'model development ... has shifted over largely to Honda'. There seems little question, however, that Rover did gain very significantly from the alliance over the years since 1979, not least as regards: A turnaround in corporate performance from, almost legendary, lame duck status to become, by 1993, one of the few carmakers turning in an operating profit (£50 million); absorption of Japanese techniques of manufacturing management, with unit costs moving towards Japanese levels (Faulkner, 1995); the deepening and widening of the scope of the alliance from a limited licensing agreement to involve a range of joint development work, the creation of joint assets (e.g., the maintenance of

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a joint component supplier base), coproduction between the two companies, and extensive information exchange; 7 a reduction in Rover's product life cycle from about seven years to nearer five (Faulkner, 1993,

p. 595). In sum, it seems fair to say that rather than being crushed by the embrace of Honda, it was rather the case that what originally seemed like a potential business corpse -- the BLMC of the late 1970s -- was, to the contrary, considerably reinvigorated by its long collaboration with a Japanese partner.

The 1994 Alliance Disruption: How Deep the Rift? In February 1994, British Aerospace (BAe) -- the then d o m i n a n t s h a r e h o l d e r in the Rover G r o u p -Announced the impending sale of its 80 per cent stake in the latter to BMW, the German carmaker, which Honda saw ' . . . as one of its most potent rivals in the world car market', specifically in the US. 8 It was reported at the time that BAe gave but one day's notice of this development to Honda -- which by then had been a partner to Rover for some 15 years? Honda initially reacted to this surprise development with coolness, but subsequently more strongly: Honda today demonstrated its fury at Rover's shock deal with B M W by severing virtually all links with the British car i n d u s t r y . . . The Japanese car giant vowed to go it alone with a new initiative in Europe . . . The initial anger at what is seen in Japan as a 'betrayal' grew rather than cooled when the company said it was ending the 15-year 'marriage' with Rover. ~o

Specifically, it appeared from reports that Honda was 'deeply worried' that the advanced technology embodied in its VTEC-E engine would seep into BMW's grasp if the p r e v i o u s extent of H o n d a - R o v e r collaboration were to continue, u A complete severance of the Honda-Rover linkages would have had serious rupturing effects upon the latter; and H o n d a had clauses written into its alliance agreements that it need give only seven days' notice on the cancellation of its key contracts with Rover should the latter be sold to another party and termination of the licences covering Honda designs at three months notice. 12 It is, however, difficult to unscramble an omelette -- and the complex, two-way exchanges that had been developed over the years between Honda and Rover were to the former's commercial advantage as well as the latter's. It is estimated, for example, that Rover in 1994 was paying Honda around £400m a year in licence fees for the latter's designs and the purchase of Honda engines.

In the event, Honda decided to relinquish its 20 per cent equity stake in Rover -- their mutual holdings were u n w o u n d in June/July 1994 - but also to maintain certain e l e m e n t s of the p r e v i o u s structure of collaboration. The related announcement by Honda stressed commercial realities: The relationship with Rover is a profitable part of our business. We do not want to jeopardise that. The decision to sell Rover was made by British Aerospace and we have to live with that, but commercial considerations are also very important at this point. 13

By the middle of May 1994 a new agreement had been patched together between Rover and Honda, covering all of their current collaborative arrangements. This promised them a continuation of a Rover-Honda relationship until the beginning of the next Century. 14 The relationship clearly had come back from the brink of a total break-up. Reading between the lines, however, the depth of the relationship also was now considerably less than it formerly was, as: The agreement of May 1994 concerned only the continuation of current collaboration -- rather than proposals for further deepening, which endured due to the commercial costs to both sides of unravelling previous involvements. It is reported that Honda took a distinctly hardnosed attitude in the renegotiation, demanding ' . . . a significant increase in its licensing royalties and components prices as the price for it continuing the series of licensing agreements and component supply deals which underpin more t h a n t w o - t h i r d s of R o v e r ' s c u r r e n t car production'. 15 It is also reported that in its secret discussions with BMW, Honda demanded of the latter the buildingin of certain 'Chinese Walls' assurances so that BMW would be unable to poach Honda's strategy and engineering. 16The previously relatively more open arrangement between Rover and Honda appears to have been replaced by a more shuttered and guarded one. Finally, Honda planned to increase its output of 100,000 units of Accords from its own Swindon plant by 50 per cent by 1998; and to double its European sales by the year 2000. The collaborator, in other words, is now planning to emerge much more as a direct competitor in the European market. 17 In short, the Honda-Rover alliance persists: but it has now changed from being a deepening collaboration to a relationship that endures primarily because of the remaining material benefits, and costs of full separation, that confront the partners.

An Evaluation of the Honda-Rover Alliance History What light does this long and varied saga throw upon

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the locomotive vs juggernaut views of Japanese partnering with Western businesses? Clearly, one case does not tell the whole story; yet this particular case is of great significance, not least because: 'The HondaRover link was the most important and complex AngloJapanese joint venture ever put together. 'is Moreover, the Honda-Rover collaboration was the first important Japanese investment in the UK car industry and, more generally, it has been taken as 'the precursor and the symbol of the steadily expanding AngloJapanese industrial alliance that helped to transform the [British] economy in the 1980s'. 19 A first conclusion must be that in this case the Japanese partner dearly acted as a locomotive force for Rover. No doubt the latter was aided by the estimated £5 billion spent by successive UK governments from 1975 onwards to effect a transformation in the company's plant and performance. Honda's partnering, however, added significantly to the company's regeneration also. Even copious applications of taxpayer largesse are no substitute for management know-how and innovative engineering in the task of building a genuine and sustainable advantage for a company. The unqualified conclusion must be that Honda's involvement genuinely aided the rejuvenation of Rover's international competitiveness.

future dependence upon close alliances with a business on the other side of the globe. This is not to suggest that Honda has set its face against any future European partnering arrangements. To the contrary, the President of Honda Mr Nobuhiko Kawamoto has announced that, in the wake of Rover's sale to BMW, it now feels free to indulge in any number of collaborative projects with various European companies that are to its advantage, including, even, BMW if a particular project appeals. However, as the Financial Times has diagnosed, there is a strong undercurrent of caution written into the subtext of Honda's refashioned European alliance strategy:

The unspoken message [is] clear: Honda may form other project partnerships in Europe, but never again will it willingly make itself vulnerable within a long-term strategic alliance. 22

Constructing Mutually Beneficial East-West Alliances: Some Basic Rules While the Honda-Rover partnership may be depicted as a mutually successful arrangement for both partners clearly, at least, until its disturbance in 1994, and in reduced form thereafter -- there are of course cases of East-West business alliances that could be characterised differently. It is possible to point to instances where -it commonly alleged the Western partner did not get all they hoped for from an alliance with a Japanese firm, or ended up with smaller gains to show from the arrangement. Major cases often referred to in this connection include the Furukawa-Siemens alliance; the Dunlop-Sumitomo collaboration; Colgate and Kao; and that of Komatsu and International Harvester (Turpin, 1993). - -

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Second, while some would detect an element of creeping dependency at the Rover end of the HondaRover alliance, the fact is that Rover was able -- as recounted above to maintain its own independence during this long alliance and, moreover, to build up its own management, supply organisation and engineering skills. Moreover, as the alliance deepened, Rover's contribution to joint development actually increased. - -

Third, if any player in the saga may be said to have acted especially ruthlessly in its partnering dealing, then that dubious honour has been assigned by numerous business commentators in the British press to BAe, not to Honda. 2° It was BAe, these analysts allege, that rode roughshod over the interests of its erstwhile partner in this case, and not the other way about. As the Times commented on the wider consequences of the preemptory BAe handling of the Rover-Honda relationship:

Trust is the keynote in most marriages, and trust is the keynote to Japanese business relationships with Western companies. BAe's decision to disregard that trust displeased not only Honda, but many Japanese companies operating in Britain; who had then to assure Tokyo that a mistake had not been made, that their partners were not going to follow suit, that not all British companies were as cavalier in their casting aside of such a central business notion as the Japanese judge BAe to have been. 21 Finally, of the various parties to this alliance casehistory, it seems to be Honda -- rather than Rover, BAe or BMW -- which has been made the most wary of 310

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Perhaps the only sensible conclusion to be drawn is that the complex reality of East-West CBAs encompasses both locomotive and juggernaut cases in both directions. There is certainly no law of economies that dictates that an alliance between a Japanese firm and a European one inevitably generates greater benefits for the former rather than the latter and vice versa. Looking at the full spectrum of East-West business alliance outcomes, we indeed may see those which seem to end in highly asymmetric pay-offs for the partners, while others result in more balanced consquences. Yet others, of course, end in mutual discomfort -- as a costly albatross for both collaborators. The correct inference to be drawn from this varied reality, for the formulation of global business alliance policy, is equally multiform. Enterprises in both hemispheres need to eschew simple stock responses to alliance prospects such as 'avoid all Eastern/Western entanglements'. The real problem is how to choose selectively among alliance opportunities in order to obtain 'win-win' prospects, whilst avoiding the problems and pitfalls associated with 'win-lose' or 'lose-lose' arrangements. What general precepts should European businesses take

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on board in considering partnerships with Japanese firms and vice versa to maximise the chance of getting these difficult decisions right? How can the vehicle of transnational alliance be used to create joint competitive advantage? How can the prospective partners mutually act as a 'locomotive' for each other? Partner selection and alliance construction often involves intricate matters -- on which there is an extensive literature (e.g., Zahra and Elhagrasey, 1994; Faulkner, 1995). It is important, however, to keep uppermost in mind the very basic strategic considerations involved in forming a mutually-beneficialCBA; if these are ignored, the prospects for success are not likely to be bright.

Four Precepts for G l o b a l Strategic A l l i a n c e Formation There are some basic principles about the formation of international CBAs that may be distilled from a large array of experience in these matters. They might be described as the 'Four Precepts' of successful East-West business partnering. Central to all of these precepts are the importance of awareness, realism, and cautious assessment and action. Marriages -- it is said -- are made in Heaven. Business alliances, however, are unquestionably an earthly endeavour! Moreover, it is well known from many studies that the major cause of marital failure is that of excessive or unrealistic expectations by one or both parties. If such problems afflict the institution of marriage, they assuredly are present also in the very worldly context of interfirm collaboration. It is, in short, essential to be unromantic and quite down-to-earth when contemplating strategic business alliances.

Be realistic about alliance prospects Our first precept flows from this general point. There appears to be a general tendency to over-estimate both the potential benefits and longevity of business partnering arrangements. When alliance failure occurs -- as it commonly does -- the partners' reactions are inevitably those of bruised spirits and often recrimination, as was the case with Honda in the wake of the Rover sell-off. It is important to guard in advance against this tendency. Many businesses that rush headlong into an alliance seem to be unaware of the sobering statistics concerning alliance failure and mortality. Various studies suggest that, as a round figure, approximately more than half of all CBAs end in termination within the span of seven years. Bleeke and Ernst (1993), for example, in their study of 49 major alliances undertaken within the ranks of the top 150 companies by market valuation in Europe, Japan and America (50 firms apiece) found that twothirds of these CBAs ran into trouble in the first two years of their operation. They also found that only 51 per cent of these alliances were deemed to be 'successful' by both partners. These general 'facts of life' about alliance prospects

apply to the broad picture across the so-called Triad (of the EU, US, and Japan) and to CBAs in general, whether involving Japanese partners or not. It seems in general, however, that Japanese firms themselves have a predisposition towards longer-term collaborative arrangements, perhaps on the model of the keiretsu relationships with which they are so familiar in Japan itself. Undoubtedly, Japanese firms involved in motor manufacturing such as Nissan, Honda and Toyota have sought to replicate these vertical collaborative arrangements in their forays into manufacturing within Europe and the US, as with the development of the Rover-Honda supplier base. Even on this matter, however, a word of caution is necessary. There is mounting evidence that the durability of keiretsu relationships within even Japan itself is weakening (Dawkins, 1994; Ogishima, 1994).23 Mr Kazuo Chiba, counsellor to Mitsui, one of the oldest keiretsu, has even argued that these long-lived alliances within Japan are likely to become a 'thing of the past' over the next two decades .24 In short, a realistic init@,l assessment of alliance durability and content is necessary to avoid a sense of failure, followed by bitterness and recrimination, when overoptimistic and grandiose expectations are eventually cut down to size by the grim tests of time and experience. This point is perhaps underlined by the case of the Daimler-Benz and Mitsubishi alliance.

A collaborative business arrangement must be initially assessed for durability and content to avoid failure This strategic partnership, formed in 1990, covered not only car production, but also potential collaboration across a broad range of aerospace and electronics developments. The partners to the alliance are two of the leading, and largest, engineering companies in the world. The announcement of this CBA -- perhaps inevitably -- was initially paraded in the world press as some sort of 'super alliance'. The realities behind this extensive press hype, however, have so far proved to be of much less substance -- if not of an illusory character. Mitsubishi, in particular, seemed to find considerable difficulty, in the cold light of day, in detecting what, if any, benefits at all it could detect in the specific projects supposedly lying behind the general alliance which it had so fully entered into. Many particular proposals entertained at the foundation of the alliance subsequently foundered. Some observers have pronounced this global strategic alliance as a classic case of CBA failure:

From start to end both groups [Daimler-Benz and Mitsubishi] could not find any mutual benefits, resulting in continuous and unproductive meetings. Moreover, both over-estimated

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the abilities of their partner, focused on remote possibilities and acted on false hopes (Sasaki, 1993, p. 48). It is not impossible that Daimler-Benz and Mitsubishi will, however, together snatch some genuine collaborative benefits for the future out of these ashes. Nevertheless, the case is a pointed reminder that it is essentially easy to engage in 'lose-lose' scenarios in business collaboration ventures. If two such vaunted and global companies can make a hash out of alliance arrangements, so can, and do, others. This underlines the basic rule advocated here that, in contemplating East-West collaborative arrangements, the prospective partners should seek to start from an essentially realistic assessment of the prospects concerning alliance content and durability. Business 'castles' built on the 'sand' of pure hope are unlikely to deliver much to either partner. Be aware of underlying differences in approach, culture and goals Any form of transnational business relationship -- be it of the trading, HQ-subsidiary or collaborative type -is likely to entail significantly larger problems of cultural dissonance than those involved in their intra-national counterparts. This problem about the management of transnational CBAs exists even in the case of those formed across the borders of adjacent countries in the relatively confined area of Western Europe (Lichtenberger and Naulleau, 1993). Such difficulties are inevitably magnified in the running of East-West strategic alliances that stretch across the globe not only geographically but also on the cultural plane• Collaborative business relations are inherently difficult to manage see for example the unitary, 'hierarchical' model of business organisation, and transnational ones especially so (Doz, et al., 1990). It is therefore especially important to be aware of the underlying differences in business ethos/goals, and cultural differences generally, that could be the source of difficulty and disenchantment in any global strategic alliance.

1988). From the European end, this should include awareness of the Japanese disinclination towards confrontation, the 'group' orientation of Japanese decision-making, and the special emphasis placed in Japanese business dealings on personal trust rather than the tightness of formal contractual specifications. To such differences in national managerial style deriving from cultural underpinnings need to be added possible differences in managerial style in the sense of Goold and Campbell (1987). The emphasis in major excellentlymanaged Japanese concerns upon the longer-term, and upon the building of core competencies rather than the performance of the current product portfolio, has been noted especially by Prahalad and Hamel (1990). While such a characterisation would not be untrue of certain European companies also, Goold and Campbell's research into major British companies has revealed a variety of managerial styles in this setting, including the 'financial control' style which focuses upon short-run financial parameters rather than considerations of longrun strategic management. There thus arises the possibility of alliance rupture due to an underlying difference in managerial styles/ objectives, as depicted in the following scenario. If: ... the Japanese partner is managing the [collaborative] business so as to increase market share and the ratio of new products, and the Western partner is looking for a high ROL and maximising the shareholders' return, troubles lie ahead (Turpin, 1993, p. 12). Indeed, the fraying of the Rover-Honda alliance, may be construed in these very terms. No doubt BAe viewed its actions in selling off its stake in Rover as 'discharging its obligations to its shareholders' (Potter, 1994). On the other hand, Honda -- steeped in a different managerial style and approach -- evidently had difficulty in comprehending, let alone countenancing, BAe's behaviour.

This, however, seems rather one-sided, in that Western businesses are not exactly monastic orders -- the competitive and enterpreneurial spirit is a general feature of Western society, most especially in its business organs.

As this latter case makes pointedly clear, differences in managerial style (in the sense of Goold and Campbell) between the partners in East-West CBAs can and do lead to difficulties -- and possibly their breakdown. At the same time, however, it would also be folly to expect to find a complete congruence of managerial style, and culture, even in the most 'perfect' partnerships. What firms contemplating such relationships could and should do is to make themselves fully aware of these prospective difficulties and differences, and take them into account in both initial partner selection and subsequent alliance management. As with marriages, strategic alliances that are built on erroneous understandings of the partner are likely to head for trouble.

Nevertheless, there are important underlying differences in Japanese and European culture and business approach that it is essential to take into account in seeking to successfully manage CBAs involving partners from both of these backgrounds (Kobayashi,

Be aware of the need to acquire and guard key skills As noted above, a key contention in the juggernaut view of East-West business alliances concerns the matter of unintended or lopsided transfers of skills, technology, and experience.

Some proponents of the juggernaut view sometimes characterise this cultural tension in Japanese-Western business partnering arrangements as residing in the 'Samurai approach' of Japanese enterprises: •.. It is today no exaggeration to say that the Bushido Code lies at the soul of Japanese business (Spruce, 1994, p. 37).

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It could, perhaps, be true historically, as juggernautists contend, that:

Western firms, with few exceptions, have been unable to utilise alliances to learn new skills as effectively as their Japanese partners (Lei, 1993, p. 37). To the extent that this has been so -- but it is not necessarily so then that is not the 'fault' of Japanese businesses. The blame, if such there has to be, would lie rather in a failure of some Western firms to understand the inherent nature of business alliances from a strategic perspective. -

-

In the very nature of things, strategic alliances are not charitable organisations: they are arrangements between commercial organisations with a view to gain. The partners agree to work together, and to put certain things into the venture with the hope of getting as much out of it as possible. As Hamel, et al. (1989) emphasise, the paramount factors involved in the split of gains to the parties in many alliance situations revolves around the balance of learning obtained by each from the collaborative venture. The companies which tend to gain the most from a CBA tend to be those which: -

-

diligently devote resources to learning as much as possible about their partner's capabilities in areas where they themselves have weakness (but which are important to their future); guard against the unintended and uncompensated transfer of their core skills and technology to their partner(s) as a result of assiduous learning by the latter. The importance of both elements in providing each partner with acceptable levels of payoff and future security is well illustrated by the Honda-Rover-BMW saga. As recounted above, the Rover-Honda alliance operated to the mutual benefit of both partners, and indeed blossomed considerably over the years. There is no doubt that Rover's considerable gains from the alliance were underwritten by its willingness to learn avidly the manufacturing management techniques of its Japanese partner. At the same time, it sought cautiously and deliberately to safeguard its own competencies from unintended transfer, as Roland Bertolo, then Director of Strategic Planning at Rover, describes:

We took steps to limit transparency and minimise informal transfer of knowledge by circumscribing a partner's opportunity to learn in an uncontrolled manner ... The challenge is sharing sufficient skill to create a competitive advantage for both partners while avoiding wholeshale transfer of core abilities. 25 Both partners, moreover, set up systems to transfer information between them on a 'need to know' basis; and to limit informal get-togethers at either the workplace or social gatherings to the minimum necessary (Faulkner, 1995). Yet the alliance was

successful -- and was so regarded by both parties. In short, effective East-West business collaboration is not undermined by a worldly-wise attitude in respect of the central importance of jointly-accepted controls on the interfirm learning process. The potential rupturing of the Honda-Rover alliance in 1994 came about as the result of the possible breakdown of this situation. Honda feared that the new controlling stake in Rover could lead to an uncontrolled and uncompensated transfer of its core technological competencies to an arch-rival, BMW. Many treatments of business alliance formation emphasise the importance of trust as an underpinning of their success or otherwise. This is undoubtedly correct. However, unilateral trust that is not backed by a sense of control is, to say the least, a potentially fraught and dangerous position to adopt. Companies engaged in East-West partnering would be on surer ground to accept the inevitable possibility of unintended skills transfer (in either direction) and to build-in deliberate controls at both ends that are upfront, mutually understood, and respected.

Search for genuine complementarities in constructing a CBA One major route to the building-in of mutual safeguards against unintended/uncompensated skills transfer is to search out business partnering possibilities across the East-West spectrum where the probability of complementarity between the partners -- as compared with their actual or potential competiton -- is high. That is, rather than seeking for collaborators who do much the same sort of thing, but are based in another continent, the focus should be upon potential partners who have complementary, rather than competitive, capabilities. 26 Neo-classical economic theory, initially erected in a century when the primary form of international economic relationship was that of direct trade in goods, emphasises, since David Ricardo, differences in 'comparative advantage' as the foundation-stone of the potential gains from trade. In this view, the gains from trade are at their highest where the trade flows involve goods (and services) moving from quite differentlyendowed countries, in terms of the balance of resources (the ratios of land to labour, and labour to capital). We live in a different century, and the possibilities of gain from international economic relationships are wider. Not only do flows of goods occur, but also a fundamental facet of the 'new' economic scenario is the flow of human knowledge from business to business, and from continent to continent. This opens up a cornucopia of both new threats and opportunities see for example, the orthodox neo-classical model of international trade. Exchanges of knowledge and knowledge-based goods and services are a major feature of the contemporary scene: and so also are worries about the unintended/uncompensated transfer of knowledge, which is a cornerstone of competitive advantage in many modern industries.

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O n what principles should business alliances across the globe be formed in this ' n e w ' world, in order to gain mutual, and mutually securable, advantage? Firms around the globe need to understand that while the old (Ricardian) comparative advantage theorem is inadequate in the contemporary context, its essential thrust remains right. There is most to be gained from the collaborative putting-together in East-West partnerings of diverse and not-easily-replicable competencies, rather than from the 'horizontal' alliance of partners w h o are doing the same things. The possibility of unintended skills transfer is lessened, and the potential gains from collaboration are maximised, where Eastern and Western alliance partners can put together a complex of joint efforts in which their respective inputs to the alliance are more truly distinctive, and therefore difficult to replicate. H o n d a and Rover in the 1980s had these differences, necessary to form a mutually beneficial alliance: distinctive competencies that could be amalgamated in particular developments, for joint gain. Perhaps the major problem of the Daimler-Benz/Mitsubishi alliance was that it possibly failed to look at things from such a genuine 'complementarity' point of view -- rather than a 'we-are-joint-top-dogs, how-can-we-collaborate?' perspective.

e n o r m o u s potential o p p o r t u n i t i e s for East-West business partnering in the current and foreseeable future, as the locomotive view stresses. The important things to remember, however, are the basic precepts in coupling the carriages of the train. Without these basic considerations being taken into account, East-West business alliances may -- and clearly sometimes do -end in an u n h a p p y ride for one, or both, partners.

Notes 1.

2. 3. 4. 5. 6. 7.

Some General Reflections There has been a growing debate in the West about the sharing of gains in strategic alliances with Japanese and more generally Eastern Asian - - business partners. One view, the 'juggernaut view' (as I have labelled it), espoused by some notable political and industrial leaders, has been the cause of a more widespread public concern in Europe and America about the matter. The detailed case examination of the Rover-Honda alliance history does not, however, lend support to the juggernaut view. It is not necessary to deny -- nor is it here denied - - that some counter-examples, more congenial to the juggernaut view, m a y be referred to. The balanced conclusion must be that there is no simple picture of the split of gains from East-West business partnering arrangements. Some end u p as 'win-win' situations; others involve differential pay-offs; and yet others may result in 'zero-zero' outcomes (or even joint losses) - - as seems to have been the case with the Daimler-Benz/Mitsubishi alliance to date. Essentially, businesses - - not governments or commissions -- need to ponder u p o n these complex matters, and select alliance prospects according to their o w n considered advantage. In so doing, they should try to be aware of the complex cultural factors involved, the learning possibilities in alliances, a n d the potential for complementarity that exist (or do not exist) in alternative partnering arrangements. They should also be generally aware that m a n y alliances end u p in trouble or failure. This might seem like a negative conclusion: but it is not so at all. It is, rather, simply a realistic one. There are 314

8.

9. 10. 11. 12. 13. 14. 15. 16. 17.

18. 19. 20. 21. 22. 23.

An earlier version of this article was delivered as a paper at the conference on East Asia -- EU Business Research, Birmingham Business School, University of Birmingham, 4-6 January 1995. The author would like to thank participants -- and separately John Addison and Jim Bourlet -- for their comments. Quoted in Rapoport (1992), pp. 26-27. Quoted in Rapoport (1992), p. 9. See, for example, Oppenheim (1991), Prestowitz (1988), Van Wolferen (1989), Wolf (1985), Samson (1993), Spruce (1994). A diagnosis of this business/economic history is contained in Williams, et al. (1987). Womack, et al. (1990). 'When Honda asked Rover to build its Concerto model at Longbridge, Honda opened its factories to Rover staff to allow them to feed back quality information. The information exchange has accelerated ever since.' J. Griffiths and K. Done, Honda May Hold the Ace When Cards are Revealed', Financial Times, 21 February (1994), p. 20. See also Oliver, et al. Morris and Wilkinson (1992), pp. 196-198. Griffiths and Done, op. cir. (1994). R. Halstead, Is this Britain's Worst Managed Company?, Business Age, March 1994, pp. 42-46. A. Cornelius and I. Morton, 'Honda Goes to War in Europe', Evening Standard, 21 February 1994, p. 1. M. Kemp, Honda Drives Away, Daily Mail, 22 February 1994, p. 2. Griffith and Done op. cit. K. Eason, Honda Allays Jobs Fear as Rover Deal is Abandoned, Times, 22 February 1994, p. 1. Rover Group and Honda Reach Agreement, Birmingham: Rover Group Public Affairs Press Release, 19 May 1994. K. Done, Honda Set to Revise all Rover Contracts, Financial Times, 2 March 1994, p. 1. Reported in M Kemp, op. cir. 'That Honda will now go head-to-head with BMW's Rover, rather than giving it largely beneficial support as a stand-alone British company, is now clear'; from Hell Hath No Fury for Honda, Times, 22 February 1994, p. 25. M. Vander Weyer, Why We Cannot Afford to Betray the Japanese, Daily Mail, 22 February 1994, p. 8. A. Kaletsky, Rover Was Really Sold to the City, Times, 22 February, 1994, p. 18. See, for example, notes 9, 17, 18 and 19. Source as for note 17. J. Griffiths, Not Divorce But a Partial Separation, Financial Times, 13 June 1994, p. 25. It is to be noted in passing that these developments -such as the ongoing dissolution of cross-shareholdings among Japanese corporations (Ogishima, 1994) -- are weakening the substance of the juggernautist contention concerning the barriers to Western acquisition of Japanese enterprises arising from the existence of keiretsu.

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24.

25. 26.

Quoted in Dawkins (1994). Quoted in Faulkner (1993), p.593. The (significant) exception to this otherwise sensible general rule concerns the case of high-tech developments involving massive yet high-risk sunk costs in R&D (e.g., the development of new airliners; major developments in computing technology, etc). In such instances, the pooling of risks by 'horizontal' global collaborators makes more sense than it does under more mundane business circumstances.

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JOHN BURTON, University of Birmingham Business School, Edgbaston, Birmingham B15 2TT. John Burton is Professor of Business Administration at the Birmingham Business School, University of Birmingham. From 1984-1987 he was Research Director at the Institute of Economic Affairs, and in 1987 a Special Adviser to the House of Commons Treasury and Civil Service Select Committee. He is co-founder of the magazine Business Studies, and the author~coauthor of 11 books and numerous journal articles. Current research focuses upon strategic alliances. Professor Burton teaches Strategic Management for European Business at the Birmingham Business School.

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