How to source, create, and manage international joint ventures

On this episode, Kison and Ritch Schaafsma, VP of Corporate Development, Global Mergers and Acquisitions at General Motors, discuss the ins and outs of international joint ventures.

Ritch is an accomplished and internationally seasoned Senior Corporate Development Executive, with over 15+ years of experience offering execution, valuation, strategy and restructuring expertise for driving multi-billion dollar growth transactions to C-level executives and Boards of Directors of Industry-leading manufacturers to meet their strategic objectives.

In this podcast you will hear about Ritch’s transition to working overseas, cultural challenges, and his favorite global transaction.

Additionally, they discuss how to navigate national governments, what prompts an international joint venture, and what exactly the international joint venture process looks like. 

Please note the views expressed in this podcast do not reflect those of General Motors.

Text version of interview

Maybe we can kick off with you sharing a little bit about your background?

I am an International Executive at General Motors. I’ve been overseas for a few years, conducting business on behalf of General Motors. I’ve been working in the M&A space for 10 years, and prior to that, I have mostly a finance background and I worked in various functions in purchasing, manufacturing, sales, and marketing, all in finance roles. Prior to working with General Motors, I have experience with Delphi Automotive and Ford Motor Company in Canada. 

What do you do at General Motors now?

Now I am the President of Corporate Development, Global Mergers, and Acquisitions for General Motors in China. I manage all of the deal activities specific to our GM China business, which is our second-largest market globally. I manage the relationships with joint ventures that we have established in China and look for any type of new collaborative opportunities with companies in or outside of the automotive space. 

Ritch, can you walk me through your personal transition, going from a US worker to working overseas?

It’s a huge adjustment. Back in 2014, we were offered to move to the GM international office, which was then based in Singapore, for a three-year assignment. When you move across the world to a new role, while you are learning about the new culture and moving to an unfamiliar location for the first time, you are also learning about new business and how to conduct business in a different part of the world. It took about six months for the whole family to adjust and for me to gain confidence in my new role.

What were the biggest cultural challenges you’ve had?

My adjustment to China, compared to Singapore, was a bigger challenge because the vast majority of people don’t speak English. You have to have the mindset to see these as exciting challenges because inevitably, there’s going to be something you don’t like and there’s going to be major changes just to how your life is conducted on a daily basis. It’s a significant change, but it can be a very rewarding experience.  

Can you tell me about your favorite global transaction that you worked on?

There was a proving track that GM owned in the UK, which became surplus within our company. We weren’t fully leveraging this asset and the thought was, rather than winding this down, it presented a positive business opportunity for somebody else that can take over the track, while still licensing it back to us or at least providing services to us. It wound up being a real win-win for all the parties involved, where we didn’t have weighing down costs, the employees continued to work and the private equity firm that was buying it from us was able to grow the business significantly and in a few years repackage and sell it. This deal catapulted me to other opportunities.

One of the biggest challenges I would expect when doing international deals is dealing with the national government. I am curious to hear about your experience with that and how it varies between countries.

Our senior leaders in the company, naturally, want us to move as quickly as we can in an efficient manner, and quite often, depending on the locale, the government approvals that are required are generally extensive and that can really have an impact on the overall transaction.  I would say it differs from country to country. It’s important to understand what level of government is appropriate depending on the transaction. You always want to make sure you have the support of the national government because otherwise, you can waste the resources of both parties. 

You’ve done deals in India, Singapore, Chine, Africa, South America, and Europe and you mentioned that a big step is getting early support from the national government. Would that hold fairly true with all those different countries that you worked in?

The level of involvement depends a lot on the nature of the transaction. If you are doing a straight-up licensing deal you may have to work with the anti-competitive body in the nation to make sure that they are going to approve this overall. Generally, it’s pretty straightforward, as long as you follow all of the laws in place and give sufficient notice period and allocate time for them to make a decision. 

Is there any country where it’s easier than in the US to do deals in?

From my perspective, Western countries are easier to do deals in just because we tend to have similar systems. e understand those systems and have established bodies there. It depends on the specific country, but in general, I find it pretty efficient to do business in most countries.

I found that in some countries, they really go into detail and come up with a million what-it scenarios. Do you see these aspects culturally when doing business with different companies in different countries?

Certainly. Part of the rationale behind detail-oriented their approach, which I’ve seen in China and Japan, is wanting to have a good relationship with their partner and to build up towards something. With American companies I find it to be much easier to get together and figure out what the teams want, communicate and move towards the deal more quickly, whereas if you are doing a deal in some of the Asian countries they need time to understand whether there is going to be a mutual level of trust that will allow us to work together or not. 

They are evaluating their partner and the deal and I think there are some positives to that approach, although it can slow things down. The fundamentals, however, are essentially similar around the globe, you just need to understand some of the different local cultural approaches. 

How do you approach dealmaking?

I like to focus on establishing trust and having a good relationship with whomever we are working with because I believe that the best deals are those when both parties are mutually working to achieve each other’s objectives and bridge gaps. It’s important to try to be flexible where you can to help others achieve their objective, look for less important things to trade-off and try to really understand who you are dealing with. You are going to be much more concerned about how you feel about the partner,  especially when you are dealing with longer-term relationships. 

What’s your advice on getting the best outcome out of a transaction?

You need to lay out your strategy in advance very clearly and learn about your counterpart and how they have interacted with other partners before you get to the negotiating table. You really want to understand your negotiating bandwidth upfront so that you are not regularly going back to leadership if you have to deviate from the original construct. 

You want to work hard to solve your adversary’s problems as hard as you work on your own. If you are doing that collaboratively, you’ll reach the right conclusion earlier. Knowing the areas where you can be flexible without huge costs ahead of time helps you weigh trade-offs and prepare your leadership team. If you don’t do that, you’ll end up reacting and when you react, you frequently make a wrong decision.

Do you try to paint different scenarios early on to help you generate those ideas and find out areas where you can be flexible? What is your approach on finding those areas?

There are certainly those where we lay out all the different options, evaluate the positives and negatives for each, and try to determine what we think is our best strategy. You also have to understand what the strategy of other stakeholders is going to be. In certain instances, we’ll have a full workshop rep with different functions and try to lay out different scenarios, how everything might play out, how our competitors and our partners might react. That’s generally what we’ll do with larger deals.  

Are you taking the same approach when you do joint ventures?

When we are looking at new commercial opportunities we explore all the different ways to handle a transaction, and if you are looking at a scenario where there’s going to be a long-term relationship where both parties are contributing to this relationship, those would lend themselves often to set up a joint venture. You want to be very careful and think through everything when doing a joint venture because the costs of getting out of it can be very high. It’s much less complex to do a licensing deal that has an expiration date or a collaboration-based contract versus setting up an entire organization.

So there are joint ventures, there are licensing deals and general contractual type of partnerships. Are these the main categories you do?

We do all kinds of transactions. We occasionally have acquisitions and I’ve also worked on divestitures, but the bulk of my work in China is dedicated to licensing deals, licensing our technology to the China companies, and code development arrangements where we both are jointly paying for the development of vehicles.

So a joint venture is when you are creating a dedicated entity that you are both contributing to, which would run independently?

Yes, you are essentially creating a new company. You are setting up an ownership structure, which can change depending on who’s bringing what to the relationship, but generally, the starting point is a 50/50 joint venture, where each partner has equal say. They generally divide up the organization and determine what decision-making roles are going to be set up by which party. 

You need to have agreements that dictate how the joint venture is going to operate, you set up a board of directors that has oversight with equal voting rights. You want to allocate the decision making responsibility to the JV itself and then above a certain level, you’ll allocate that decision making to the board of directors. You want to define the dispute resolution upfront. If you don’t have a structure in place that allows you to make decisions quickly and move, then the business is not going to be healthy.

What specifically drives the direction for a joint venture over partnership?

I would say business needs. A joint venture is set up in scenarios where you want to conduct business on a specific location for a while when you are dependent on other partners for certain elements of it, when your interests are aligned and both parties are motivated to go in the same direction that gives the business the most chance to succeed. 

What qualities do you look for in a joint venture partner?

You certainly want a company that has an established history of partnering with others. You want to establish partners that will be easy to work with, that are transparent, have experience in working with others, and have a good reputation. 

Is there anything specific that can help discern whether it’s going to be good versus a bad fit?

If right away, when you start discussing things around partnership they start to negotiate before you get further than establishing the relationship, that’s a warning sign. If you find a company that had a history of litigation associated with their partnerships, that’s another red flag. 

What’s the process of approvals when it comes to doing joint ventures?

We have a senior-level team that we get approval for the negotiating envelope from early on in the process. We keep them aware of the progress of the transaction as we go and raise issues we need help with. When you are setting up these types of relationships it goes to the very senior leaders of the company for approval. 

Is this similar to your M&A activity?

Large deals are going to the CEO, and if they require significant investments they go to senior leaders. When doing different transactions we keep the senior leadership team updated on the progress, and once we reach a completion phase, we’ll go through a final approval where all of the different functions get an opportunity to review the entire agreement before we actually sign.

What are the executive’s biggest concerns?

It’s important that we have identified risks, tried to mitigate all of them, and really understood the nature of the deal so that we are getting the best deal that we possibly can. There’s a lot of focus on strategic work, what are the financials around each deal, how would we mitigate things if the deal goes wrong and what are the parameters we can put in place to ensure the success of the deal.

What happens when conflicts arise in your joint ventures?

When things pop up related to contracts, functional experts escalate those issues to me, and then I’ll work with my partner within the joint venture to try to understand what’s causing that conflict, what are the different ways to solve it, and who is responsible for it. We really try to be impartial and understand what’s really happened and then find a solution, which is a big part of my role. There are conflicts that I’m unable to solve at my level, conflicts that are real roadblocks, and those are the ones we need to escalate to senior leaders.

What type of issues would be examples of things that cause a conflict?

A lot of it is around the interpretations of the contract and what rights go with intellectual property licensing. There can be agreements on how that is approached, what are the obligations of each party, who is responsible for the work, and what the ultimate solution is. It all usually comes down to contractual terms, the interpretation of them, or commercial terms.

Can you walk me through setting up governance for a joint venture?

There are two big elements to it. One is how you set up the organization itself and who has the decision-making responsibility within the joint venture, which is a structural piece of it. How you structure that organization itself really dictates how it’s going to run on a day-to-day basis. On top of that, you’ll put a board of directors that have the oversight of larger decisions. 

You really want to establish what the rights are and make sure those are documented in both parties, how the voting is conducted, and what is the decision making ability of the employees. This would be the contractual piece in the organization structure itself, and both of those need to be strong to ensure the success of the JV.  

What does the international joint venture process look like and how would that differ from doing something domestic?

The biggest factors are understanding the culture and what that brings, understanding the legal environment and the regulatory environment, as well as the local customers in that market. The biggest difference is that things generally take longer and sometimes you need to negotiate in a different language with the translators in the room, which can make the whole process difficult. 

There are obvious communication challenges, but do you see cultural challenges or barriers that really make things difficult to get the deal done?

When we are setting deals, we are always relying on expertise in the US from different functions. Before we bring these people into the deal, however, we have internal meetings, plan for everything before we start and educate people, things can go much more smoothly. 

Can you tell me a little bit more about working with those third party people to help facilitate the transaction? Who are they and what’s their approach?

If we are doing a new type of transaction and we aren’t exactly sure how regulatory bodies behave, we’ll work with an M&A firm there that does deals in that locale. You have to be careful to not be afraid to spend money if you have an outside partner that’s really going to help you to protect your interest and help anticipate issues that you don’t see. Often they have connections with the right administration to tell us what the rules are, what paperwork we need to fill out, and what the deadlines are. Doing that on our own would make us waste a lot of time and money. 

How do you go about finding somebody if you did want to use an outside adviser?

We’ll leverage any contacts we have in the country where we’ve conducted business and look for recommendations and sometimes we’ll leverage our global relationships with bigger accounting firms. A lot of times, it’s just using contact to find a company that could be a very local company that really understands things and has a lot of experience doing deals.

What would be your top points or considerations when approaching the conversation with a company that you are looking to do a joint venture with?

It’s really important to understand the context of the business objectives that are trying to be achieved. If the joint venture is going to maximize the value, will there be enough decision making power within the joint venture itself that it can conduct business and complete as an independent company? What does each partner want out of the relationship? How easy would it be to unwind the JV if it’s unsuccessful? Those are all things that should be asked early before you embarked on setting up a joint venture.

If it does go down that path and things don’t look successful, how do companies unwind those relationships?

In the most successful ones, you would have thought about initially when setting up the joint venture and put it in a contract. If you haven’t done that, it can lead to a poisoned relationship between partners, and that is something you want to avoid. The best way to do it is to try to wind it down in an orderly manner, but looking out for the interests of both partners. 

What is the craziest thing you’ve seen in M&A?

I’ve flown to Saudi Arabia to meet a price in the Middle East to explore different opportunities to collaborate, and as we were traveling, some of our senior leaders turned to me and told me to play a role of a flower pot in the upcoming meeting, meaning I should sit there, be pretty and don’t say anything. It was really humorous. I’ve also done deals where I had armed guards with me, although fortunately nothing negatively happened. 

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