Reasons to Form Joint Venture

Question 1

Reasons to form joint venture are as follows:-

It was a legal requirement for foreign company to join with Chinese companies to form joint ventures.

Krohne and Shanghai Puyuan are high tech companies. Puyuan had the technical, sales channel and production worker for one of its subsidiaries. The joint venture enabled Krohne to transfer its international technology standard into China’s fast growing market whilst Shanghai Puyuan provided its existing manufacturing plant, workforce, sales and distribution channel for Krohne’s products. Krohne could also use Puyuan’s network, especially Puyuan was a subsidiary of China National Nuclear Corporation who should have good networks with top policy maker, to build good relationships, avoid red tape and other bureaucratic complexities. Both companies were related as they have overlapping by their product/ technology and material used. The joint venture enabled the transfer of knowledge, skill, competency, share the same customers, sale force thus creating positive synergy.

Reasons for giving up the joint venture are as follows:

1. It was the joint venture agreement signed in 1987 to take turns to appoint the general manager every 2 years. In early 2000, the Chinese violated this agreement. Unwilling to lose power a vice-president representing the Chinese side broke into Sean’s Office and took away SGAIC’S official seal and legal chapter by force. The Chinese side had committed a moral hazard breaking their mutual trust.

2. Seizure of the official seal and legal chapter by force means that the Chinese side did not obey and law and regulation. The controlling power was still vested on Chinese side who could do anything to the company detrimental to the German side. Such act is equivalent to a holding up hazard.

Answer Q2

The primary causes of conflicts between the shareholders are as follows:

1. They will expect the Chinese side to abide by the joint venture contract agreement. The moral and holding up hazard had indicated that the Chinese side had breached the agreement. German shareholders felt that the Chinese side is cheating. The mutual trust had broken.

2. Chinese side is holding majority shares and they considered it unfair to rotate the appointment every two years. Therefore they breached the agreement by taking control by force in 2000. There is a conflict on who should control the joint venture.

3. SGAIC has learned the core component knowledge and capable of producing another product to compete with the product produced by Krohne. As the intellectual property rights were owned by Shanghai Puyuan, Krohne can do nothing about the new product by SGAI. Krohne considered