Soviet joint ventures
pearls and perils of Perestroika
This article is an introduction to a planned feature column which will begin appearing in the PM NETwork soon, edited by Rudy Boznak. It will focus on news from around the World which may have an impact on project management. Individual contributions of 200 to 300 words are welcomed. Send them to: PMIC ATTN: Rudy Boznak
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SOVIET JOINT VENTURES: Pearls and Perils of Perestroika
Rudolph G. Boznak, United Research
We are living in one of the most dramatic and unpredictable periods in world history. The Berlin Wall has been scaled, two Germanys have merged, Western Europe is becoming a community of nations, and the Soviet Union is threatened with “coming apart at the seams.” Not only have the pace and magnitude of these changes destabilized Europe'apolitical status quo, they have also captured the imagination of world business leaders.
While these initiatives may alter national and global economics, in pure business terms each also promises significant financial risk and opportunity. One region that is least predictable, yet may afford the opportunity for long-term economic expansion, is the Soviet Union.
The USSR's 8.6 million square miles abound with virtually every natural resource and geographic and climatic condition found on earth. Its 280 million people, long suffering from a dearth of consumer goods, transportation, food supplies, housing, leisure pursuits, and banking and investment opportunities, have billions of rubles available to seed a free-market economy.
Although Soviet businessmen and government bureaucrats may lack in the management skills needed to develop a free-market orientation, the Soviet people combine an academic and cultural richness with an unbridled eagerness to reform. Together, these factors can create a unique opportunity for those with the vision to see the possible. As one Soviet business director emotionally stated during a recent exchange, “We have been waiting seventy years for this moment.”
His words were echoed in discussions with other key business leaders who “look toward the West” for their source of management expertise and guidance. Amidst uncertainty and anticipation of a free-market economy, they note that “the momentum unleashed by Pere-stroika's initiatives cannot be reversed.”
Figure 1. Causes of Joint Venture Failures
PROJECT MANAGEMENT'S ROLE
It is no longer a question, “Will the Soviets achieve a market economy?” but rather a question of, “When and how will they accomplish this enormous undertaking?” The reward for Western business leaders who choose to participate in their march forward into the unknown will be an abundance of long-term general business, academic, and consulting venture opportunities—opportunities that will require effective application of project management skills to achieve the success of these initiatives.
Project managers involved in Soviet joint ventures must possess more than technical ability however. Success will depend more on their understanding of Soviet history, politics, infrastructure, economy, culture, and the sources of motivation of government officials, businessmen, and individual workers. Recalling nearly 1,000 joint venture experiences in Hungary, Gottfried A. Wolf states, “Seventy percent of joint venture failures can be attributed to the cultural incompatibility of those selected to negotiate and/or manage the joint venture project. Only 30 percent were failures in strategic planning, financial considerations or knowledge transfer.”
VENTURE OPPORTUNITIES ABOUND
Joint venture opportunities exist within most spheres of Soviet financial, manufacturing, infrastructure, government, agriculture, and service industries. Unfilled basic needs (which translate into business opportunities) are so pervasive they are impossible to overlook.
Construction of minimum housing is years behind schedule. Inefficient farmers cannot produce enough food to feed the population. Clothing and consumer products are continually in short supply. Telecommunication systems are below Third World standards. Office automation and “infomatics” (the Soviet term for computerization) are decades behind Western capabilities. Routine services such as gas stations and repair garages are virtually nonexistent.
Conversations with the Deputy Director of Electrosila, the largest Soviet turbine and generator manufacturer, highlighted the scope of their need: “In the past, we have been completely controlled by policies dictated from government ministries. In the future, it will be a great task for us to decide how to improve because the past is all that we know.”
Figure 2. Seventy Years of State Control has Created “Puppet” Businesses
To fully appreciate the enormity of this message, one must realize that the past seventy years have severely restricted local management control. For example, a manufacturing enterprise is controlled by dictums contained in 13,000 government documents. These directives provide minute state-level control of the plant's 800 functions, from which there can be no local management deviation without ministry authorization.
Seventy years of state-stifled initiative and creativity have greatly restricted management development and innovation at every level, creating a “puppet” business and a great void in the management skill base that must be filled. Equally important is overcoming and correcting the problems this void has created, from planning to cost accounting to process control—all of which are joint venture opportunities. Despite the urgency of need and far-reaching impact, corrective change will take years to fully implement—even with Western assistance.
TIMING IS A KEY FACTOR
The timing for Western businesses to investigate or enter a joint venture opportunity can be critical. As Soviet President Mikhail Gorbachev stated on a visit to the United States in June 1990, “Those who cooperate with us now will see many more opportunities for further cooperation, but those who stand on the sidelines will remain standing there.” This feeling is echoed throughout the Soviet economy as business leaders express their wishes to develop a “few long-term” relationships.
In personal discussions with Soviet businessmen, one can readily detect that loyalty is a cherished quality, an obvious management trait, and a joint venture objective. Those who wait may find the doors to key markets have been locked and the keys to open them too expensive to buy. While timing may mean action, it should also be a deliberate process based upon an accurate assessment of both Soviet and Western business needs and capabilities. The validity of this statement is underscored by the following excerpts from a recent Wall Street Journal article:
The Western auto makers who rushed into Eastern Europe at Autobahn speeds are now hitting speed bumps and finding they need as much patience as they do technology and cash.
The companies most affected are those with the most ambitious plants … Western car makers are being frustrated by unusable plants, inadequate parts suppliers, unmotivated workers, murky free-market reforms and the constant threat of economic collapse. They are also discovering that Eastern Europe's auto industry was deliberately neglected because the old communist regimes never wanted their citizens to be able to move about freely .
Clearly, greater emphasis upon early understanding of the issues and environment in which the joint ventures were initiated could have precluded these costly conclusions. In these circumstances, timing was a key factor.
FLEDGLING INFRASTRUCTURE EMERGES
Overcoming bureaucratic entrenchment, ministry officials and business leaders are taking steps to uncover the skills and structural changes necessary to successfully compete within a free market. For Evgeny Malinsvsky First Deputy Director General of the USSR Ministry of Heavy Machinery in Moscow, release of ministry funding and control is rapidly revealing these grassroots requirements. “Since 1987, we have been developing a marketing orientation to sell our design and testing services. As a result, we've successfully reduced ministry funding to 32 percent in 1990.”
Likewise, the director of the Institute of Mining and Mining Construction in Tbilisi proudly proclaimed, ‘This year, over 30 percent of our programs will be customer funded.” (The Soviet choice of the word “customer” here refers to other Soviet facilities.)
Boris Fomin, Director General of the largest electric power station manufacturer in the USSR, shared his plan to create a consortium of sixteen separate enterprises. Fomin's initiative is part of a government plan to establish twenty-eight such consortiums within major Soviet industries. Each consortium will be self-managed by a board of directors responsible for determining their economic direction and viability.
Although the consortium boards of directors may appear similar to their Western counterparts, they are not. Rather, they are more a microcosm of the present state infrastructure, replete with Communist party, union, and state agency representatives appointed to each board. Overcoming seventy years of government control will not occur overnight; however, this is a bold move in the right direction.
CONSORTIUMS AND JOINT VENTURE SUCCESS
Despite the newness of this approach, a consortium can improve the odds of a successful joint venture for several reason. First, the board has greater decision-making latitude and local authority over business issues such as joint venturing. Second, increased local control can speed the decision-making and approval process-current obstacles to joint ventures.
Figure 3. The Party Hardliners’ Worst Fear!
Although these initiatives may not be as far-reaching as management might wish, they are a significant transitional step. For example, in one textile consortium, all key resources were brought together to develop a product from “cradle to grave.” Enterprises were formed to provide total financing, procure raw materials, and manufacture, distribute, and sell the finished product—a revolutionary concept in the face of the traditional state-owned and -planned economy.
PERSISTENT PERILS TO JOINT VENTURE PROGRESS
Pockets of progress give way to optimism. However, there are several significant obstacles to successful joint venturing that must be weighed and overcome. Not the least of these is the party hardliners’ fear that a free market economy will overturn the base of power. Other significant issues include:
Political instability. Party power struggles and personal jockeying for position occupy a majority of a government official's calendar—activities that divert energies needed to solve pressing economic issues. These economic issues range from establishing the financial and legal infrastructures necessary to attract Western participation, to providing adequate living space for Soviet citizens and visiting foreigners.
Convertible currency. Although the lack of a convertible currency is one of the most critical issues to be addressed, it is not without interim solutions. For instance, the expansion planned by McDonald's reflects a belief that a convertible currency will soon be created. Pepsi Cola and others choose to hedge their bets by bartering for Soviet products.
Profit repatriation. The lack of a definitive policy concerning repatriation of profits is a barrier to Western investment. While bartering may fulfill venture requirements on a limited basis, a clear government policy is a prerequisite for obtaining venture capital on a larger scale. The Soviets must act quickly if they are to simultaneously revitalize key agricultural, construction, communication, service, and industrial segments. All of these are necessary to invite widespread, large-scale joint venture participation.
Cost accounting. Effective cost accounting is a major void in the Soviet business process. In the past, central planning, procurement, allocation, and pricing have severely distorted product costs. In the future, painful and unpopular economic reforms must be initiated to eliminate government subsidies and to enable price and cost parities to float with those of global market partners.
Cultural changes. Cultural changes must be introduced to improve the work ethic. As one Soviet worker jokingly replied, “The state pretends to pay us, and we pretend to work.” Western partners should not expect the work force to rapidly depart the security of a welfare state for the unknowns of a free-market economy.
A United States Embassy representative supports this assumption with the following example: “Here in Moscow, McDonald's employees are typically ostracized by their peers. This is not because they earn nearly three times as much as a pediatrician or an electrical engineer, but because they work like they enjoy it.” Responsive, courteous service with a smile is characteristic of a free market, not of a welfare state.
Cloistered management. Although most Soviet executives are extremely open, candid, and eager to learn, it is important to remember that their careers have been spent in a “Rip Van Winkle” society. They have been closeted from computerization, a free-market orientation, the importance of cost accounting to quality management, and other skills that are generally taken for granted by Western management.
IMPROVING THE ODDS FOR SUCCESS
When faced with formidable obstacles, the Soviets have historically exhibited the capability to achieve the seemingly impossible. They have demonstrated the ability to generate convertible currency for select ventures deemed strategically important to their economy. Through the establishment of consortiums and free enterprises, a limited capability may also exist for boards of directors to make similar agreements.
As a result, the obstacles described in this article and those presented in the news media should not be taken as blanket statements. Exceptions do occur, and opportunities for joint ventures continue to expand. For example, as of February 1990, more than 1,300 joint ventures were registered with the Ministry of Finance.
However, from the Soviet business executive's point of view, most of the few operational joint ventures have proven difficult and marginally satisfactory for all parties involved. Others have failed as a result of such factors as inadequate financial or strategic planning, inadequate knowledge transfer, and behavioral issues. Fortunately, these experiences enable us to draw guidelines to improve the odds for success:
Start small—but start now. Given the state of the Soviet management skill base, their lack of computerization and automation, and the obvious language and cultural barriers, a logical starting point might be initiation of a “consulting joint venture” to develop the appropriate skill levels in your partner's organization. This can provide an early, low-risk opportunity to explore future possibilities and associated risks while building a solid foundation for more complex ventures. For example, Western auto makers are planning more than $7 billion to capture an estimated and untamed Soviet car market of more than seven million cars per year. Yet the dealerships, mechanics, service stations, financing agencies, and distributors needed to support this growth explosion are virtually nonexistent.
A successful joint venture creates a working environment that enables each partner to overcome major economic, political, and cultural barriers and to build the degree of mutual trust, confidence, and loyalty that promotes long-term relationships.
Utilize a third-party arbitrator. Most negotiations involve more than one party, more than one set of objectives, and more than one agenda. Therefore, each party can benefit from the participation of a qualified and impartial arbitrator to ensure that critical issues are adequately addressed and a meeting of the minds takes date.
The term joint venture implies that each party has a clearly stated objective that can be achieved upon successful completion of the venture. In essence, a mutual need and benefit exists in the minds of all parties. Joint ventures that do not mutually achieve these basic consideration-s are highly vulnerable to failure. Remember, inadequate negotiation/arbitration is the cause of 70 percent of joint venture failures.
Appreciate the differences. Differences such as language, environment, culture, and personal behavior are obvious. Others are more subtle and insidious. One such difference is found within political/economic structures.
For example, in Western nations, wealth is earned by the people, and some is given to the government in the form of taxes. In the USSR, wealth is earned by the government, and some is given to the people in the form of wages. As a result, Western businesses create products to fill demand, whereas Soviet businesses create products to fill government quotas. The consequences are that people and businesses in the West have choices and alternative—options that generally do not exist for Soviet people or businesses.
These seemingly simple differences can create vast disparity in our mutual expectations, values, and decisions. To ensure a successful joint venture, therefore, we must make a conscious effort to identify, understand, empathize, and work within each party's differences.
Western businesses have evolved through a local, national, international, and, now, multinational and global experience. We have developed over time a business skill base, perspective, and expertise very different from the Soviets. Therefore, a plan must be implemented not only to achieve a venture's objective, but also to bring each venture partner to the same levels of performance.
Conduct frequent audits. The road to a successful joint venture often develops a few “potholes” along the way. Frequent audits, performed by an impartial third-party arbitrator, can usually identify the early stages of conflict and provide candid, unfiltered communication to each party. More importantly, a qualified arbitrator may often facilitate acceptable and timely solutions to problems before they become divisive or disruptive to the venture relationship.
Success begins at the start of joint venture negotiations, where skilled arbitration can minimize the inherent risks resulting from cultural and operational differences. As the venture progresses, frequent and impartial audits play a critical role in maintaining harmonious partner relationships and long-term operational effectiveness.
Together, these facts argue for the retention of a qualified international consulting resource-one that can impartially facilitate the negotiation, planning, and implementation processes.
Robert N. Ruzanov, the Soviet trade representative in Washington, DC, agrees that doing business in the Soviet Union is complex and risky. “Of course, there are difficulties, and I would say that at times it's extremely difficult to work there for foreigners. But the card game is worth the candle,” says Ruzanov, citing an old Russian saying from the days when people played cards late into the night under the light of candles, which were very expensive. He continues, “Many companies are scared, but those who don't risk, don't win.”
While a tenet of joint management is risk management, joint venture success will require much more expertise. Personal project leadership must supplant technical project management. Although the tools of the trade are important contributors to the success of a Soviet joint venture, the complexities and disparities of culture and infrastructure can be overcome only with informed and effective project leadership.
1. Bradley A. Sterz and Terence Roth. 14 November 1990. To Western Industry East Bloc Auto Market is Losing Some Luster. The Wall Street Journal, p. 1.
Rudolph G. Boznak in an internationally recognized authority in strategic operationalization, computer-integrated enterprise, manufacturing, and major automated systems design and implementation. He advises Fortune 50 executives on how to improve their manufacturing competitiveness by developing and integrating state-of-the-art systems and the human dynamics required to implement them. Boznak is a technology executive with United Research, an international management consulting firm headquartered in Morristown, New Jersey, and London, England. The firm helps well-managed companies in virtually all economic sectors around the world accelerate strategic change. A member of PMI, Boznak has a B.S. in business management from the University of Nebraska, an M.S. in management/computer science from American Technological University and is a certified project management professional.
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