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

Potential Risk and Return, Suitable Mode of Payment in Joint Venture Customer Inserts His/ Her Name Customer Inserts Name of Tutor Customer Inserts Grade/ Course (September 23, 2014) Outline Letter of Transmittal Executive Summary Introduction About the partner company Benefits of the Joint venture Potential risks and returns Suitable mode of payment Recommendation Letter of Transmittal The CEO Hunan China Sun Pharmaceutical Machinery Co. China. I submit herewith a report regarding the joint venture of The China-based Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. to form Venus Pharmaceutical Machinery LLC. I have made recommendations in the report on the suitable mode of payment for the consideration as well as possibility of success of the joint venture. Your consideration of my report is greatly appreciated Sincerely, (Customer Inserts His/hers name) Enclosure: Report Executive Summary Corporate alliances take many forms of relationships such as partnerships, takeovers, and joint ventures among others. Other forms of alliances include revenue sharing agreements, licence acquisition, disposition, and indirect acquisition of a business just to mention a few. This reports analysis a joint venture that is defined as an organization that brings together two companies of different forces and strengths. It is however, important that the management structure of the joint venture be fair to both parties (Cole, 2014, para. 1). This report will therefore look at the potential risks involved in a joint venture between Hunan Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. In addition to this, the report will also look at the suitable mode of payment for the joint venture. A recommendation will also be given regarding the possibility of success for the venture. Introduction A joint venture is an organization that brings together two companies of different forces and strengths. They have been common among small companies that team up to form one large company that is able to compete with other companies in the same market. It is important to note that joint ventures are normally formed to exist and operate in the long-term thus involve huge investments. Depending on the involved companies, the level of risk of the joint venture could be high or low. This case of study involves a joint venture by the name Venus Pharmaceutical Machinery LLC that is expected to be formed by the partnership of Hunan Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. This report is therefore an in-depth analysis of the potential risks and returns of the aforementioned joint venture as well as an analysis of the best mode of payment. About the Partner company There are basic considerations that the parties to a joint venture ought to put in mind before forming the alliance. This is done through evaluation of the potential partner or partners to select the best option. In this case, the potential partner is ACIC Fine Chemicals Inc., which is a Canadian Company in the pharmaceuticals sector. Among the first things to be evaluated is whether the potential partner has been in a joint venture before. The success of the previous joint ventures should also be put into consideration (Geringer, 1988, p.145). This information can be obtained from the companies that they have collaborated with in the past. Research indicates that ACIC Fine Chemicals Inc. has not been involved in any joint venture. It is therefore not possible to determine their success in the partnership with Hunan Sun Pharmaceutical Machinery Co. When choosing the potential partner, Hunan Sun Pharmaceutical Machinery Co. should also evaluate whether ACIC Fine Chemicals Inc. has similar goals and objectives to theirs. This is important in avoiding conflict of interest, which could pose the danger of competition from other companies hence leading to the failure of the joint venture. “Just because some company wants to partner with you, and they have name recognition or customers, doesn't mean they are right for you”, says Dahl (Para. 4). Secondly, the fact that the partnering companies are from different regions of the world that is China and Canada with the new company Venus Pharmaceutical Machinery LLC expected to be based in the United States, cultural differences should also be evaluated to determine the existence of the joint venture. Benefits of the Joint venture The main reason behind joint ventures is the fact that the partnering companies collaborate to bring their strengths hence forming a strong alliance. When this happens, the joint venture gains competitive advantage over other companies in the same market. Thus, the formation of Venus Pharmaceutical Machinery LLC in the United States will create bigger completion than that of Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. The joint venture will also be privileged to share the risks of the previous companies as well as decrease the cost of production (Beardsworth, 2014, p.1). This will in turn make the pharmaceuticals of Venus Pharmaceutical Machinery LLC cost lower than of the existing companies hence creating a bigger market for the products. When the two companies join in the venture, technology is expected to improve and lead to the production of high quality products. Unlike the previously existing companies, the new joint venture will no longer have difficulty in venturing the foreign market since this will be an international corporation. Finally yet importantly, the joint venture will have the benefit of enjoying economies of scale because of pooling resources together. Potential risks and returns Joint ventures come about with several risks simply because it entails the coming together of already established organizations each with its own ideologies. Thus, a joint venture can be quite a complex process that requires time and effort to build up the right alliance. Some of the potential risks of joint ventures include the possibility of different objectives by the companies involved (Reuer, 2004, p.1). When the partners have objectives different from each other, there is the risk of failure of the joint venture. At the same time, if the objectives of the venture are not well communicated to the involved parties, the joint venture becomes at risk to failure and non-performance. It is therefore of essence that Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. to have similar objectives which ought to be communicated to all involved parties of the joint venture. As mentioned earlier in the report, Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. have different cultures given their different countries of origin. This will definitely pose as a great risk because it will mean incorporating the Chinese and Canadian cultures to the American culture of the joint venture. The two partnering companies have different management styles given their origin something that could lead to poor integration and cooperation. Another potential risk of the joint venture is failure of the two companies Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. to provide adequate leadership to the venture especially during the early stages of the formation. In addition, there is the risk of imbalance in terms of investments, employee expertise, and assets (Baker and McKenzie, 2013, p.4). For example, Hunan China Sun Pharmaceutical Machinery is the biggest investor in the venture contributing 80% of the total capital while ACIC Fine Chemicals Inc. contributes 20% of the expected capital. This could create the risk of superiority and inferiority where Hunan China Sun Pharmaceutical Machinery assumes superiority while ACIC Fine Chemicals Inc. assumes inferiority. The formation of a joint venture can be equated to the formation of a new company. Just like new companies, a joint venture is expected to start generating returns after some time as stipulated in the growth and development curve (Wolf, 2000, p.280). This indicates that a joint venture will in the short-run experience low or no returns and experience higher returns in the long run. It is expected that the ultimate returns of Venus Pharmaceutical Machinery LLC will be higher than those of Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. combined. The profits generated by the joint ventures are expected to be shared in accordance to the contribution ratio. Suitable mode of payment When two or more companies are joining, they could take different modes of capital contribution. There are those that pay the consideration using cash mode of payment, others bring in their tangible and non-tangible assets while other opt for purchase of shares (stocks) in the joint venture. Of the aforementioned modes of payment, the purchase of new stocks of the joint venture is considered the most suitable for most companies (Reither and Lott, 1996, p.1). Unlike cash which is subject to depreciation and inflation changes, the value of stocks remains constant and only affected by profit changes of the company. Secondly, stocks mode of payment is preferred in the case of Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc. given their different currencies, which is likely to affect the cash mode of payment because of different foreign exchange rates. Recommendation Hunan China Sun Pharmaceutical Machinery Co. is a pharmaceutical company that specializes in the manufacture, packaging, and distribution of pharmaceutical products in China (Korea Pharm, 2014, p.1). On the other hand, ACIC Fine Chemicals Inc. is a Canadian based pharmaceutical company dealing supply of pharmaceutical products globally (Industry Canada, 2014, p.1). From this brief description of both companies, it is evident that they have similar goals hence a joint venture of the two is bound to be successful. Nevertheless, the issue of cash mode of payment ought to be considered and in turn use the stocks mode of payment given its advantage over the cash system. Conclusion From the above discussion, it is evident that the process of forming a joint venture is not as simple as one may think. Various control measures and considerations ought to be put in mind before settling on the partnering companies. This is with regard to the numerous risks involved in joint ventures that could lead to the eventual failure of the new formed company. Emphasis is however put on the potential partner because “you don't want to find out that your disgruntled partner decided to start a separate business offering the same products or services as the joint venture and competing against it in the market” (Dahl, 2011, p.1). The mode of payment should also be considered to avoid losses or unfairness on any of the involved partners. Reference List Baker, N., and McKenzie, L, 2013, International Joint Ventures Handbook, Available Fromhttp://www.acc.com/chapters/gny/upload/International_Joint_Ventures_Handbook.pdf Beardsworth, J, 2014, Control Issues of International Joint Ventures, Available from http://www.americanbar.org/groups/public_utility/pages/Control_Issues_of_International_Joint_Ventures.html Industry Canada, 2014, ACIC Fine Chemicals Inc. Available from http://www.ic.gc.ca/app/ccc/srch/nvgt.do?prtl=1&estblmntNo=123456246311&profile=cmpltPrfl&profileId=1961&app=sold&lang=eng Cole, L, 2014, Partnerships and Joint Ventures, Available from http://www.lcolelaw.com/General-Business-Advice/Partnerships-Joint-Ventures.shtml Dahl, D, 2011, How to evaluate a Joint Venture, Available from http://www.inc.com/guides/201103/how-to-evaluate-a-joint-venture-business-proposal.html Geringer, J, 1988, Joint Venture Partner Selection. Westport, CT: Quorum Books. Korea Pharm, 2014, Hunan China Sun Pharmaceutical Machinery Co. Available fromhttp://www.koreapharm.org/eng/press/news.asp?B_CATEGORY=0&B_CODE=TB_NEWS_EN&IDX=49&gotopage=3&search_category=&mode=view&searchstring= Reither, C, and Lott, R, 1996, Accounting for Joint Ventures, Available from https://aaahq.org/abo/reporter/WINTER96/REITHER.HTM Reuer, J, 2004, Strategic Alliances: Theory and Evidence. New York, NY: Oxford University Press. Wolf, R, 2000, Effective International Joint Venture Management, New York: Sharpe publishers. Read More