Nora-Sakari: A Proposed Joint Venture In Malaysia

This case is about Nora, one of the leading suppliers of telecom solutions in Malaysia. The case involves a possible joint venture with Sakari, the leading manufacturer in Finland of mobile phones and telecom systems. There is a large potential in the future development of telecom facilities in Malaysia and the to enterprises have discussed a joint venture since May 1990 in order to get their share of the Malaysian market. Nora’s reason for the joint venture is to gain Sakaris advanced telecom solutions and cable related technology, while Sakaris main benefit is to access the Asian and Malaysian market.

In 1991 Nora made a bid on a 2 billion RM contract from the largest telecom company in Malaysia, Telecom Malaysia Berhad (TMB). They based the bid on supplying Sakaris technology and in early May 92′ Nora won a 1/5 share of the contract. However observers were critical of TMB’s decision to select Sakari, as they were small and unknown compared to the competitors like Alcatel, Fujitsu, NEC and AT&T.

Following the successful bid and ignoring the criticism against Sakari, the two companies held a major meeting in Helsinki on May 21, this to finalize the joint venture. The meeting went on for several days, and the negotiation turned out to be quite difficult as there raised several disputes between the two counterparts. The negotiation turned out even more complicated when Sakari became interested in bidding a recently announced tender for a major telecom contract in the UK.

As the May-meeting resulted in no fruits, there was held a new meeting on the 6th of July in Kuala Lumpur. In this meeting, the two leaders of Sakari and Nora did not participate, but followed the process and was briefed on the progress of the negotiations. Some of the issues of the negotiation were difficult to resolve and had led to heated discussions. These included aspects like equity ownership, technology transfer, royalty payment, expatriates salaries and perks, and arbitration.

At the end of the 5-day negotiation many of the issues couldn’t be resolved. But Nora will soon have to fulfil the contract with TMB, and time is running out. So what should Zanial do? Reconcile with Sakari or find another partner for the big contract?

Cultural differences

One of the major problems that faced the joint venture possibilities between Nora and Sakari, was the cultural differences between them. Nora as a Malaysian company has totally different ways of negotiating and doing business than their counterpart from Finland. However, the cultural differences are big, but still this shouldn’t really be a big problem if the two companies did their cross-cultural homework or research on how to behave and act in front of their future colleagues.

In this part of the assignment, we are going to describe each countries business behaviour, and why problems may and actually did occur. We have focused on three dimensions: Relationship-Focus vs. Deal Focus, Formal vs. Informal, and Time and Scheduling- Monochromic vs. Polychronic.

Relationship-Focus vs. Deal Focus

Malaysia is a typical relationship focused culture. They prefer to do deal with family, friends and persons or groups well known to them – people who can be trusted. They are uncomfortable doing business with strangers, especially strangers who also happen to be foreigners. Because of this key cultural value, relationship-oriented firms typically want to know their prospective business partners very well before talking business with them.

In contrast, the deal-focused culture in Finland, people are more open to doing business with strangers. The marketer can make initial contact with the prospective buyer without any previous relationship or connection. Having an introduction or referral is helpful but not essential.

In deal focused markets like Finland you can usually get down to business after just a few minutes of small talk. And you can learn most of what you need to know about your potential finish counterpart in a matter of days rather than the weeks or months it will take in strongly RF cultures such as Malaysia. In Finland, you make a deal first- then you can become friends, which are quite the opposite of Malaysia. In Malaysia, you first make a friend, then you make a deal.

In Finland people rely on written agreements to prevent misunderstandings and solve problems. And some business people tend to take a rather impersonal, legalistic, contract-based approach when disagreements and disputes arise. In Malaysia they primary depend on relationship to prevent difficulties and solve problems, while in Finland they depend on the written agreements to fulfil the same functions.

In Finland negotiators tend to value direct, frank, straightforward language. When communicating with others, the priority is to be clearly understood, they usually say what they mean and mean what they say. However, in Malaysia they hide their emotions, especially negative emotions. By showing impatience, irritation, frustration or anger disrupts harmony. It is rude and offensive. So people there mask negative emotion by remaining expressionless or by putting a smile on their face.

There might be underlying problems when it comes to discussions that occur during the negotiation. When a disagreement comes up, the Finns will raise the question directly, and confront the Malays. The Finnish way of solving a disagreement may be seen as disrespectful by the Malays, witch tend to value modesty and diplomacy. The Nora team will also try to keep the harmony of the negotiation, and by all means avoiding conflicts and confrontations. The Finnish also have a tendency of using slight face expressions when there is a disagreement, the Malays might see this as loss of face, and can be very negative. These problems came to the surface at the first meeting in May. The Nora team found the Finns serious, reserved and “cold”. As a result it was difficult for the Malayan team to determine whether the Finns was really interested or not. The negotiation turned out even more complicated when Sakari became interested in bidding a recently announced tender for a major telecom contract in the UK. The Malaysian negotiation leader felt what he saw as lack of unity and support, from the Sakari management, led to further difficulties in the negotiations.

Formal vs. Informal

Formality has to with relative status, organizational hierarchies and how to show respect to persons of high status. That is why international marketers always should know whether they are dealing with formal or informal cultures.

It seems like Malaysia is slightly more formal than their finish counterpart. In Malaysia they tend to be organized in steep hierarchies, which reflect major differences in status and power. In contrast the finish, as moderately formal culture, value more egalitarian organizations with smaller differences in status and power. Ignorance of this distinction at both sides can cause serious problems across the bargaining table.

In Malaysia status differences are larger and more important than in Finland. Formal ways of addressing people is one important way of showing respect to persons of high status, but also clothing the right way.

So how can you tell who has high status? In Malaysia and most other Asian and formal cultures, age confers status. But other factors such as family background, level of education and knowledge of “high culture” confer status. As long as the person you are discussing with are older than you, it is important to show your respect. Further on they tend to ascribe status according to one’s gender, organizational rank whether one is the buyer or seller, and of course the age. According this, there are three classes of international business people Sakari should try to avoid bargaining in Malaysia. These are:

· People on the lower rungs of the corporate ladder in their own company,

· Young people of either sex, and

· Women

The sharp divide between these two countries can act as an invisible barrier for both Nora and Sakari. Therefore it’s important, especially for the Sakari-team, to know how to show respect to the high-ranked persons in Nora, who may be easily offended by perceived slights. The bottom line for export marketers and dealmakers in today’s global marketplace is that ignorance of cultural differences is not an acceptable excuse for failure.

It seems that this have already appeared as a problem in the negotiation. Why have one of Sakaris team members been asked to leave the final negotiation? And why was he preserved as extremely arrogant and intensive to the local culture. In our opinion some of the reasons might be: If Mr. Pekkarinen is young, the Malayan team will see him as a person that is of low rank and is inexperienced. He also could have been ignornant of the Malaysian way of adressing in business meetings, and followed finnish guidelines of meeting culture, then he would been seen as disrespectful. In additon to that, it seems that Mr. Pekkarinen has acted cocky, and has a way of negotiation like “the take it or leave it type”. That seems to be the main reason for the Nora request of Mr. Pekkarinen to leave.

Time and Scheduling- Monochromic vs. Polychronic

The negotiators in this case probably quickly learned that people look at time and scheduling differently in different parts of the world. In the monochromic society as Finland, punctuality is critical, schedules are set in concrete, agendas are fixed and business meetings are rarely interrupted. In direct contrast are polychronic cultures as Malaysia, where people place less emphasis on strict punctuality and are not obsessed with deadlines. They value loose scheduling as well as business meetings where several meetings-within-meetings may be taking place simultaneously.

As to this, some problems and confusion may occur between the two counterparts. Especially if the Nora people comes to Finland and show up later as scheduled to a meeting. The Finish would look at them as rude and disrespectful. The Finish would also lose respect to the Nora’s negotiators if they didn’t start the meeting in Malaysia as planned. With other words; the Finish are a lot more punctual than the Malays.

When we look at how the meetings are run, meetings in Finland tend to follow an agreed outline or agenda. At a typical negotiation you can expect to start off with a few minutes of small talk and then proceed in linear fashion from item 1 to the last item on the agenda with no major digressions. In Malaysia, meetings tend to follow their own inner logic rather than a fixed outline. The important thing is that everyone has his or her to say.

Finland: Malaysia:

Deal focused Relationship focused

Moderately Formal Formal

Monochromic and Reserved Polychronic and Reserved

Low masculinity Medium masculinity

Low individualism High individualism

It should been clear to Nora before the negotiation starts, that the seller is expected to adapt to the buyer. In this case Nora is the seller, and it is more important for Nora to finalize a contract than Sakari.

Why Nora should contact Kuusisto in Helsinki.

Ever since Peter Mattson, President of Sakari’s Asian regional office in Singapore, saw the possibility to form a cooperative venture in February 1990, both Nora and Sakari have spent a great deal of time and money on this project. For Nora, a Malaysian company, making good relationships with their partners is very important. Over a period of almost two and a half years they had been spending more than 3 million RM and participated in over 20 meetings in order to promote the relationship and manage to format the joint venture. All this effort would be worth so much less if nothing came out of it, and a good established relationship would loose its strings if Nora and Sakari choose not to work things out. Even though the negotiation has been very difficult and that the cultural barriers hard to cope with, Nora and Sakari have indeed learned from it. Therefore, future negotiations between them are likely to be easier as communication most likely will improve.

As Nora would have to fulfil the contract with TMB soon they are in a hurry no matter what kind of choice they make. If Zainal chooses not to contact Kuusisto he will have a very limited period of time to make a new relationship with another company. This is not desirable for Nora, who focus upon and emphasizes relationships and consistency.

When Nora placed the bid for the 2 billion RM contract with TMB, they placed it on supplying Sakari’s digital switching technology. This means that they got the contract based on Sakaris technology, and will be expected to supply that specific technology. To choose another partner with different technology will be inconsistent with the contract, and might make them loose it. As Nora is facing stronger competition both in/at the domestic and the international arena, it is important that they fasten their position in Malaysia. To fulfil this contract perfectly they will gain goodwill by a positive reputation that will make it easier to attract new contracts.

The most desirable aspect of this joint venture for Nora is the technology transfer they can obtain. Nora is very impressed by the Finnish high tech industries success, and would very much like to learn from their experience by dealing with Sakari.

The technology Nora is interested in is Sakari’s SK33, a digital switching system that is based upon an open architecture. This means that it enables the use of standard components, standard software development tools and standard software languages. While other suppliers of switching systems require the purchase of their own developed components, the components used to Sakari’s SK33 are freely available on the open market. This making competition and lower prices a reality. As Sakari also is a small player in this game, they are more willing to lower the prices in order to gain market share. This aspect combined with freely available components makes Sakari’s switching technology an economical choice.

The most attractive feature of the SK33 is that the system is modular. The software can be upgraded to provide new services, and can interface easily with new equipment in the network. Sakari’s networks are also easy adaptable and can cater to large exchanges both in the urban and rural areas. This makes the system highly flexible.

An added strength and positive aspect is that Sakari is prepared to work out customized products according to Noras needs. The larger telecom companies such as Ericsson, Siemens and AT&T tend to offer standard products, which means that they in some aspect can be inconsistent with the customers needs.

Even though Sakari is a relatively small company, they are a niche player in the global switching market. Their SK33 has sold well, for instance in China and The Soviet Union, making it a tested and therefore a safer product to invest in. Sakari had also developed a derivative of the SK33, called Sk33XT. This technology is to be used in cellular networks and personal paging systems. Nora could also try to distribute this technology, as they will have a wider product offer to access more market share. This will also be an opportunity to learn more from Sakari and to adopt different aspects of their new technology.

Sakari is also a compatible partner as they focus upon research and development to a great extent, and attribute their emphasis on R&D as a key success factor in the telecom industry. R&D skills and resources is also a priority for Nora, and they wish to learn from Sakari in order to be able to produce their own systems in the future. Nora believes in making improvements in small steps, and has to borrow technology in order to learn. This making a platform of knowledge which they later a use to develop their own technology. That about 17% of Sakaris annual sales revenue is invested into R&D and that they have plans to set up R&D centres in leading markets, including South-East Asia makes Sakari a desirable partner for Nora to learn from. However, in order to access the root of the switching technology Nora has to make sure that the basic structure of the switch are developed in the joint-venture company, something Sakari would prefer to avoid.

To sum up, Sakaris technology is reliable and flexible and will therefore be desirable for Nora to gain access to. It is also widely compatible, and Sakari is willing to offer customised products according to Noras needs. That it is an economical solution compared to other systems is an other positive aspect. Finally, Nora and Sakari have built a relationship worth taking care of, and the fact that that the bid was placed on Sakaris technology makes another good reasons for Zainal to contact Kuusisto in Finland.

Why shouldn’t Nora contact Kuusisto in Helsinki?

Having looked at all the reasons for why Nora should try to partner up in a joint venture with Sakari, we now have to look on the possible downside of this partnership. This because creating a joint venture is costly, requires extensive preparation and a high level of managerial commitment. Nora has to make sure that this joint venture is a better option than any other alternative.

We can define a strategic alliance as a long-term contractual agreement between firms from different nations who create mutual dependency. The intention of the partnership is to increase each partners long-term competitive advantages. The criteria are that each partner has something unique to offer the other. In this case Sakari has a unique knowledge in switching technology and Nora has the knowledge and access to a growing marked.

In order for a joint venture to succeed there are many factors that have to be fulfilled. Such as the companies goals and strategies have to be unifying, both sides have to see an advantage with the partnership, it should be mutually dependency, low level of conflicts, dedication from both sides and good communication.

In the following we will focus upon areas Zainal has to take in consideration before he makes a decision.

Even though Sakari is one of the leading telecom companies in Europe, Sakari is still a small company by international standards. Industry observers were critical of the TMB`s decision to select Sakari as one of the company to supply digital switching exchanges. Sakari was perceived to be the least capable of the five chosen companies in supplying the necessary lines to meet TMB`s requirements, as it was alleged to be a small company with little international exposure. As mentioned Sakari has been a niche player in the global switching marked and has avoided head-on competition with the big companies such as Siemens and Ericsson in major markets, instead focusing one smaller markets with less competition. Because of this strategy, Sakari has not been able to develop a strong marketing capability and they have been forced to rely on joint ventures to enter the world market.

Sakari has also been accepting lower margins for its products, and often the Sakari name has not been revealed on the product. In recent years, Sakari has decided to emerge from its hiding place as a manufacturer’s manufacturer and begin to marketing under the Sakari name. As this joint venture should be a long-term investment, Sakaris weak brand name can become a problem for Nora. Although it is positive that Sakari is trying to build a strong brand name, brand building take years. Because of this, Nora can lose out on other contracts in the Asian marked due to the weak position Sakari has in this region. Contracts Nora could have gained access to, through partnership with an other MNC.

Cultural differences are another complex area, as discussed in the first part of this paper. So far in the negotiations there have been many problems related to issues of cultural differences. Such as when one of Sakari’s team members was asked to leave the final negotiation because he was precived as extremely arrogant and insensitive to the local culture. As cultural differences are amongst the most commonly experienced joint-venture-related problems, Zainal has to decide if the problems experienced so far can be worked out. If they can’t, Zainal should not contact Kuusisto.

Not only must Zainal concider the differences in national cultures, he also has to consider problems that can occure due to the difference in organizational cultures. This because one of the major reasons why joint ventures fail is because the organisations have incompatible cultures. Organisational culture can be defined as:

“Pattern of basic assuptions that are developd by a group as it learns to cope with problems of external adaption and internal integration and that are taught to new members as the correct way to percive, think, and feel in relation to these problems”.

From the case text we can read that Zainal is activ in instilling and promoting Islamic values among the Malay employees at Nora. He states that the Islamic values must be reflected in the daily life of Muslims, and he also revales his conserns over the fact that the Malay managers often are influenced by western counterparts who tend to stress knowledge and mental capability and often forget the effectivness of the softer side of management which emphasizes relationships, sincerity and consistency. If Zainal really feel that the influence from the Sakari management will be a problem, one solution can be “seperation”. With seperation we mean that both Nora and Sakari should remain as distinct entities with minimal exchange of culture and personnel. Allthough by doing so, this will limit the possibility for Nora to acquire the unique knowledge Sakari has.

It is important to do a Bi-Cultural Audit to identify potential problems before entering a joint venture. This will minimize risk of cultural collision by diagnosing before the partnership. There are three steps in a Bi-Cultural Audit, and those are:

· Examine artefacts identifying cultural differences between the two companies.

· Analyse audit data – determine where cultural conflict and compatibility exist.

· Identify ways to bridge the two organizations` cultures.

Another possible problem is that Sakari has become interested in bidding for a major telecom contract in the U.K. This has led to the formation of two opposing “camps” inside Sakari. One “camp” in favour of the joint venture with Nora, and the other “camp” believes that Sakari should focus its resources on entering the U.K. marked. As stated earlier, dedication from both sides are of crucial importance in order to create a successful partnership. This lack of full dedication from Sakari is another aspect pointing in the direction of Zainal not contacting Kuusisto in Helsinki.

The main issues raised at the final meeting between Nora and Sakari, were Nora’s capability in penetrating the South-east Asian marked and Sakari’s concerns over the efficiency of Malaysian workers in manufacturing the product, maintaining product quality and ensuring prompt deliveries. That Sakari still have these concerns after 20 meetings with Nora shows that they do not believe Nora can fulfil their part of the contract. This lack of belief in Nora’s capability is a negative sign. The question that has to be answered is why are Sakari still interested in the joint venture if they don’t believe Nora have the skills that matches Sakari’s needs? This could be a play of tactics from Sakari’s side. That they excaudate their concerns in order to gain the upper hand in the final negotiation. On the other hand it might be the case that Sakari only wants a short-term partnership with Nora. Sakari might consider this joint venture as an opportunity to acquire knowledge and gain access to the South-east Asian marked in order to establish themselves in the region and then become a strong competitor to Nora. If this is the case, Nora should not enter the joint venture.

The main reason for Nora in securing a share of the RM2 billion contracts from TMB was not about the money, but the possibility in acquiring the knowledge in switching technology from its partnership with a telecom MNC. Research and development (R&D) is part of Nora’s core business strategy. As Zainal said: “To be able to make improvements, we must learn from others. Thus we would borrow technology from others, but eventually, we must be able to develop our own to sustain our competitiveness in the industry.” It is no doubt about what Nora hopes to gain from the joint venture with Sakari; it is the possibility of technology transfer. In Sakari’s proposal to the final contract of the joint venture, they stated that they would only provide the joint venture with the basic structure of the digital switch. By doing so, the core of Sakari’s switching technology would still be well protected from Nora and the main reason for Nora to enter the joint venture is not fulfilled. If Nora can’t renegotiate and reach a better agreement on this part of the contract, this will be another incentive for Nora not to partner up with Sakari.

Conclusion

Having looked at both the pros and cons of this possible joint venture between Nora and Sakari, it is now time to sum up and conclude what we mean Zainal should do.

There are many areas pointing in the direction that Nora should try to partner up with Sakari. First of all, both parties have put a lot of money, time and effort in the preparation and negotiation of the possible joint venture. Second, Nora has committed themselves to a contract they soon are expected to fulfil. Third and finally, Sakari has a unique knowledge in switching technology, knowledge Nora would like to acquire.

Although we have identified many current and potential problems, many of these are common joint-venture-related problems, problems Nora might have to deal with no matter which foreign MNC they partner up with. Both the problems concerning differences in national cultural values and organisational culture can be sorted out.

From our point of view the problems identified are in minor when compared to the advantages Nora can explore by a joint venture with Sakari. Our advice is that Zainal should contact Kuusisto in order work out an agreement of a joint venture between Nora and Sakari.

Our advice is based on the facts presented in the case. We cannot say that this would have been the right advice to give when this negotiation actually took place back in 1991. Because the case text doesn’t provide enough information about other possible partners.

One important lesson to be learned: Several of the disputes could have been avoided if the two companies would have been more adaptive to the differences in their cultures.

How to create a win-win situation?

Nora and Sakari are both small sized companies compared to their industries. A joint venture would therefore be to both companies advantage. We have created two possible solutions in order to work out a win-win deal. We have tried to be objective and therefore both parts have to give concessions in different areas and/or be open to creative suggestions.

Proposal number one:

The whole idea behind this particular proposal is that each side are to give equal concessions in order to make a fair deal.

1. 70-30 equity relationship in Noras’ favour

On this particular point Sakari has to give in because the laws in Malaysia prohibit foreign equity ownership of more than thirty percent. This is clearly the easiest way out of this dispute.

2. The Joint Venture plant is only provided with the basic switch structure.

Here we follow Sakaris’ suggestion. The switches are to be assembled at the Joint Venture plant and further installed. This way Sakaris’ core-technology will still be well protected, while Nora obtain the “screwdriver” technology (installation/service)

3. 5% royalty payment for Nora

Nora have to decide whether “technology know- how” or return on investment is more important. Since Nora’s long-term goal is to obtain as much technological know-how as possible, they should be willing to give concessions.

4. Sakari will pay the difference in wages.

In Nora’s suggestion for expatriates salaries and perks it is stated, “any Malaysian income taxes payable would be added to the salaries.” This might be a considerable amount. We therefore suggest that Nora’s proposal will be used. A possibility internally for Sakari is, of course, to implement a very healthy organizational culture. This way their employees may be willing to lower their salaries and perks for the grater benefit of the company.

5. Neutral ground

The most suitable and convenient solution to this problem is to meet on neutral ground. In this proposal Nora is the major shareholder of the joint venture, and disputes should therefore be arbitrated somewhat closer to Malaysia then Finland. A good suggestion here is Singapore, which often is seen as a link between the east and west.

Proposal number two:

We have used Fisher and Ury’s four principles for principled negotiation to create this second proposal.

1. Separate the people from the problem

2. Focus on interests, not positions

3. Insist on using objective criteria

4. Create options for mutual gain

1. Export opportunities

Since Nora’s proposal is based on the Malaysian government regulations and not their own interest, this conflict can be resolved. Sakari is allowed an ownership of up to 51 percent for introduction of high-tech products, and/or if the joint venture exports between 20 and 50 percent.

Sakaris’ main reason for joining the joint venture is the entrance to the Asian market. By exporting between 20 and 50 percent to another Asian country of interest, they will hit two flies in one smack. But they could of course start with an application to the government because they produce products of high quality that actually are priority products in order to develop Malaysian infrastructure

2. Cooperative R&D

One way to solve the technology transfer problem is through cooperative development of new and even better digital switches. They could then be sold in Asia and potentially other parts of the world as well.

3. Standard royalty payment

The parts can use objective criteria to solve this problem. They should find an industry standard based on companies operating in the same industry.

4. Standardized salaries and perks.

They should compare employees’ salaries and perks to other Scandinavian companies operating in Malaysia. By using the industry standard both parties should be fairly satisfied.

5. Mutual ground

The easiest solution concerning arbitration must be very clear to both parties. As mentioned in proposal one, we suggest that they meet in either Singapore or Switzerland.

The actual results of the negotiations between Nora and Sakari

1. 60-40 share of equity in Nora’s favour-> 20% export

2. A mutual R&D department

3. Sakari received a royalty fee of 3%

4. Nora’s proposal

5. The two countries decided to have the rest of their negotiations in Switzerland (“The Neutral Country”)