Joint Venture Negotiation
SGK, a Japanese corporation, is looking into establishing a joint venture in China. SGK manufactures and sells high technology parts for advanced train systems. SGK's president, Mr. Jun Tanaka, was on holiday in Beijing when he had the good fortune to meet Ms. Jiang Ying, the vice president of Trans Con. Trans Con is the recently privatized national railway corporation for Eastern China.
Trans Con is expanding its train service and is in the process of upgrading several of its longer lines to special high-speed service similar to the Japanese Shinkansen and the French TGV. Over the next 15 years Trans Con plans on opening up six new lines servicing the major cities in Eastern China. Until now Chinese companies did all of the trains and maintenance. Trans Con is looking for higher technology from Japan or Europe so they can build world-class high-speed trains.
SGK is a very old Japanese company with its roots in the Edo period. The original company supplied parts for wagons used to carry mail in the Edo period. SGK moved into train parts and has recently supplied the R&D for the newest super-maglev train in testing in Japan. SGK has one of the world's best research teams and holds many patents. SGK does all of its manufacturing and sales in Japan. JR is SGK's only customer.
Mr. Tanaka and Ms. Ting discussed the needs of Trans Con over an informal meeting at the Hilton hotel in Beijing. Ms. Ting stressed the need to create a Chinese company due to certain tax and state security issues involved with train service. Mr. Tanaka admitted that SGK has never worked outside of Japan and has never done a joint venture before. After animated discussions they signed <exhibit A> Memorandum of Understanding pledging their support for a joint venture.
Ms. Ting stressed that Trans Con was concerned about relying on a foreign company to supply essential parts for the trains. Trans Con is worried that in the future some unforeseen political complications could render a sustained supply of parts difficult. As an example Ms. Ting suggested that if Japan and China had a political dispute Japan might ban the export of high technology items including train parts. Mr. Tanaka expressed his concern that SGK not have its technical know-how copied or otherwise infringed upon.
On October 12th, 2003 the negotiation teams from both companies have agreed to meet in Nagoya to create a framework agreement to establish the main points of the joint venture. This is the initial meeting and a complete joint venture contract is well beyond the scope of the negotiations. The parties should however try to reach agreement on the following points:
Memorandum of Understanding
RECOGNIZING, Trans Con's need for a high technology parts supplier.
RECOGNIZING, SGK's interest in expanding its operations to China.
ACKNOWLEDGING, the political, legal, and tax needs the parties hereby agree to use best efforts to establish a joint venture company "SG-Trans" to supply high technology train parts to Trans Con. SG-Trans will conduct manufacturing in China to the maximum extent possible, as labor, rent, and materials are significantly cheaper in China.
Beijing Hilton Hotel
Confidential briefing for SGK
To: SG-Trans Joint Venture Negotiation Team
Our objective is to establish a joint venture in China to be the exclusive supplier of high technology parts to Trans Con. We are seeking a long-term contract so that we may secure a foothold on this lucrative market.
SGK has enjoyed a long-term contract with JR in Japan. However, the recent introduction of low cost airlines has reduced the need for shinkansen services. Moreover, JR has cut back on upgrades on its trains as it is short of cash and it sees little need for increased speeds in service. As a result our profits have dropped each year. We must expand our business. The French TGV dominates Europe and we stand little chance of penetrating that market. The United States has little need for train service it seems. All of our market research points to China as the best place to expand our business.
Trans Con is the best partner for us in China since they run the largest train system in China. They are also the most technologically advanced train service in China and therefore have the greatest need for our high technology.
SGK's main assets are its technical know-how in manufacturing and design. SGK would be at a great loss if this knowledge were to be compromised or copied. We must at all costs preserve our intellectual property rights.
SGK has extra cash from a recent payment from JR. We can therefore supply up to 75% of the capital of SG-Trans but would prefer to supply just enough (51%) to gain a majority control. We should control SG-Trans to ensure that our technology is not copied. The president should be from SGK since we will be supplying the majority of the capital.
SG-Trans needs to work on expanding its manufacturing base in China and any profits generated should be put back into the company. Short-term profits should be forgone for greater long-term benefits. Any profits and losses should eventually be split according to capitalization contributions.
Confidential briefing for Trans Con
To: SG-Trans Joint Venture Negotiation Team
Trans Con needs a steady supply of high technology parts and service to expand their train service. There is no local supplier with the technological know-how or manufacturing expertise. We need to create a joint venture with SGK to build and supply these parts.
After the national railway was privatized Trans Con was awarded the large and potentially lucrative Eastern section. The current trains are very outdated and require costly maintenance. Trans Con is modernizing the trains and will open six new lines with high-speed service. High-speed service is the key to profits as the margins on those lines are the highest.
Our market research shows SGK to be the best partner for the joint venture. Their technical expertise is second to none and their experience with JR has proven that they can steadily supply parts and maintenance. TGV of France is an alternative, but their technology is not compatible with our current systems and would require major changes.
Trains make money by providing reliable, safe service. We must ensure a steady supply of technical parts and maintenance. Any interruption in supply would greatly impact our profits and image. SG-Trans must be located and have its manufacturing in China.
Trans Con is in a major cash crunch now with all of its reserves being spent to upgrade and expand existing services. As such it cannot commit much cash to the joint venture. Trans Con would prefer to supply 20-30% of the capitalization but would make up its contribution with staff. Since SG-Trans will be located in China, local staff will be essential. At most Trans Con could contribute 50% but this would be difficult.
We should have control over SG-Trans and appoint the president to ensure that supply of parts and maintenance is uninterrupted. Since we are in a cash crunch we would like to take out any profits of SG-Trans. Moreover profits and losses should be equally shared since we will be supplying the majority of the staff while SGK supplies most of the capital.