The Nora-Sakari: A proposed JV in Malaysia
Introduction The Nora-Sakari: A proposed JV in Malaysia set in 2003, focuses on the possible joint venture between Nora Holdings Sdn Bhd, a leading supplier of telecommunications equipment which is based in Malaysia, and Sakari Oy, a Finnish conglomerate, which was a leader in the manufacturing of cellular phones and switching systems from Finland.Nora as well as Sakari was part of a group of seven companies that submitted a five year bid outlined by Malaysia’s national telecommunication company, Telekom Malaysia Bhd, to develop the country’s telecommunication infrastructure to align with the government’s Vision 2020 program. Nora needed the JV with Sakari to ensure it could meet the obligations for the TMB contract, specifically the switching technology.
Also, it will give them the ability to utilize the tacit knowledge gained from working with Sakari to implement their model in the Malaysian market. The problem that arises is that the negotiations between Nora and Sakari are not moving in a positive direction. Many issues had risen that have stalled the negotiations about the joint venture, which include:
- Cultural differences
- Differences in organizational behavior between management
- Disagreements by both parties on significant issues pertaining to:
- Equity ownership
- Technology transfer
- Royalty payment
- Expatriates’ salaries and perks
The main issue outlined in this case is Nora’s decision to either continue with negotiations with Sakari or end the negotiations to enter a JV with another company because their time is limited due to the bid contract with TMB.
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Analysis Cultural differences The culture of Nora was influenced heavily by strong Islamic beliefs and values. Similar to western cultures, Nora negotiated utilizing a relational, laid back approach, while Sakari negotiators were “serious, reserved and cold”.
Nora’s vice-chairman, Zainal Hashim made a significant mistake by not researching the types of personalities he would be negotiating with, making the assumption that Sakari executives would operate in a manner similar to Americans. A prime example of this behavior was Sakari’s senior accountant, Solail Pekkarinen being dismissed from negotiations after the second day because of his insensitivity to the local culture. It is evident that each company should have done their due diligence by heavily researching crosscultural communications to learn how to find a happy medium in negotiations between one another. This would have potentially closed communication gaps to expedite the negotiation process.
Differences in organizational behavior Nora operated vastly different in their negotiations than Sakari. Nora’s negotiating team of five was led by Zainal whom not only was their most seasoned negotiator but he predominately made the final decisions. This centralized decision making approach was in stark contrast to the decision by committee approach adopted by Sakari. Internal politics within Sakari led to the “formation of two opposing camps”.Entry modes, along with location of the business opportunities became one of the first topics to be argued. One Sakari camp were in favor of the Joint venture because they felt that there was high growth potential in the Asian –Pacific region and a deal was eminent with Nora.
They also felt there was no need to take part in negotiating a deal within Europe because of the competitive landscape while the second camp was in favor of negotiating for a telecommunications contract in the United Kingdom because they were closer in proximity to Finland which would allow them to penetrate the European Union. Also, since they were more familiar with the area, cultural differences would be minimized and they could avoid a joint venture and steer in the direction of a wholly-owned subsidiary to avoid equity disputes that could arise from a joint venture. This difference in negotiating teams was detrimental to any resolution being made between Nora and Sakari.
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Each company blindly went into negotiations assuming their senior negotiators would be their best negotiators without taking into account the differences in personalities and culture. Sakari’s lead negotiator and vice-president, Kuusisto should have mitigated these concerns with the opposing Sakari management prior to the initial meetings. If these concerns were outlined with relevant solutions, then the potential of opposition of the deal would have been lessened.
Items of Disagreements by both parties Equity ownership Both Nora and Sakari agreed to an initial investment of RM5 million to form the JV but disagreed on the equity share proposed by each side .Sakari proposed a 49 -51 percent split between itself and Nora to control the JV, however Nora countered with a 70-30 split between itself and Sakari based on the historical foreign equity regulation set by the Malaysian government. These negotiations were taken place in 2003; approximately 5 years after the Malaysian government adopted new regulations that did not employ these percentages any longer. Despite the new regulations, Nora appeared very inflexible. Each company had significant long-term equity ownership concerns which could have been mitigated if Nora would have negotiated further.
Technology transfer Sakari wanted to protect their intellectual property pertaining to switching exchanges. They proposed that the development of the basic structure of the digital switch be provided to JV Company, while Nora wanted the development of basic structures to be developed at the JV location to access the root of the switching technology .Sakari has a legitimate concern because if they decided to adhere to the recommendation outlined by Nora their IP would potentially be compromised. From Nora’s perspective, the proposal to Sakari involved sharing information from an assembly and installation point of view and the core technology of Sakari would still be unknown.Royalty payment Sakari suggested a royalty payment of five percent of the gross sales of the JV while Nora proposed a payment of two percent of the net sales. Nora considered Sakari’s suggestion to be too high based on financial simulations prepared by Nora’s managers.
They claimed their ROI would be less than 10 percent if royalty rates exceeded 3 percent. This line of thinking stemmed from Nora’s plans to invest in buildings, plants and surfaced mounted devices needed to produce the switching exchanges.
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They also felt Sakari would gain additional benefits from the JV’s technology used in the manufacturing of the surfaced mounted devices. Sakari did not give any additional data to explain their method of why five percent of growth sales were a fair royalty payment. Expatriates’ salaries and perks Sakari proposed a rate of US $1,260 per day for temporary employees and US $20,000 per day for permanent employees.
Nora proposed temporary rate of RM 1,170-1,350 per day and longterm rate of RM 20,700 – 27,900 per month based on skill and experience. Sakari based their salary requirements of the cost of living in Finland rather than in Malaysia, where the JV would be located. Nora compared the costing of living rates utilizing the cost of living index of major cities to determine Malaysia cost of living of 83.75 versus Finland’s of 109.4.
Nora’s position of “take it or leave it” in a negotiation of this proportion was short sighted and they could have negotiated further to find a middle ground. Arbitration Nora and Sakari agreed to arbitration the event of a dispute but could not agree on a location. Both companies wanted arbitration to take place in their own environments, which is understandable. Both companies could have agreed to find an unprejudiced place for negotiation. The negotiation between both parties was more of a tug of war rather than a mutually beneficial negotiation.In a joint venture, each party should be concerned about their potential partner’s opportunities as well as their own to create synergies, not to be adversarial.
A clear and concise plan outlining the benefits and risks for each company must be established. Strategic Alternatives Accept the terms of the deal This would give Nora the ability to fulfill TMB’s contract. Also, no further costs would be incurred in negotiating a JV with another firm. They have already invested RM3 million, have a time constraint to start this project and do not have the technological expertise to complete this project. The disadvantage of agreeing to terms with Sakari is that not all conditions of the deal will be favorable for Nora.
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End negotiations Outside of freeing themselves from a difficult group of negotiators, Nora would have to spend additional resources, time energy and effort in forming a JV with another company, preferably Siemens, Samsung, or lucent who was part of the initial group of companies that submitted a bid to TMB. Ending negotiations would lead to valuable experience and knowledge of working with Sakari’s switching technology being a missed opportunity which could hurt them long term in implementing their model in Malaysia. Renegotiate Zainal can decide to reach out to Kussisto and setup further negotiations. Zainal would ultimately have to succumb to more favorable terms in Sakari’s favor. If the negotiations extend for a significant period of time, this will lead to additional costs without a guarantee of agreement of terms in a timely fashion. When renegotiating I believe it important of Zainal to show the benefits that Sakari would attain in agreeing to terms of a joint venture and ease the concerns of the opposing management.
This would include: ? ? Nora’s relationship with Malaysian government officials, specifically the Prime minister. Nora’s investment in R ; D is in direct synergy with Sakari’s emphasis on R &D and how each company points to these actions as to why they have been successful in the telecommunications industry. ? Nora has successfully participated in joint ventures with other countries in the cable business which shows evidence of their experience. Sakari would benefit from the JV Company contract because they would gain access of the growing south-east Asia market for Telecommunication products. Sakari was experiencing growth in the telecommunication manufacturing industry however; they were looking to diversify their business.
Nora was diversified into the cable, telephone, payphone and mobile phones industries. A JV with Nora would provide Sakari with the knowledge with strategies to diversify themselves, specifically in the fixed network market. ? In 1999 there were only 20 phone lines per 100 people in Indonesia, Malaysia, and the Philippines. Whereas, there were 55 telephone lines per 100 people in United States, Canada, Germany, Finland, and Sweden.
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This example shows the potential of the telecommunications growth potential.
? Lastly, Nora has already landed the contract with TMB so this could be reassurance to Sakari management that profits are attainable. Recommendations It is in the best interest of the firm to renegotiate the terms of the deal. Nora has put them self in position to act fact because the contract with TMB has been secured without having the switching technology in place. Zainal must take the lead by contacting Kussito to set up the next meeting and show willingness to compromise on some terms of the deal. Mistakes in negotiations should be discussed to come to a mutual understanding to move forward. Equity ownership Nora should off a 60/40 equity ownership in the JV which would be more favorable for Sakari while Nora would still have majority ownership in the JV.
They should accept no less than a 55/45 split because they are taking the most risk in the JV. Technology transfer Nora should not concede to the Sakari recommendation because this would only benefit them for the short term. One of the main purposes of this JV is to gain tacit knowledge in switching technologies. When negotiations resume, the lead engineers from each firm should be present at the meetings to outline their positions. Nora should explain in great depth how Sakari’s IP will be protected so that this does not continue to be an area of concern that could end all negotiations.
Royalty payment Since Nora is responsible for the majority of the financial investment, I believe they should stick with their plan of offering a royalty to payment based on net sales. To show their willingness to be flexible and acknowledge their need to get the deal settled, the royalty payment should be 4-5%. This would be an additional expense in the short run, but the long term effects of gaining knowledge in switching technology and the diversity it adds to the company is worth the capital investment. This would be more than Sakari wanted and the additional profits would be a sign of good faith that they would not expect based on the initial negotiations.
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Expatriates’ salaries and perks Nora has done significant market research to evelop the appropriate salaries while the same analysis has not been outlined by Sakari. Without this information, it is in the best interest of Nora to stay with their initial Salary proposal.
If Sakari does the proper financial analysis and has evidence to back their findings then the average between the ranges of salaries should be agreed upon. Arbitration Each firm feels more comfortable with arbitration closer to their home country however; a happy medium must be met. If each firm agrees to arbitration in a neutral territory equidistant from each country, it would satisfy this dispute. One country that could be considered is Kazakhstan based on their location between Malaysia and Finland. Additional item to consider Nora as well as Sakari have had experience in negotiating deals with companies outside of their countries of origin and have been successful. However, neither can assume that this will always be a smooth process.
To help mitigate the delay and/or missed opportunities due to different organizational behaviors amongst negotiating firms, each company should have their negotiating teams take professional development classes focusing on the soft skills of negotiating with people of different cultures. This would give their negotiating teams valuable knowledge for the present negotiations as well as future negotiations. Conclusion Nora had government ties, had won a part of the bid with TMB and was eager to enter the South Asian market piggy backing on Sakari’s technology, and above all, had knowledge of the Malaysian market. Sakari, on the other hand, wanted to enter the Asian market because of the opportunities it offered, and had technology that Nora was looking for. Coming to terms on this deal would be mutually beneficial for both Nora and Sakari. Nora put themselves in position where they gave Sakari a significant advantage in negotiations because they won a bid for a project they could not complete without Sakari.
Moving forward, they should avoid this unfavorable positioning. Furthermore, Nora and Sakari should now understand the importance of researching organizational behaviors with companies they do business with in the present and future.