5.3.1 Joint venture advantages
Forming a V has certain general advantages. Similar to the acquisition route, forming a J-V gives a firm access to the competencies and expertise of a local company, which can help it adapt to some of the subtle differences of the local market. The foreign firm does not have to recruit and train a large number of new employees because it can to some extent utilize the staff of the local company. We also mentioned that sometimes in an acquisition, management leave the company that was acquired and thus take with them the firms competencies and expertise. In the case of J-Vs we could argue that the likelihood for employees to leave the collaboration is less because they have a guaranteed say in its
activities and a share in its outcome. In addition, the action of forming a partnership indicates some level of willingness to make the alliance beneficial.
Compared to the organic and acquisition routes, the J-V option is a less costly and thus risky entry strategy. You do not have to build up a market presence from scratch and you do not have to buy a possibly over-priced local brand. This is important since the majority of Chinese firms have a low-cost strategy and should not erode this competitive advantage.
Working in a J-V you can pay for the expertise and knowledge you receive by offering your partner knowledge and expertise concerning your core competence. In the case of Chinese firms, they can perhaps offer information and advice on doing business in the world’s largest consumer market in exchange for branding expertise in western markets.
The speed, at which the foreign firm can establish a brand presence in the local market with a J-V, is potentially very fast. Given access to the partner’s customer base, the foreign firm can easily get in direct contact with potential customers. Moreover, using the existing distribution networks of ones partner can significantly increase the rate at which the foreign firm gets it products in stores and its brand visible. The J-V route is faster than the organic route, but the fastest way to gain a brand presence in a foreign market is naturally through the acquisition route.
Another advantage of J-Vs that is worthy of mentioning is that it very often avoids troublesome protectionist legislation. Also, the acquisition of a domestic company may stir up scepticism and unleash a wave of “economic patriotism”, followed by negative media coverage and thus poor consumer attitudes towards the foreign brand. However, engaging in a partnership with a local company will doubtfully incite such a response. Furthermore, the previously mentioned detrimental effects of the Chinese country image may be reduced since a partnership with a local firm weakens the link of a product to its foreign counterpart.
Additional advantages of J-Vs that are specific to co-branding can be witnessed in research carried out by Washburn et al (2000). Washburn investigated the consequences of co-branding between brands of different equity. Brand equity is in a sense the strength of a brand, and since recognition and awareness (i.e. salience) are vital parts of becoming a strong brand, we can argue that Chinese brands are typically of low equity in the international setting. The research focused on four types of co-brands:
1. A high equity brand pairing with another high equity brand 2. A low equity brand pairing with a low equity brand
3. A high equity brand pairing with a low equity brand
4. A low equity (LE) brand pairing with a high equity (HE) brand
The first type of co-brand is of little interest to us as it is not applicable to Chinese (LE) brands, but the findings from the other three types of co-brands are of significance. They found that when a HE brand was paired with a LE brand and product trials were positive that brand equity of the LE brand increased significantly whilst the brand equity of the HE remained the same. Similarly, when a LE brand was paired with a HE brand and product trials were positive, the brand equity of the LE brand increased significantly whilst the brand equity of the HE brand remained stable. Even though the brand equity of the LE brands in the two types of co-brands (type 2 & 3) both increased, it was when the LE brand took the dominant position in the partnership that it benefited the most (type 2). The research also found that when a LE brand paired with a LE brand, the brand equity of the two constituent brands both increased after a positive product trial, albeit not very much.
The research thus suggests that for Chinese firms, pairing with a HE brand from a compatible product category will result in significant positive spillovers; given the product trials are positive. Being the dominant partner gives the Chinese brand a greater brand equity increase, but either way the Chinese brand gains. Furthermore, even if Chinese brands pair with other LE brands and the product trials are positive, there will be some favourable spillover effects for both parties. The main positive outcome for Chinese brands
was that none of the HE brands were negatively affected when paired with LE brands. This means that when Chinese brands attempt to find HE partners to pair with they can point to research that assures their potential partners they will not suffer from the partnership, given positive product trials.
Perception of poor quality is one of the main challenges that Chinese brands have to endure in foreign markets, as well as the domestic market. The negative quality association means that potential customers are reluctant to try the Chinese products, but when co-branded with a firm that has favourable quality associations, consumers would be more willing to take the chance. Rao, Akshay R. et al (1999) state that consumers are more willing to take this chance because the Chinese brand is in essence buying “vulnerability” from the more established brand. The new (Chinese) brand may just be a short-term venture intending to trick consumers into buying their product before they close operations and shift to a new brand name, whereas if the established brand delivers lower than claimed quality it will result in intolerable economic losses.
A branding alliance gives Chinese brands the opportunity not only to convince potential customers to try their brand (albeit co-branded), but also to increase the equity of their brand through positive spillovers. This gives Chinese brands a foot in the door and the chance to eventually sell many of their own branded products in the foreign market. There are many additional advantages of engaging in a branding alliance, Blackett & Boad (1999, Ch.2) list 23 specific opportunities and benefits in their book. However, in the case of Chinese brands entering developed markets, the broad advantages of J-Vs mentioned in section 5.3.1 and the advantages discussed in this section, are most relevant ones.