Going It Together

Dec. 21, 2004
A U.S.-Japanese joint venture that's lasted 30 years points the way to successful cross-border partnerships.

In a perfect world, the most efficient way for a U.S. manufacturer to enter a specific overseas market would be to initiate a joint venture with an indigenous company already established in the region. In the real world, however, cross-border joint ventures are usually just disasters waiting to happen. As global management consultants PA Consulting Group reported in a 2002 study, the vast majority of joint ventures either implode or are ripped apart within four to seven years of inception. Only a minuscule number survive to the ripe old age of 10, and only a tiny fraction of those make it to 15. How, then, to explain the ongoing relationship of NACCO Industries Inc. of Cleveland and Japan's Sumitomo Heavy Industries Ltd. (SHI) -- an alliance that has thrived for more than three decades? One of the longest-lived of all existing U.S.-Japanese joint ventures, the NACCO-SHI 50-50 partnership has withstood a series of increasingly knotty and potentially lethal challenges over the years. These have included differences in culture and language, changes of corporate ownership and direction, radical readjustments of individual responsibilities within the joint venture, currency fluctuations -- just about everything but famine and pestilence. So how have these two companies kept their relationship intact over so many years? "The first thing is that both sides must be prepared to compromise," says Yoshinori Ohno, president of Sumitomo NACCO Materials Handling Co. Ltd. (SNMH), the joint venture entity. "Compromise on strategies, on approaches, on almost everything." Reginald R. Eklund, president and CEO of NACCO Materials Handling Group Inc., agrees. "We go into every discussion with the idea that in the end, common sense will prevail," says Eklund. "We have to work things out, because no matter what, the business must go forward." The origins of the NACCO-SHI joint venture date to 1968, when Sumitomo decided it needed to balance the wildly fluctuating revenue stream of its construction crane and heavy-machinery business by mass-producing a product that could weather most cyclical storms. Forklift trucks appeared to be an excellent opportunity, because research revealed that demand in Japan would likely rise fivefold in the coming years. At the same time, the Yale Materials Handling division of Cleveland's Eaton Corp. was looking for an efficient way to enter the Japanese domestic market. In 1969, SHI and Yale signed a licensing agreement, whereby Sumitomo would utilize the American company's engineering and technology to manufacture Yale-branded internal-combustion-engine (IC) forklifts for sale in Japan. A potential conflict arose immediately. SHI wanted to redesign and re-engineer the forklifts it would produce to meet such Japanese specifications as shorter maintenance schedules and smaller operator cabs. SHI also wanted to rely on domestic rather than U.S. suppliers for all components, right down to engines. Ordinarily, such differences of approach could easily undermine even an established business relationship. As Eklund notes, "The typical misconception in the U.S. is that if something works here it will work everywhere, so we expect everyone to just do it our way." Yet within a year, SHI created a new, 30,000-square-meter design, engineering, and manufacturing facility in the industrial town of Obu and was successfully selling a range of Yale-branded forklifts into the Japanese market . A major disagreement was avoided, says Ohno, because "Yale people listened to our opinions. They did not make decisions by themselves." For its part, Yale allowed its licensee to make major changes to its branded products for two reasons: The Japanese made a logical case for the changes; and -- with the yen then very cheap relative to the dollar -- the cost savings from using Japanese suppliers would be substantial. Although the arrangement proved profitable in its first years, SHI soon realized that production and sales volumes were too low to justify maintaining the business. A broader relationship was then proposed, and in 1972 a new entity was born -- Sumitomo-Yale Co., Ltd., a 50-50 joint venture. Yale gave the joint venture the right to sell Sumitomo-Yale branded forklifts into Japan and other Asian countries and territories. In addition, the joint venture would also build 1.5-ton Yale-branded forklifts -- the smallest of its IC products -- for export to North America and Europe. The confluence of interests that resulted in the establishment of the Sumitomo-Yale joint venture is actually a fundamental component of success for any joint venture: Both parties must derive benefits of roughly equal value from the enterprise. In this case, SHI got more volume, as well as distribution in countries it could not enter on its own. Yale got additional markets in Asia, plus a high-quality and very cost-competitive OEM product for North America and Europe. "In the early years," says Nobuo Kimura, managing director of SNMH, "the relationship between Yale and Sumitomo was always 'win-win.'" Indeed, the arrangement worked so well that in 1980 Yale gave the joint venture total responsibility for producing all sizes and models of its IC forklifts for sale worldwide. New Partner Enters Picture Not long after, however, the yen began to appreciate steadily against the dollar, and the cost advantage that had been such an important factor in the equation for Yale started to disappear. This was one of the reasons behind Eaton Corp's decision to spin off the Yale division as a separate operating company in 1983, a move that presaged its sale the following year to NACCO Industries. The joint venture now had a new part-owner, and the potential for conflict arose once again. But aside from its new name -- Sumitomo NACCO Materials Handling Co., Ltd. -- the joint venture proceeded with very little substantive change. One of the primary sustaining factors in this transitional period was the personal relationships that had been established among the Yale and Sumitomo old guard within the joint venture. "We have always made every effort to ensure that our Japanese partners are perceived and treated as equals," says NMHG's Reg Eklund, a Yale veteran since the mid-1970s. For his part, Yoshinori Ohno refers to his American colleagues as "nice guys" -- although he notes with a smile that U.S. managers "begin every discussion by assuming they are correct. And they speak very loudly." The most critical moment in the life of the joint venture occurred in 1989, when NACCO acquired Hyster Co., a U.S. forklift producer with extensive capabilities in the development and manufacture of IC machines -- the very types of products that the SNMH joint venture was producing. The Hyster acquisition forced NACCO to reappraise the joint venture's role in its global strategy, which resulted in lengthy and sometimes heated debates between the partners. "We strongly requested to continue designing and manufacturing the midsize class of IC forklifts, because they have higher margins and face less competition than the smaller products," says Ohno. "NACCO insisted they keep those responsibilities in the U.S. with Hyster." Eklund remembers the period as "a very difficult time." What saved the joint venture at that stage was the attitude of its participants. The Japanese prepared for meetings with their American counterparts by creating lists of subjects to address in a purely logical way. By following their "scripts," they avoided letting emotion or personalities cloud discussions. Similarly, the Americans realized that despite the gulf of cultural and language differences, they could come to an understanding with the Japanese if they always spoke frankly and focused on achieving consensus. At the conclusion of every meeting, points that had been agreed upon were written on a whiteboard for all to see, to ensure that nothing would be assumed and no detail overlooked. And after a full day of contentious debate, everyone would repair to a nearby restaurant for dinner, during which conversation would be limited to non-business subjects. After months of deliberations, a compromise was reached. The joint venture would retain its markets for all sizes of forklifts in Japan and Asia, continue to produce 1.5-ton forklifts for export to the U.S. and Europe, and also contribute to the development of new IC products of all sizes -- an arrangement that continues to this day. Benefits Are Both Tangible, Intangible With sales last year of nearly $170 million divided equally between its two part-owners, SNMH accounted for approximately 5% of both NACCO's total unconsolidated revenues and SHI's consolidated results in 2002. Although the joint venture has not always been wildly profitable over the decades, it has unfailingly been in the black. And each of the partners notes that it derives both tangible and intangible benefits from the long-standing venture. NACCO, for example, enjoys an on-the-ground presence in Japan (a market that is still quite difficult for foreign companies to enter alone), and its brands have won acceptance in a number of far-flung Asian countries. Through the joint venture, it is also doing particularly well in Australia, a market with great potential. SHI has gained expertise in managing alliances with overseas firms (still a relatively rare phenomenon in Japan) and in mass-production techniques, an area in which it previously had no experience. And it has learned how to manage a multibrand strategy, a skill that facilitated the joint venture's recent acquisition of the electric-forklift business of Shinko Electric Co. Ltd. "We have contributed Sumitomo's strengths to the joint venture, and NACCO has contributed its strengths," says Ohno. "Each partner understands the needs of the other because we talk openly and frankly about issues. We have learned much from this relationship." Says Eklund: "We have fully integrated the joint venture into NMHG's business, as opposed to looking at it as a separate company that stands outside. When I hold management meetings of the group's foreign divisions, Ohno-san is always here." Ultimately, the most fundamental explanation of the durability of the NACCO-Sumitomo partnership comes down to the participants' mutual respect and willingness to find common ground on potentially divisive or even destructive issues. In a decidedly less-than-perfect world, those may well be the critical factors in ensuring the success of any joint venture.

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