1. Why have the negotiations so far failed to result in an agreement? Is the formation of the JV between Nora and Sakari the best option for both companies to achieve their respective objectives?
Ans. Part 1: Negotiations to date between Nora and Sakari have failed mainly due to a mutual ignorance of one another's cultural norms. One of the key reasons for failed to result in an agreement is that there is huge gap between what Nora and Sakari can sacrifice to successfully negotiate the contract with each other. Following are some example proving how far they are from the real contract.
Sakari proposed an equity split in the Joint Venture (JV) Company of 49 percent for Sakari and 51 percent for Nora. Whereas, Nora proposed a 30 percent Sakari and 70 percent Nora Split. Sakari proposed to provide the JV Company with the basic structure of the digital switch where by the JV Company would assemble the switching exchanges at the JV plant and subsequently install the exchanges in designated locations identified by TMB. On the other hand, Nora proposed that the basic structure of the switch be developed at the JV Company in order to access the root of the switching technology. Sakari proposed a royalty payment of five percent of the JV gross sales while Nora Proposed a payment of two percent of net sales. Besides this, there is a huge gap in the Sakari’s expected salaries and perks from the JV Company and what Nora willing to provide. And finally both Nora and Sakari disagreed on the location for the dispute resolution.In addition to this, lack of preparation and lack of understanding on the differences due to national culture is another factor for failed negotiations.
Ans. Part 2: While talking about the Nora’s point of view, to ensure compliance with the terms of the TMB contract, joint venture negotiations with Sakari must be successfully concluded. Nora is looking to secure a partner that will enable them to comply with the TMB contract, as well as to learn from Sakari's success and replicate that model in the Malaysian market. JV Company would be the best objective because if they are able to reach the negotiations, Nora would benefit from the JV in terms of technology transfer. Sakari was one of the leading telecom companies in Europe. It would be an invaluable opportunities for Nora to learn from the Finnish experience and emulate their success for Malaysia.
Although, Sakari was a relatively a small player in fixed networks, these networks were easily adaptable, and could cater to large exchanges in the urban areas as well as small ones for rural needs. Apparently, Sakari’s smaller size, compared to that of some of the other MNC’s, was an added strengths because Sakari was prepared to work out customized products according to Nora’s needs. Large telecom companies were alleged to be less willing to provide custom-made products. Instead, they tended to offer standard products that, in some aspects, were not consistent with the needs of the customers. Therefore, Sakari is the best option for Nora as Sakari can provide what Nora really need and they also know each other as they already involved in the negotiations contract. If Nora strated negotiations with any other possible parties then that will be costly and consumes too much time that way Nora will lose its reputation in the market due to its inability to provide what it had previously promise with TMB.
Finally, Sakari has experience in the exporting market and they have modular based open standard technology which would be another key advantage Nora would be benefited from its Finnish counterparts.
On the other hand, Sakari would also be benefited from the JV Company contract between Nora and Sakari because the venture would pave the way for Sakari to acquire knowledge and gain access to the market of south-east Asia. Sakari's main objective is to acquire knowledge of, and gain access to, South Asian markets for Telecom products would be fulfilled if the contract is successful. Furthermore, in Malaysia and Thailand, fixed network project were approaching contract stage therefore, for Sakari, it is imperative that Sakari established its presence in this region to capture the share in the fixed network market.
The other evidence that the Joint Venture (JV) will be beneficial for Sakari is that the large potential for telecom facilities was also evidenced in the low telephone penetration rates for most South-east Asian countries. For example, 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.
Finally, Sakari would be benefited from the Nora’s advantage of local knowledge of Malaysia and Asian Market. Not only this but also Nora has strong government ties and they already has a contract in hand. Beside this, Nora has experience working with companies based in developed countries.
2. As Zainal, what would you do to ensure that Nora fulfills the TMB contract?
As Zainal, to fulfill the TBM contract I would restructure the contract with that of Sakari and request them for final attempt for negotiations. The reason I would like to do this is that Sakari’s network are easily adjustable and can cater to large exchanges in urban areas, and small ones in rural areas. Beside this, Sakari is willing to deliver a customized system to meet the needs of the customers which the larger corporations couldn’t provide to Nora. And if Nora started negotiating with third company then it will be costly as well as time consuming which Nora cannot afford to do as Nora is liable to provide RM2 billion contract to supply digital switching exchanges supporting four million telephone lines. And Nora alone cannot provide this without Joint Venture with either Sakari or any other digital switching technology provider.
To materialize the negotiation with the Sakari, we (Nora) will accept the Sakari’s proposal about the technology and salaries and perks of the Finnish expertise. Beside this, we will propose different place either in Asia or in Europe for future conflict resolution. Not only this but also a third country will be chosen as a venue for the possible future conflict. Beside this, 40 to 60 percent of equity ownership will be proposed to ensure the relative control of the both parties in JV Company.
Some of the reasons why I will prioritized the negotiation with Sakari if I were Zainal is that Sakari is one of the globally popular companies in terms of creating joint ventures and to successfully enter the new markets through JV. “Sakari was the leading telecom company in Europe and had experience using high technology to enable small country to have a fast growing economy. Nora was looking to do the same thing in Malaysia if given a piece of the contract. Malaysia had adopted the British system and Sakari, unlike other corporations could make the components customized.” (Lander, L. & Clark C.) Furthermore Sakari has technology called SK33 which can be use with several components parts which are available in the market and was modular and could be interfaced easily with new equipments.
The fact is that Nora is looking for a Joint Venture to manufacture and commission digital switching exchanges to meet the needs of the telecomm industry in Malaysia. They are able to securing a share of RM 2 Billion contract from TMB with the help of the possible future Joint Venture with Sakari. And now they are unable to negotiate the Joint Venture (JV) due to the conflict of interest in terms of control (equity ownership), Royalties, and conflict resolution avenues etc. But the ground reality is that Nora needs a partner at any cost and they cannot provide digital switching exchanges to TMB alone or by their own. Therefore, situation of Nora clearly tells that Nora needs Sakari at any cost. Therefore, as Zainal, I would make every possible change in the structure of the negotiations and try to reach the agreement with the Sakari.
If Sakari doesn’t even accept the refine and restructured contract of Nora then it would be better for Nora to find another JV partner such as Siemens, Samsung and Lucent who have failed the in the bid but still be potential partners of Nora to fulfill the commitment Nora had made with the TMB.
3. If Zainal decides to renegotiate [and assuming Kuusisto agreed], how should we restructure the terms of the deal?
Nora and Sakari both are very successful in their respective field of business. Nora is one of the leading suppliers of the telecommunication equipment in Malaysia. Sakari can gain a lot from the Nora’s strengths and knowledge about the culture and market. On the other hand, Sakari is one of the successful niche market players for supplying digital switches technology. Therefore, both the companies have their own strengths and advantages over another and both the partners can learn and gain a lot from each other. Therefore, in my opinion, both the company should compromise in something in order to materialize the contract.
While talking about the restructuring the negotiations, following are the key areas where I would restructure the negotiations.
Ownership: The first key issue that should be restructured is about equity ownership and power control. In my opinion, Nora should posse’s greater portion of JV equity (60 percent for Nora and 40 percent for Sakari) for two reasons. First is that JV will operate in Malaysia and not in Finland and they understand their culture better than that of Sakari. And the second reason is that Nora has the competitive and suitable managerial forces to manage the JV. Therefore, it would be better if Nora holds larger percentage of share than that of Sakari.
Technology: Second key area is technology transfer in which it would be better if Nora accepts the Sakari’s proposal. Every company wants to control the technology transfer in the highest degree. Therefore, Nora should let the Sakari to keep the technology development in house and accept the Sakari’s proposed assembly and installations plan.
Royalty: In my opinion, Royalties should be compromised as Nora because the financial stimulation prepared by the Nora’s manager’s indicated that Nora’s return on investment would be less than the desired 10 percent if royalty rates exceeded three percent of net sales.
Arbitration: In my opinion, for arbitration a neutral location other than KL and Helsinki should be chosen so that none of the company feel like the other party is gaining advantage over themselves in terms of possible future disputes.
Salaries and Perks: Salaries and Perks should be given as per the conditions in Helsinki because both the companies and their JV need expertise of the Finnish experts who will be working for Sakari. Therefore, salaries and perks should be given as per the rules and rate in Helsinki. Therefore, it would be better if Nora agrees with Sakari regarding Salaries and Perks.
In conclusion, if above mentioned facts are reconsidered then Nora and Sakari Joint Venture agreement will possibly be materialized.
References:
Phatak, Bhagat & Kashlak, International Management, 2nd ed., McGraw-Hill Irwin, 2009
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