Managing partners

Date: 21-05-2015
Source: The Economist: Schumpeter

The pressure on companies to form alliances with rivals is growing inexorably

IN THE run-up to the British election this month, it was taken for granted that politics was entering an age of alliances. No party would win a majority; that much seemed certain. The question was whether the Conservatives or Labour could put together a winning coalition. David Cameron’s surprise victory on May 7th put paid to this talk. But in many industries it is still May 6th: companies are casting around for alliances that can complement their strengths, make up for their defects, hedge their bets, add to their store of knowledge or extend their reach.

There is nothing new about businesses forming either joint ventures (in which they establish jointly owned subsidiaries) or looser alliances. There are ample studies to show how often they have been tried—and how often they have ended in tears. However, despite the difficulties of making partnerships work, firms are under a number of pressures to keep trying.

The first is that, in some industries, the cost of new technologies is so crippling that even the largest companies cannot bear it alone. Carmakers, for example, are having to spend fortunes developing electric, hybrid, hydrogen fuel-cell and other forms of propulsion, while also investing heavily in their petrol and diesel engines as they struggle to meet regulators’ ever-stricter targets for carbon-dioxide emissions. Even Toyota, the world’s largest carmaker, is having to swallow its pride and work with rivals such as BMW on fuel-cell technology. Ford is collaborating with its Detroit arch-rival, GM, on high-efficiency gearboxes. Daimler is increasingly co-operating with a long-standing alliance between Renault and Nissan, into which AvtoVAZ of Russia has also been incorporated.

Among makers of aircraft and mobile phones, uneasy alliances are ever more common, not just with direct competitors but between manufacturer and supplier. One big lesson from Boeing’s struggles to get its 787 Dreamliner in the air was that it needed a collaborative, rather than an adversarial, relationship with the firms that provided its advanced components. Apple’s main supplier of microchips for its iPhones is none other than Samsung, its main rival in the smartphone business. The two have to manage a complex relationship in which they compete furiously in the market—and in the courts, where they are locked in battle over patents—while collaborating closely on the design of the semiconductors Samsung sells to Apple. Lee Jae-yong, Samsung’s genial incoming boss, is said to be better than his autocratic father, Lee Kun-hee, at navigating this neologistic world of “frenemies” and “co-opetition”.

A second source of momentum behind partnerships is new technology that brings firms from different industries together. Allianz, a German insurer, has teamed up with Google to create an “accelerator” centre in Munich, to foster startups that are seeking to use data analysis to improve the insurance market. Mobile-telecoms operators and financial institutions are collaborating to offer mobile payments.

Cross-border ties are also on the rise. Western companies have long sought out partners in developing countries to help them cut costs and enter markets. Now, however, it is as likely to be an emerging-market firm seeking a Western partner to help it go global. Dr Reddy’s Laboratories, an Indian pharmaceutical company, and Merck KGaA, a German one, are working together on cheaper versions of cancer therapies that are losing their patent protection. In a reversal of the normal arrangements, Dr Reddy’s will take the lead in early product development and testing; and Merck will handle manufacturing and late-stage trials.

The fourth pressure to get together stems from the consumer. As online shopping gains in popularity, owners of physical shops are having to find new ways to get customers to visit them. Uniqlo, a Japanese clothing retailer, has improved the pulling-power of its 90,000-square-feet flagship store in New York by striking deals with Starbucks, to install a coffee shop on the premises, and with the nearby Museum of Modern Art, to feature reproductions of work by Andy Warhol and Jackson Pollock. H&M, another fashion firm, has begun a scheme in which consumers can free space in their wardrobes by bringing their old clothes to its shops, also receiving a discount on new ones. To do this it works with I:CO, a logistics firm, which sends some of the used clothing to the second-hand market and the rest to be recycled.

A fatal embrace
There is no shortage, then, of good reasons why companies should seek to join hands with even their eternal foes. However, the drubbing that the Liberal Democrats—the Conservatives’ former coalition partners—received at the polls this month is a reminder of how easily alliances can go wrong. Sometimes even the best-intentioned partner can squeeze the lifeblood out of another. Companies entering an alliance must learn how to trust each other—but also guard against being taken for a ride.

Businesspeople have much to learn from politicians and diplomats in this. Politicians have always lived in a world where the boundaries between friends and enemies are blurred. They recognise that your closest ally can soon become your bitterest adversary. (Mr Cameron may soon be looking back at how much easier it was to work with his “enemies” from the Liberal Democrats than with his “friends” on the right wing of his own party). Diplomats understand the importance of maintaining relations through thick and thin: whatever their underlying rivalries and occasional spats, America and China have a mutual interest in remaining on tolerably good terms and co-operating on global problems. And both politicians and diplomats realise that all alliances are marriages of convenience. Lord Palmerston, a British prime minister, once said that Britain has no permanent allies or enemies, only permanent interests. That is the view business leaders should take as they enter partnerships.

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