An international joint venture is among one of the outstanding mechanism that can be used in case a business wishes to collaborate with other firms in a international markets. The primary reasons that many businesses have started to associate themselves in these kinds of ventures are due to the ever increasing rates of the globalization of the world markets. With an international joint venture, the business will access the global foreign markets more economically and more efficiently. Well strategized joint ventures allow the companies to share the risks, startup costs and the profits.
Was the country choice appropriate?
With most of the world’s pharmaceutical companies being concentrated in North America, Japan, and Europe, there was a need for Eli Lily to find another market with moderate competition for its drugs. India initiated economic reforms and started embracing globalization thus it was a perfect choice for investment. The country encouraged foreign direct investment, and limited foreign ownership was increased from 40% to 51% in the drugs industry. It was a clear indication that the country was ideal for investments. With it having very few multinational companies, the competition would not be very stiff. The Two Acts, The Patents Act of 1970 and the Drug Price Control Order were also abolished thus making it hard for the local manufacturing companies to enjoy the freedom they earlier had. The government was also focusing on making the country more export-oriented than import-oriented. It was an indication the government was going to support all the foreign investments. The country consisted of 800 million individuals, where 200 to 300 million belonged to the middle-class economy thus they could afford the company’s products (Dhanaraj, Beamish, & Celly, 2004).
Delegate your assignment to our experts and they will do the rest.
Suppose there was no regulatory requirement in 1993, would you have still chosen partnership?
The existence of regulatory requirement would not have been ideal for partnership. The country had Acts such as the Drug Price Control Order and The Patents Acts of the 1970s.These regulatory laws were not ideal for any investment into the country. The DPCO Act gave the government the powers to control the prices of drugs. The act also gave the government the rights to limit the profits made by the pharmaceutical companies. The Patent’s Act removed the product patent rights that had earlier been protected The Patents and Design Act of 1911. If Eli Lily had invested in the country, it would have suffered losses and even stopped its operation in the country that recorded a drop in the market share of multinational companies from 80% to 35% (Dhanaraj, Beamish, & Celly, 2004).
Appropriateness of the partner choice
The partnership with Ranbaxy Laboratories was perfect with it having been formed in the 1960s. The company was the leading domestic pharmaceutical in India at the time they were entering into a joint venture. By 1990, the firm had a control of about 15% of India’s bulk and generic drugs business. Ranbaxy came second after Glaxo as second largest drug company in India and ranked as the second largest exporter of all pharmaceutical products from India. Ranbaxy had a lower capital cost which was 50 to 70 percent less than other US plants in the country. Eli Lily had no presence in India thus its products would not easily become recognized. However, with its partnership with Ranbaxy, it successively established its presence in the market.
The Appropriateness of JV structure
The international joint venture with Ranbaxy begun in the late 1990s. The two companies had one thing in common; they believed in innovation, technology, and ethical standards. With Ranbaxy emphasizing on how it looked after its employees and desire to become a corporate citizen, Lily knew they had found the right partner. Their joint venture agreement was signed in 1992 and from its structure it was perfect. It was because none of the two companies had more power in the venture than the other. It was to have an authorized capital of $7.1 million and $3 million initial subscribed equity capital. This was divided equally giving both companies 50% ownership. The JV’s board of directors consisted of six directors where the pair contributing three members each. Lily was given the right to hold the CEO position. The JV also gave either of the companies a right to all the shares in case either wanted to opt out (Dhanaraj, Beamish, & Celly, 2004).
Evaluation of the Three Successive IJV Leaders and their Unique Challenges
By 1993, the joint venture had started its operations. Its first managing director was Andrew Mascarenhas who had been Lily’s general manager from the Caribbean basin. During his leadership, Lily had its product being sold by local manufacturers for there were no patent rights that could protect Lily products. The company was facing a lot of resistance from buyers. They did not have any recognition among doctors. Mascarenhas’s greatest challenge was to revamp the venture and get it running. They had no employee base and office space. He had to start building the company’s infrastructure from scratch. The venture had no distribution network thus relied on Ranbaxy’s which they had to pay. The ministry of health also put limitations on the company’s products hence attaining profits was very challenging for the managing director.
In 1996, Chris Shaw, the manager of of operations at Lily’s Taiwan branch was elected as the new managing director. The company was still unstable in its processes and systems. Shaw had to come up with a senior level manager and a team that would see the standard operating procedures being developed. These were aimed at ensuring that the JV has smooth operations. The Indian business environment was also changing rapidly hence the need to ensure that the JV did not lag behind. Shaw later decided to hire a management consulting firm that would come up with recommendations for growth for ELR.
After Shaw exited the company in 1999, Gulati took over as the managing director. The company growth rate was stagnant at 8% per annum and had very few employees. Gulati had to come up with strategies that would see the company grow above the 8% annual margins.
Assessment of the overall performance of the JV
At the time of the JV’s inception in 1993, they had no knowledge if it would succeed or leave a mark in the market. The venture started off with no infrastructure or employee base. Most of its main products were being sold in India due to lack of patents rights. The government was bringing down the ventures success. It had limitations on its products that affected its overall profit margin. However, the experiment came to surpass all the hurdles and the aftermath made the company stronger and successful. ELR started handling its product approval in conjunction with the government after creating a medical and regulatory unit. It meant ELR had control over its products hence they were not being produced illegally. The venture had stopped sheltering under Ranbaxy name by 1999 and was independent. By 2001, ELR had seen impressive growth within the pharmaceutical industry in India. Out of the 10,000 pharmaceutical companies, it was the 46th largest drug company. Most of the subsidiaries that had started at the same time as the venture had shut down and some were under severe financial crisis (Dhanaraj, Beamish, & Celly, 2004).from the IJV’s performance the two partners came to see that indeed the IJV was worth forming. It had surpassed all the hurdles that would have made it turn into a failure.
Recommendations Regarding the Ranbaxy Partnership
ELR had fully grown into a big company that was not dependent on its parent companies. For Ranbaxy, it was experiencing financial burden as a result of the international sales it had involved itself into. It had divested in some of its other joint ventures with Lily; thus its aim was to divest in the ELR. I would have recommended for Lily to purchase Ranbaxy’s shares and not sell them to another company.
Implications of the Recommendation?
Despite rumors indicating that it would to cost a business about US $70 million, Lily could still afford to pay the entire stake and recover it within a short period. By 1995, Lilly had also grown immensely. It was the 12th leading pharmaceutical company in the US, 17th in Europe and 77th in Japan (Dhanaraj, Beamish, & Celly, 2004). It clearly indicated that Lily had the financial capabilities to pay any amount Ranbaxy required. At the time of the JV formation, Indian pharmaceutical market had no laws thus there were no patent rights governing drug companies. Despite this, ERL came to grow. By 2005 according to the WTO Agreement Indian signed into law a clause that would start offering patent rights to the companies. It was an indication that the market would become exquisite for the companies. If Lily purchased Ranbaxy’s stake, it would get it back within a few years of operations. Its principal reason for this would be, the venture had already acquired a broad foundation within the Indian market hence it would have the capabilities to offset any other new entrant who had no recognition in the market (Dhanaraj, Beamish, & Celly, 2004).
How would you implement this?
Before the Lily could purchase the stake, a joint task force was to be formed. The panel would comprise officials from the two sides that had a part in the venture formation. Its aim was to foresee the initial; agreement. During the formation of the venture, both companies had staked 50% contribution for each side. During the signing of the accord, a transfer of shares was to occur in case one company wanted to dispose part of its shares or its whole shares in the venture (Dhanaraj, Beamish, & Celly, 2004). This would act for Lily. They would have the upper hand when it came to the bargaining on the price that would be given to Ranbaxy. Both organizations had an equivalent share in the operation of the venture. However Lily was to pay severance to Ranbaxy for the time they were together and a two future year profit amount. Despite it being expensive for Lily in the short run, its long-term benefits were far better.
In conclusion, it is indeed evident that joint ventures make it easy for companies that want to involve themselves in foreign investment. However, before the formation of any venture, it is necessary for both parties to come up with agreement on how they will operate their new business. The agreement is useful in case a partner wants to quit the venture. It makes it easy for any financial settlements. For the case of Eli Lily, the induna market was very new to its products. It had no recognition within the market. However, its partnership with Ranbaxy, an Indian firm allowed it to build its market in the country and gain recognition. Even with the two companies splitting up, the venture was still operational and had become its independent company.
Reference
Dhanaraj, C., Beamish, P. W. & Celly, N. (2004). Eli Lilly in India: Rethinking the Joint Venture Strategy . The university of Western Ontario: Ivey Management Services.
