More than a decade ago, I was parachuted into a loss-making joint venture (JV) in a developing country that was a noncore business belonging to a foreign conglomerate.
When the conglomerate invested in the JV that made packaging materials for noodles, sweets, and beverages 15 years earlier, there were very few companies in in the country that had the technological sophistication and capability to produce highly consistent and quality packaging products at the right price. Local competitors were not anywhere close to the economies of scale of this JV operation in terms of its production costs and its highly skilled labour. The conglomerate I worked for was also looking to expand its business footprint.
Customers' willingness to pay for high-quality products was also reasonably high due to a shift in consumer tastes from mostly local food to more "modern" foodstuff and beverages like instant noodles, chocolates, and packaged drinks.
Like the example of the JV I shared in "Issues CFOs Should Consider Before Launching a JV", this JV partnership had three important ingredients: chemistry, strategic fit, and a favourable deal structure. It was a match made in heaven.
However, 15 years later, the JV found itself far behind its competitors. Competitors challenged the JV's core differentiating factor by imitating and copying its key capabilities in machinery. Competitors had machinery that was half the cost of what the JV had, and they were able to offer products and services with very similar quality.
Against this backdrop, I was offered a role as a finance business partner to support the business unit head and the turnaround of this business. My bosses promised me that it would be one of the most difficult assignments in my career up to that point. There would be ample opportunities to stretch myself to new limits, find entrepreneurial solutions, and perform multidimensional strategic business analyses to support the business on its turnaround journey. Needless to say, I was very excited by the opportunity to elevate my finance business partnering career and skillsets.
Start with strategic business analyses
First, I performed strategic business analyses and communicated with key stakeholders. I met customers, suppliers, all departments' key personnel, and local key stakeholders, such as the JV partner and the local government, to get a sense of the existing situation and see whether they had good ideas for turning around the company. I used many techniques I learned through CIMA courses like SWOT analysis, value-chain analysis, and business model analysis to look at where we could turn around the operation.
Working side by side with the business unit head to provide strategic analysis and ideas, I proposed two strategic options:
- Improve production. Invest heavily in capital expenditure on machinery and improve production processes to lower the overall cost base. In addition, to attract better staff and workers with the aim to increase sales, the JV would have to move towards providing better sales incentives.
- Strategic divestment. Since this was not the conglomerate's core business, cash could be conserved and invested in core businesses within the conglomerate that would yield higher returns.
Keys to success with the next steps
These two strategic options were presented and debated extensively amongst the business unit's management team and the conglomerate's management team. The first option to improve production would have enabled the JV to compete with local players on production cost and product price. However, my analysis showed that the disadvantages of pursuing this option would have been a payback period of more than ten years and an unattractive internal rate of return.
Eventually, the decision, taken reluctantly, was to pursue the strategic divestment. I was then tasked to be the project leader to spearhead the closure of this unprofitable JV.
From these experiences, here are three tips finance leaders can use to improve the chances of successfully shutting down an unprofitable JV:
Form the right team
Upon the decision to commence closure of the unprofitable JV, the first move was to immediately transfer the business unit head out to another business unit and install myself (the finance business partner) to lead the closing of this operation. Before this decision, the conglomerate's management team had called me to see if I was sufficiently confident in shutting down the operations if the business unit head was transferred to a different business within the company. In my response, I assured the management team that I was keen to help the company achieve the best possible results and that I was confident in leading the project.
Looking back, I learned that this move was made upfront to eliminate any possible chances a conflict of interest might occur. For example, the business unit head might have wanted to continue business and might have worked against the interest of the strategic divestment plan. Furthermore, closing down operations requires a lot of business controlling and negotiation skills, which a finance business partner is well suited to perform.
There was also a mass one-off retrenchment of about 300 staff and workers in the process of executing this closure. Hence after much consideration and deliberation, I recommended the formation of a core team. I hand-picked five other core members: the finance manager, sales manager, production manager, purchasing manager, and human resource manager. Notice that this core team had all the key elements required to "run the business unit" and, as a result, would be the most "suitable" execution members.
I then sought approval to form this core team and to guarantee the core team's subsequent job placements within the conglomerate after satisfactory completion of the project. Through persuasion and many rounds of justifications, I was given the mandate. This eliminated job uncertainty for the core team members and kept the motivation of this core team focused on completing this project.
My recommendation for the first step in the closure process is to look out for possible conflicts of interest in the existing management team and form a core execution team that possesses the skills most relevant to the tasks.
Communicate with all strategic stakeholders in a consistent manner
Next, our team crafted a consistent description of how we arrived at this decision. It was vital that the core team and I approached any stakeholder in a consistent manner to avoid miscommunication or rumours and to remove second-guessing.
I first approached the JV partner informally to give them a heads up. This was a vital step in the entire process before the information went public. It also helped to gauge the level of support and concern key stakeholders may have had and to find ways to address them to ensure the execution would not have faced any unexpected surprises. We addressed these major questions:
- Why management felt it was unable to turn around the business;
- The two strategic options and their pros and cons; and
- We left a door open by explaining that even though this business was to be closed, we were always willing to explore other, more profitable business opportunities with the JV partner moving forward.
A JV board meeting was held to formally present analysis and reasons for taking the strategic divestment option. The JV board's approval was obtained to liquidate all assets and to pay staff and workers compensation at rates higher than local statutory requirements.
Social stability is an important element the local government seeks to preserve. Understanding this, I then visited local government leaders to reassure them that the JV would pay all necessary compensation to affected workers, staff, and their families at rates above local statutory requirements. We promised to make the transition easier for affected staff, workers, and their families and to do whatever it took to minimise disruption to their livelihood. We offered job placement opportunities for those who needed such services and additional compensation to relatively less well-off workers and staff.
My recommendation is to manage and communicate with all strategic stakeholders, many of whom should be informed before the news goes public. It is also important to prepare a consistent analysis and storyline upfront to ensure there are no rumours or miscommunication that could affect the execution.
Maintain focused execution and business control of tasks
The major areas to focus on when executing closure of operations are:
- Workers and staff retrenchment;
- Realisation of the value of fixed assets;
- Realisation of the value of debtors;
- Realisation of the value of inventory; and
- Payment of amounts owed to suppliers.
The most critical part was to inform major stakeholders when we would stop operations, and scheduling workers and staff to leave the JV company in phases. The analysis and storyline we crafted above were consistently used to explain our position.
I led the core team in visiting every customer and supplier to inform them formally of our intention to terminate operations and that we would stop taking orders from customers and placing orders with suppliers. We reassured our customers we would stop taking orders only after a reasonable period and would fulfil all existing outstanding orders. We also reassured our suppliers we would honour obligations to pay for the orders we placed with them and would not default.
The best values of fixed assets and inventory were recovered by conducting an open public tender. CIMA training had helped me implement many checks and balances along the way to ensure the tendering process was fairly conducted. I ensured that we gave the tender to as many sources as possible and implemented many business controls to ensure tendering prices benefited the JV the most.
I would recommend anyone executing an operation closure to conduct a comprehensive analysis on the major tasks involved to ensure sufficient resources are allocated to execute the tasks. Identify major stakeholders and take the time to engage them and plan a schedule from the beginning to the end. Anticipate as many issues as possible at the planning stage and deal with the ad hoc issues as and when they arise.
C.F. Wong, ACMA, CGMA, is a member of the Association of International Certified Professional Accountants' North Asia regional advisory panel and head of finance at a company with manufacturing and sales operations in China. He has more than 20 years of experience in finance, including strategy planning and execution, strategic finance business partnering, operational management and improvements, mergers and acquisitions, and automation. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.