Joint Venture and Lg

¶ … Joint Venture Partner for HP Inc.

Candidate Companies

LG

Daewoo

Samsung

Assessment of Candidate Companies

LG

Daewoo

Samsung

Investment Recommendation

Team Fab Five have recommended that HP target South Korea for an acquisition. The acquisition should be undertaken as joint venture with a suitable partner. To determine the most suitable partner, potential joint venture collaborators must first be identified, and HP should determine what they would like to gain from the alliance, which will be used as a basis for assessment of the potential partners.

HP is a well-known leading player in the international markets focusing on personal computers, printers, and related hardware (HP Inc., 2016; Kitagawa, Jump, & Lam, 2016). The firm emerged in 2015 following the split of HP in 2015 (Kitagawa et al., 2016). The firm is now seeking to expand and increase its foot print, but has suffered as a result of the slow economy, this is reflected in the announcement that HP are expecting planning to cut between 3-4,000 jobs over the next three years, due to sluggish sales (Reuters, 2016). Dion Weisler, the CEO has stated that the firm expects condition to remain uncertain and markets volatile. In addition, the firm has a clear focus on the core items of personal computers and printers.

When identifying and assessing potential joint-venture partners, the candidates should have characteristics, resources, and/or core competencies which are complementary to the competencies and resources held by the initiating firm (Mintzberg, Ahlstrand, & Lampel, 2008). Therefore, it is assumed in this paper that the desired to expand, strategy as defined by, is a joint venture partner (JV) should have a high level of knowledge regarding the potential new market. As the organisation has also suffered financially, it would be desirable for the joint venture partners not only to bring additional financial resources, but demonstrate a degree of financial stability.

2. Candidate Companies

Three potential candidates have been identified; LG, Dahlia, and Samsung.

2.1 LG

LG, previously known as Lucky-Goldstar, is a publicly listed firm, which had a turnover of U.S. $48.06 billion in 2015 (Statista, 2016). The firm has highly diversified operations, while known predominantly for its presence in electronic technology markets internationally, with products as wide-ranging as television and DVD players, household white goods, through to telecommunications equipment. In 2016, LG is the third-largest OEM smartphone manufacturer supplying the U.S., supply 9.8% of all smartphones in the country, trailing behind Apple and Samsung (comScore, 2016). However, the diversification goes beyond product within the electronics/technology markets, with the company involved in the manufacture of additional products such as soap, laundry detergents and toothpaste, created and sold for the South Korean market (LG, 2016). The firm undertakes manufacture in-house, and has outsourcing agreements (LG, 2016)

The financial position of the firm appears viable, with the firms showing profit over the last three years, but this profit was constrained in 2015, to a net profit margin (before tax) of 0.44%, with the parent company making a loss in 2015 (LG, 2016). Notably, the company is also facing challenges, as the revenues in 2015 have from the previous figure of $50.21 billion in 2014 (Statista, 2016).

2.2 Daewoo

Daewoo is a large multinational conglomerate made up of 20 different divisions, operating under an umbrella structure (Daewoo, 2016). The different firms are listed separately as public listed firms (Morning Star, 2016). The JV may be undertaken with Daewoo Electronic Components, where there is a high level of common interest. This business unit had a turnover of KRW million 46,263 in 2015, with a profit margin of 2.32%, which has increased to 4.18% in the second quarter of 2016 (Google Finance, 2016).

Daewoo, which has faced bankruptcy in the past, is now more highly diversified than LG, with Daewoo Electronic being the largest company (Daewoo, 2016). The main thrust of the business currently appear to be on other areas, mainly gas, oil and energy, including investments in Myanmar, with the firm criticised for dealing with a political regime which a poor human rights record (Kyung-min, 2016)

2.3 Samsung

Samsung, similar to Daewoo, is a multinational conglomerate, made up of multiple subsidiaries (Samsung, 2016). The group is highly diversified with interests in areas such as chemicals, construction, hospitality, transportation, as well as electronics and ICT industries (Samsung, 2016). In 2015 the firm had a total turnover of KRW 200,653 million, and a profit margin of 12.93% (Samsung, 2016).

Samsung is well-known, but also has a degree of controversy. Between 2012 and 2015 Samsung have been accused of child labour abuses (Murgia, 2016). This has included turning a blind eye to upstream suppliers using child labour (Murgia, 2016). The firm has also faced multiple legal suits, including price fixing as part of a cartel seeking to control DRAM prices (Harrison Pensa, 2015), has had ongoing patent battles with Apple (Bradshaw, 2016), and most recently the firm has been damaged by the launch of the Samsung Note 7 with the batteries catching fire, resulting in a large recall, and associated costs (Hollister, 2016).

3. Assessment of Candidate Companies

3.1 LG

LG offers mid mass market products, seeking to differentiate itself from competition with the use of image; associating LG with the term 'life's good' (LG, 2016). In terms of the potential for a JV, the differentiation to the consumers is an important consideration, as if the JV is to go ahead, LG would need to benefit from the agreement, with the operations expanding or supporting their existing market/product interests. The higher level of diversification at LG may also be beneficial for HP, as it creates a spread of risk, which may help to create a greater level of financial stability (Thompson et al., 2013).

With a broad range of interests, and a strategy that supports expansion into different IT/electronic market, there are some common interests. As both firms also target the mass markets, the ability to collaborate on upstream supply chain management will be beneficial. Both firms already utilise OEM manufacturers to provide inputs for their own production (HP Inc., 2016; LG, 2016), the underlying consideration was the pursuing advantages associated with comparative advantage to reduce overhead costs (Mendoza, Chua, & Melchor, 2015). Supply chain management can be a major source of efficiency and cost savings (Christopher, 2011). Acquiring input for both of the organizations supply/value chains.

A specific concern may be the available resources LG. LG has resources required for dealing with joint ventures, are between 2001 and 2008 the company are involved in a joint venture with Royal Philips Electronics, which ended in 2008 when Phillips sold their share, and since 2005 the firm has been part of the LG-Nortel Co. Ltd. joint venture, which was undertaken with Nortel Networks (LG, 2016). However, there may be concerns regarding the financial position of the organisation. The 0.44% net profit before tax is lower than HP, and when combined with the loss made by the parent company, may indicate LG may have constrained financial resources.

3.2 Daewoo

Daewoo is a much larger firm, with many diverse interests. The electronic components business is made up of firms that both manufacture consumer goods, as well as OEM manufactures as part of their upstream supply line, which indicates a degree of common interest in the supply chain, and the knowledge that Daewoo may bring to the JV as a result of their existing experience.

The operational aspects of Daewoo may indicate that while there is diversity, which may support increased stability, the firm has little experience with the use of JVs. Other Daewoo companies have undertaken JVs such as Daewoo Engineering and Construction working with L&T Construction to build a 9.76 km bridge over the River Ganga (Bridge Engineering and Design, 2016). However, a lengthy search does not reveal any current JV's for the electronics division. There are higher profit levels which may be preferred, but with the parent company focused on energy, so a JV with HP may not receive a high level of focus and commitment.

3.3 Samsung

Samsung may appear to be an ideal partner, as it is larger, and of the three candidates is also the most profitable and efficient. The firm has a high level of diversification which may add to the stability, and has a strong brand name. However, the competitive advantage of the firm in terms of the supply chain management (seen with the high profit levels) may be eroded as there appears to be weak decision-making, as seen with way the Note 7 was rush to market before it was ready (Hollister, 2016). This may indicate the firm does not pay sufficient attention to issues associated with the supply chain and its management. This is also seen with the claims of child labour (Murgia, 2016). The firm also appears to be prone to litigation, which may pose a risk for a JV partner, especially if the same corporate behaviour is applied to the JV acquisition; exposing HP to both negative publicity and litigation..