HP Inc. Joint Venture Partner Selection in South Korea

Introduction and Strategic Context

HP Inc. is a well-known leading player in 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 the former HP company (Kitagawa et al., 2016). HP Inc. is now seeking to expand and increase its footprint, but has suffered as a result of a slow economy — reflected in the announcement that the firm planned to cut between 3,000 and 4,000 jobs over the following three years due to sluggish sales (Reuters, 2016). CEO Dion Weisler stated that the firm expected conditions to remain uncertain and markets volatile. The firm maintains a clear focus on its core products: personal computers and printers.

The strategic recommendation explored in this paper is that HP Inc. target South Korea for expansion through a joint venture with a suitable local partner. When identifying and assessing potential joint venture partners, candidates should possess characteristics, resources, and/or core competencies that are complementary to those held by the initiating firm (Mintzberg, Ahlstrand, & Lampel, 2008). Accordingly, this paper assumes that an ideal joint venture partner for HP Inc. should bring a high level of knowledge regarding the South Korean market. Given that HP Inc. has also faced financial pressures, it is further desirable that any joint venture partner not only contribute additional financial resources, but also demonstrate a degree of financial stability.

Candidate Companies Overview

Three potential candidates have been identified: LG, Daewoo, and Samsung.

LG

LG, previously known as Lucky-Goldstar, is a publicly listed firm that recorded a turnover of US$48.06 billion in 2015 (Statista, 2016). The firm has highly diversified operations and is known predominantly for its presence in electronic technology markets internationally, with products ranging from televisions and DVD players to household white goods and telecommunications equipment. In 2016, LG was the third-largest OEM smartphone manufacturer supplying the United States, accounting for 9.8% of all smartphones sold in the country, trailing behind Apple and Samsung (comScore, 2016). However, LG's diversification extends beyond electronics: the company is also involved in the manufacture of products such as soap, laundry detergent, and toothpaste for the South Korean market (LG, 2016). The firm undertakes manufacturing in-house and also maintains outsourcing agreements (LG, 2016).

The financial position of LG appears viable, with the firm recording profits over the last three years. However, profitability was constrained in 2015, with a net profit margin (before tax) of just 0.44%, and the parent company recorded a net loss in that year (LG, 2016). Revenues also declined in 2015 from the previous figure of US$50.21 billion in 2014 (Statista, 2016).

Daewoo

Daewoo is a large multinational conglomerate comprising 20 different divisions operating under an umbrella structure, with its constituent firms separately listed as public companies (Daewoo, 2016; Morning Star, 2016). A joint venture might be undertaken specifically with Daewoo Electronic Components, where there is a high level of common interest. This business unit recorded a turnover of KRW 46,263 million in 2015, with a profit margin of 2.32%, which improved to 4.18% in the second quarter of 2016 (Google Finance, 2016).

Daewoo, which faced bankruptcy in the past, is now more highly diversified than LG, with Daewoo Electronics being the largest subsidiary (Daewoo, 2016). The main thrust of the broader business currently appears to focus on gas, oil, and energy, including investments in Myanmar — an area for which the firm has faced criticism for engaging with a government that has a poor human rights record (Kyung-min, 2016).

Samsung

Samsung, like Daewoo, is a multinational conglomerate comprising multiple subsidiaries (Samsung, 2016). The group is highly diversified, with interests in chemicals, construction, hospitality, transportation, electronics, and ICT industries (Samsung, 2016). In 2015, the firm recorded a total turnover of KRW 200,653 million and a profit margin of 12.93% (Samsung, 2016).

Samsung is globally well-known but has faced a degree of controversy. Between 2012 and 2015, Samsung was accused of child labour abuses, including turning a blind eye to upstream suppliers that used 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), ongoing patent disputes with Apple (Bradshaw, 2016), and, most recently, reputational and financial damage caused by the Samsung Galaxy Note 7's batteries catching fire, resulting in a large-scale product recall (Hollister, 2016).

Assessment of Candidate Companies

LG

LG offers mid-market mass-market products and seeks to differentiate itself from competitors through brand image, associating the company with the slogan "Life's Good" (LG, 2016). In terms of potential for a joint venture, consumer-facing differentiation is an important consideration: for a JV to proceed successfully, LG would need to benefit from the arrangement through operations that expand upon or support its existing market and product interests. The higher level of diversification at LG may also be beneficial for HP Inc., as it creates a spread of risk that may contribute to greater financial stability (Thompson et al., 2013).

With a broad range of interests and a strategy that supports expansion into different IT and electronics markets, there are several areas of common interest. As both firms target mass markets, the ability to collaborate on upstream supply chain management would be mutually beneficial. Both firms already utilise OEM manufacturers to provide inputs for their own production (HP Inc., 2016; LG, 2016), with the underlying motivation being the pursuit of 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), and acquiring shared inputs for both organisations' supply chains represents a significant area of potential value creation.

A specific concern relates to LG's available resources. LG does have experience relevant to joint ventures — between 2001 and 2008, the company was involved in a joint venture with Royal Philips Electronics, which ended in 2008 when Philips sold its share; and since 2005, the firm has participated in the LG-Nortel Co. Ltd. joint venture, undertaken with Nortel Networks (LG, 2016). However, concerns remain regarding the organisation's financial position. The 0.44% net profit before tax is lower than HP Inc.'s, and when combined with the loss recorded by the parent company, this may indicate that LG has constrained financial resources.

Daewoo

Daewoo is a much larger firm with many diverse interests. The electronic components business includes firms that both manufacture consumer goods and operate as OEM manufacturers as part of the upstream supply line, suggesting a degree of common interest in supply chain operations and indicating the knowledge Daewoo may bring to a joint venture through its existing experience.

The operational characteristics of Daewoo suggest that, while the group's diversity may support increased stability, the electronics division has limited experience with joint ventures. Other Daewoo subsidiaries have undertaken JVs — for example, Daewoo Engineering and Construction worked with L&T Construction to build a 9.76 km bridge over the River Ganga (Bridge Engineering and Design, 2016) — but a thorough search does not reveal any current joint ventures involving the electronics division. Although Daewoo Electronic Components offers higher profit margins than LG, the parent conglomerate's primary focus on energy means that a joint venture with HP Inc. may not receive a sufficiently high level of focus or commitment.

Samsung

Samsung might appear to be an ideal partner, as it is the largest of the three candidates and the most profitable and operationally efficient. The firm's high level of diversification may add to stability, and it carries a strong global brand name. However, the competitive advantage Samsung holds in supply chain management — evidenced by its high profit levels — appears to be offset by indications of weak decision-making, as seen in the way the Galaxy Note 7 was rushed to market before it was ready (Hollister, 2016). This suggests that the firm does not pay sufficient attention to issues associated with supply chain management and quality control, a concern also reflected in the child labour allegations in its upstream supply chain (Murgia, 2016). Furthermore, Samsung's propensity for litigation poses a significant risk for a prospective JV partner, particularly if the same corporate behaviours were extended to the joint venture itself — potentially exposing HP Inc. to negative publicity and legal liability.