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Building a joint venture in an emerging market
A Burmah Castrol case study
Burmah Castrol is a leading international marketer of specialised lubricant and chemical products and services. With operations in over 50 countries, Burmah Castrol employs some 20,000 people world-wide.
Burmah Castrol’s organisation is based on a number of business streams which operate in the lubricants and chemicals sectors. The lubricants business, which operates under the name Castrol, supplies specialist products and services to the Consumer, Industrial, Commercial and Marine markets. Castrol is the world’s leading independent marketer of specialised lubricants and lubrication services.
The chemicals businesses are involved in the marketing of high value added speciality chemicals to industrial end-users. There are five principal businesses - Foundry, Construction, Printing Inks, Releasants, Steel – and a Specialities Group. Once again, the chemicals businesses are highly international with operations in over 40 countries world-wide.
In recent years we have seen the development of a truly global economy. We have moved forward from the days when the world was seen as being made up of First World (capitalist), Second World (communist) and Third World (less developed countries). Clearly, divisions continue to exist between the nations, particularly in terms of income per head, but new markets are developing and strengthening all the time.
The development of new market models in former communist strongholds in Eastern Europe and parts of South East Asia provides a tremendous opportunity to well-established companies in the West. There is great demand in these countries for the sorts of goods that we have taken for granted for so long, as well as a demand for advanced technology which will enable them to improve home-based production techniques greatly.
In order to take advantage of new market opportunities, many large Western companies are developing joint ventures with enterprises in the new emerging markets. This case study focuses on a joint venture between Castrol, Burmah Castrol’s lubricants business, and Vietnam’s Saigon Petroleum. It sets out the rationale for the joint venture
and examines the benefits to the two parties.
What is a joint venture?
A joint venture means that two separate organisations work together on a specific project, for example, a well established Western multinational works with an established South East Asian producer. The joint venture will hopefully bring synergistic benefits to the organisations, i.e. the ‘sum’ of the two organisations working together will be of greater value than if each worked alone. The joint venture is based on shared ownership between the participants in the venture. For a joint venture to work effectively, there has to be agreement between the participants on how the joint venture will be managed.
Castrol seeks to expand its business by entering countries in which it has little or no presence but which offer good long-term potential. Vietnam is believed to be one of these countries. Castrol has been involved in the Vietnamese market since 1981 but this has been essentially confined to the marine sector. With the joint venture, Castrol aimed to broaden its presence in Vietnam.
Positioned at the centre of the fastest growing economic zone in the world, Vietnam offers a unique opportunity for Burmah Castrol to continue geographic expansion of its heartland business. Vietnam is situated on the eastern seaboard of the Indochinese peninsula. Neighbouring countries are China to the north and Laos and Cambodia to the west. Vietnam has a land area approximately one third larger than the UK. The population of Vietnam is 75 million people. The two major cities are Hanoi in the north and Ho Chi Minh City (formerly Saigon) in the south. The majority of the population lives in rural areas and is evenly spread through the countryside.
Vietnam is ruled along classic Marxist-Leninist lines where the Communist Party of Vietnam and the Government are totally fused. Following the much publicised period of Doi Moi (Renewal) in Vietnam, it now appears likely that pursuit of a free market economy through stage by stage reform is the aim of the Vietnamese Government. Doi Moi has opened up Vietnamese markets to foreign investors and companies.
In 1990, the Soviet Union cut back heavily on direct aid in the form of subsidies to Vietnam. The resultant loss of cheap lubricants, previously supplied by the Soviet Union, has led the Government to liberalise the lubricants industry and elevate it to a priority investment category. Market reforms, therefore, are taking place but the Government is not prepared to engage in the sort of widespread reforms that would threaten the existing political system.
Prior to the Vietnam war in the 1960s and early 1970s, Vietnam was at a similar stage of economic development to Singapore, Thailand and Malaysia, which are all now highly profitable economies for Burmah Castrol. There is little reason to doubt that following reform of the economy, Vietnam will enter an accelerated growth period and offer similar significant opportunities for the sale of Castrol lubricants, even though Vietnam is currently one of the poorest nations in the world.
Economic problems increased when Vietnam invaded Cambodia in 1979 and became involved in conflict with the Khmer Rouge and other resistance movements within Cambodia. This invasion brought further political isolation from Western countries and a US-led trade and investment embargo, which was maintained until 1994. Until recently, the maintenance of a 1.3 million strong army was also a considerable drain on Vietnam’s economic resources. However, economic reforms since 1987 have helped lead to a turnaround in the economy. By allowing peasants once again to own land and sell their produce at market prices, Vietnam has been transformed from a net rice importer to the world’s third largest rice exporting nation. Like other South East Asian economies, Vietnam has been experiencing rates of growth which are the envy of the West. Vietnam possesses enormous mineral resources and recent foreign investment in offshore oil exploration activities has finally borne fruit. Successful processing of these finds will provide much-needed US dollars and a catalyst for economic growth.
Whilst the foreign investment law of Vietnam allows foreign companies to invest at 100% equity, the preferred investment route of the State Investment authority is through a joint venture with a local partner. This makes good sense - a well-connected, established local partner with access to foreign currency can help the foreign investor greatly, making a joint venture the most appropriate strategy.
Market research information available to Castrol in the 1990s estimated the automotive market (consumer and commercial) and the general industrial market at approximately 37 million litres each, giving a potential market of 75 million litres of lubricants. Market growth is estimated to be about 6% per year, so that in the early years of the next century, the market will be worth about 130 million litres. Demand in the consumer market is expected to rise rapidly, with market research indicating that the greatest part of the demand will be in Ho Chi Minh City and the nearby provinces.
Since the supply of lubricants from the USSR stopped in 1990, Vietnam has had to procure its own lubricants at world market prices. Foreign currency shortages have created considerable difficulties in buying lubricants from abroad. This situation has provided the joint venture with a tremendous opportunity to develop branded lubricants in Vietnam - a previously brandless market.
The car market in Vietnam is primarily made up of vehicles which are ten years old or more. In recent times, the Vietnamese Government has been very restrictive on the importation of new foreign cars in order to prevent the outflow of scarce foreign currency. Market research and test marketing show that a key requirement for success in the automotive market is a regular supply of quality lubricants. There is also a clear preference in Vietnam for well-known branded lubricants because of their perceived higher quality.
With the recent growth of incomes in Vietnam, there has been a large increase in motorcycle ownership. This country has a unique consumer channel of wash shops (Rua Xe) where motorcycle owners take their bikes for a wash and oil change. The vast majority of Castrol outlets are such establishments, which are the Vietnamese equivalent of a ‘Quick Lube’/automatic car wash. This clearly presents a strong market opportunity.
Commercial vehicle consumption counts for a large percentage of total lubricant consumption. The truck and bus population is predominantly old and poorly maintained and the operators, in general, use cheap, low quality lubricants. However, as the economy is improving, increasing numbers of operators are turning to higher quality lubricants.
Vietnam’s key industrial sectors include mining, fishing, sugar, textiles, shipbuilding, power generation, railways and cement. These industrial markets are likely to grow with the stimulus of increased overseas investment. The lubricants for these industries supplied previously by the USSR were of inferior quality and resulted in many inefficiencies – for instance, avoidable lubrication problems have cost the Vietnamese railways up to $40m in losses per year.
The marketing information provides a strong case for Castrol’s involvement in Vietnam. There is clearly a gap in the market for the supply of high quality, performance lubricants. Castrol’s association with Vietnam began in the early 1980s through a link with Vosco Shipping, Vietnam’s premier overseas shipping line, which, at that time, was having vessels constructed in the UK. The ongoing link between Castrol and Vosco grew from strength to strength and Castrol developed a dominant share (90%) of the Vietnamese marine market. As a result of this link, Castrol was introduced to Saigon Petroleum in 1988.
Saigon Petroleum is a former subsidiary of the Food Company of Ho Chi Minh City (Foocosa). Foocosa is one of the most successful capitalist organisations in Vietnam. It has a sales turnover in excess of 200 million US dollars per annum and is one of the largest earners of foreign exchange in the country. It therefore has the facility to provide foreign exchange for importing base oils and additives. Foocosa itself is wholly owned by the People’s Committee of Ho Chi Minh City (effectively the Municipality). The creation of the joint venture in the early 1990s was built on a number of years of close co-operation involving the distribution and test marketing of new and existing lubricants in Vietnam.
Castrol and Saigon Petroleum established the joint venture under Vietnamese law to construct and operate a lubricant blending plant and to market and sell lubricants in Vietnam, trading under the name Castrol Vietnam Ltd. Castrol owns 60% of the joint venture and Saigon Petroleum owns 40%. Both sides have a blocking vote.
Vietnamese law allows the setting up of joint ventures providing they can meet one of three success criteria:
- bringing about considerable improvement in the appearance and quality of the products and an increase in output
- creating products which Vietnam urgently needs or producing import substitutes
- achieving considerable savings in terms of raw materials and energy.
Castrol Vietnam clearly met all three of these criteria.
Today, Castrol Vietnam works with 7,000 retailers and employs about 160 people in Ho Chi Minh City, Hanoi and Da Nang. The joint venture has worked hard to develop strong relationships with local retailers and distributors by providing detailed technical assistance and support. It has become standard practice to provide funds for upgrading petrol stations as well as arranging trade loans. Marketing campaigns have been particularly successful, with Castrol Vietnam offering gifts such as key rings and pens to encourage sales.
The joint venture has been particularly successful in changing customers’ perceptions about lubrication, whether the customer be a car or motorcycle owner or an industrial customer. Castrol Vietnam has played a major part in changing consumers’ buying habits, from low quality and regenerated lubricants, to oil blended to international standards.
After the lubricant blending plant had been operating successfully for several years, Vietnam’s first transformer oil processing plant was opened by Castrol in Ho Chi Minh City in March 1998. Constructed at a cost of US$1.5 million, the 3,000 tonne per year transformer oil plant utilises modern technology and equipment from the UK and will use raw materials imported from Singapore and other Asian nations for processing. The use of transformer oil produced by Castrol Vietnam will help save Vietnam money as its prices will be around 10% lower than imported oil. At full production, the plant will be able to meet around 80% of the local market’s demand and is part of an ongoing investment programme.
At the end of the day, running a successful joint venture is a matter of give and take. One disadvantage, of course, is that Castrol does not have 100% of the ownership and takes only a
part share of profits and dividends.
However, this is counterbalanced by the benefits of working in partnership with a local company - a better understanding of the culture, market and ways of operating in an emerging nation.
Castrol Vietnam is almost exclusively run by local Vietnamese people, who have the best understanding of the local market and of appropriate ways of dealing with local customers. The Vietnamese Government is also far more likely to favour business organisations in which the power and decision-making basis has a strong local flavour.
You can download resources for this case study below
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