Choosing The Right Friends

In the early 1970s, General Electric began to think about building a new class of commercial aircraft engines. Although GE [...]

March 1 1992 by Edwin J. Feulner


In the early 1970s, General Electric began to think about building a new class of commercial aircraft engines. Although GE had most of the technical skills, it couldn’t afford to develop and produce engines by itself. Neither did it have much access to the emerging European commercial aircraft market.

Meanwhile, France‘s SNECMA, which builds jet engines for the Mirage fighter, got the same idea. Although SNECMA had the necessary technical and investment resources and European contacts, it lacked commercial experience.

The two firms struck a deal. The result: CFM International, which today produces the world’s best-selling commercial jet engine. Most business leaders understand America‘s desperate need to remain a step ahead of the competition in an increasingly competitive world. With 70 percent of U.S. manufacturing facing foreign competition, they’d better understand it.

But I’m not as certain those same CEOs understand that what has worked so well for GE could become the single most powerful competitive weapon for the 1990s-strategic alliances.

MAKING A MATCH

When two or more firms form such an alliance, or joint venture, they pool their capital, technology, and other resources for a very specific purpose. The limited partnership allows both companies to accomplish mutually beneficial goals: fund new research and development, acquire state-of-the-art technology, or penetrate foreign markets, for example.

Most such ventures have involved companies in high-tech computer and electronics production. But the principle of companies cooperating out of mutual need can apply to a host of other industries as well: the chemical and pharmaceutical industries, retailers, telecommunications, insurance companies, and financial institutions.

Inland Steel, for example, recently agreed to a partnership with Japan‘s Nippon Steel, the world’s largest steel producer. The partnership-in which the firms share ownership in a steel plant in New Carlisle, IN-gives Inland access to advanced manufacturing technologies, and allows Nippon a U.S. production base. The plant’s operating costs are 50 percent lower than comparable facilities.

BUREAUCRATIC RELUCTANCE

Strategic alliances of course are nothing new. From 1979 to 1985, the number of alliances among American, European, and Japanese firms grew thirtyfold. Despite this, many American businesses are hesitant to enter into such agreements. Indeed, it is sometimes more difficult for U.S. firms to form strategic alliances than it is for foreign firms.

Ironically, American reluctance does not spring from unfair trade or investment practices of other governments, but from U.S. antitrust laws, which restrict the freedom of businesses to form such alliances. Under existing antitrust laws, U.S. companies can sue their competitors and win triple damages if courts rule that monopolistic practices have been applied.

The problem is: Who decides what is monopolistic? The legal definition is so vague and arbitrary that businesses often don’t know what is permissible and what isn’t. Though there are some legal exemptions for research and development projects, alliances in production and marketing can easily come under court attack. As a result, many gun-shy U.S. companies sit on the sidelines for fear of costly lawsuits.

Legislation before Congress would somewhat limit the threat of antitrust lawsuits among domestic companies. But to date there has been no successful bid to protect foreign ventures.

Policymakers and business leaders must recognize that restrictions on foreign partnerships hurt American businessmen in two ways: They cause retaliation against U.S. firms doing business overseas and deny them access to foreign technology.

It should come as no surprise that U.S. companies continue to have some serious shortcomings in technology. Japan commands an enormous technological lead in such industries as audio equipment, laptop computers, and other consumer electronics. Indeed, it is the Japanese, not the Americans, who most risk losing their technological edge.

Consider just a few examples of successful alliances:

  • Motorola and Toshiba, two of the world’s leading electronics manufacturers, agreed in 1986 to jointly manufacture semiconductors. The alliance has since grown into a profitable partnership. Motorola ignited its production of memory chips, while Toshiba gained access to Motorola’s microprocessors, the “brain” chips of personal computers.
  • Early last year, AT&T and Japan‘s Nippon Electric forged a strategic alliance to give both firms an edge in manufacturing electronics equipment. AT&T, the world’s largest telecommunications company, is benefiting from Nippon‘s semiconductor technology. Nippon is able to become more involved in manufacturing telecommunications products.
  • More recently, Apple Computer and Sony announced an agreement that blends the American firm’s easy-to-use software with the Japanese company’s hardware. Apple is gaining access to Sony’s miniaturization and manufacturing techniques, while Sony, using Apple’s computer design know-how, is expanding into laptop computers. [See "Will The Alliance Bear Fruit?" January/February 1992.]

These initiatives stand in glaring contrast to what some policymakers and even some business executives believe to be the solution to America‘s sagging world competitiveness: government intervention. This takes the form of grants or credits to enterprises within industries that government bureaucrats believe can be competitive.

Or the specter of government appears in the form of trade protectionism, which assumes that shielding U.S. businesses from competition will enable them to restructure and compete better. We have seen the sorry results of such protectionism in the steel industry.

Such thinking reveals its fatal flaw: the idea that U.S. firms cannot compete effectively abroad without a close partnership with government. But think about it. Who is in a better position to determine whether a corporate alliance will help or hinder an industry? Entrepreneurs and managers, whose money and jobs are on the line, or government bureaucrats?

LOOSEN THE REINS

Certainly, there are no guarantees of success for the businesses involved. Like any other business strategy, an alliance may not be the best approach. A poorly designed alliance can backfire, with one of the partners gaining a technological edge to become a stronger competititor.

But the record is clear enough:

Strategic alliances can achieve goals that a single company acting alone never could. The exchange of information and technologies can be the deciding factor in winning new markets-without closely guarded corporate secrets being lost.

On the government end, the current antitrust laws are baffling-and harmful. With an integrated international economy, firms rarely are able to dominate a market. They quickly encounter rivals, both domestic and foreign, if their prices go beyond what is acceptable to buyers and sellers in the market.

If lawmakers and business leaders are determined to bolster U.S. competitiveness, they don’t need an alliance with one another. Rather, government must allow U.S. firms to build the sort of business relationships with each other, and even with their foreign competitors, that help them to use their financial and technological resources to meet the competitive challenges of the 1990s.


Edwin J. Feulner, Ph.D., is president of The Heritage Foundation, a Washington, D.C.-based public policy research institution. He also serves on the board of several other foundations and research institutes. Dr. Feulner is the author of Conservatives Stalk The House.