Choosing the Right Friends

Article excerpt

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. …