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Building a Joint Venture in an Emerging Market

This case study focuses on a joint
Introduction to Burmah Castrol venture between Castrol, Burmah
Burmah Castrol is a leading international marketer of specialised lubricant Castrol’s lubricants business, and
and chemical products and services. With operations in over 50 countries, Vietnam’s Saigon Petroleum. It sets
Burmah Castrol employs some 20,000 people world-wide. out the rationale for the joint venture
and examines the benefits to the two
Burmah Castrol’s organisation is based on a number of business streams
parties.
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 What is a joint
markets. Castrol is the world’s leading independent marketer of specialised
lubricants and lubrication services.
venture?
A joint venture means that two separate
The chemicals businesses are involved in the marketing of high value- organisations work together on a
added speciality chemicals to industrial end-users. There are five principal
specific project, for example, a well
businesses - Foundry, Construction, Printing Inks, Releasants, Steel - and established Western multinational
a Specialities Group. Once again, the chemicals businesses are highly
works with an established South East
international with operations in over 40 countries world-wide. Asian producer. The joint venture will
hopefully bring synergistic benefits to
Emerging markets the organisations, i.e. the ‘sum’ of the
two organisations working together
In recent years we have seen the development of a truly global economy.
will be of greater value than if each
We have moved forward from the days when the world was seen as being
worked alone. The joint venture is
made up of First World (capitalist), Second World (communist) and Third
based on shared ownership between
World (less developed countries). Clearly, divisions continue to exist
the participants in the venture. For a
between the nations, particularly in terms of income per head, but new
joint venture to work effectively, there
markets are developing and strengthening all the time.
has to be agreement between the
The development of new market models in former communist strongholds participants on how the joint venture
in Eastern Europe and parts of South East Asia provides a tremendous will be managed.
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
Castrol in Vietnam
will enable them to improve home-based production techniques greatly. Castrol seeks to expand its business by
entering countries in which it has little
In order to take advantage of new market opportunities, many large or no presence but which offer good
Western companies are developing joint ventures with enterprises in the
long-term potential. Vietnam is
new emerging markets.
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.
Vietnam - as an
opportunity
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.
Land and people
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.
Political background
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.
Economic background
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, makes good sense - a well-connected,
which are all now highly profitable established local partner with access
economies for Burmah Castrol. There to foreign currency can help the foreign
is little reason to doubt that following investor greatly, making a joint venture
reform of the economy, Vietnam will the most appropriate strategy.
enter an accelerated growth period and
offer similar significant opportunities
for the sale of Castrol lubricants, even
Vietnam’s lubricants
though Vietnam is currently one of the market
poorest nations in the world.
Market research information
available to Castrol in the 1990s
Economic problems increased when
Vietnam invaded Cambodia in 1979 estimated the automotive market
and became involved in conflict with (consumer and commercial) and the
the Khmer Rouge and other resistance general industrial market at
movements within Cambodia. This approximately 37 million litres each,
invasion brought further political giving a potential market of 75 million
isolation from Western countries and a litres of lubricants. Market growth is
US-led trade and investment estimated to be about 6% per year, so
embargo, which was maintained until that in the early years of the next
1994. century, the market will be worth about
130 million litres. Demand in the
Until recently, the maintenance of a 1.3
consumer market is expected to rise
million strong army was also a
rapidly, with market research indicating
considerable drain on Vietnam’s
that the greatest part of the demand will
economic resources. However,
be in Ho Chi Minh City and the nearby
economic reforms since 1987 have
provinces.
helped lead to a turnaround in the
economy. By allowing peasants once Since the supply of lubricants from the
again to own land and sell their produce USSR stopped in 1990, Vietnam has
at market prices, Vietnam has been had to procure its own lubricants at
transformed from a net rice importer to world market prices. Foreign currency
the world’s third largest rice exporting shortages have created considerable
nation. difficulties in buying lubricants from
abroad. This situation has provided the
Like other South East Asian
joint venture with a tremendous
economies, Vietnam has been
opportunity to develop branded
experiencing rates of growth which are
lubricants in Vietnam - a previously
the envy of the West. Vietnam
brandless market.
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

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Castrol_IrisV1 14/10/98 9:58 am
The consumer market
The passenger car 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.
The motorcycle market
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.
The commercial vehicle market
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.
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The general industrial
market
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.
Joint venturing
partnership
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.
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Castrol Vietnam today
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
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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.
Conclusion
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.
TASKS & ACTIVITIES
1 6
Write a brief 400 word report for
shareholders of Burmah Castrol,
explaining why setting up a joint
Explain the part played by foreign
exchange in the relationship
between Castrol and the Vietnamese
venture is a much better option for economy.
producing and trading in Vietnam than
setting up a 100% Burmah Castrol
owned operation. 7 Explain why the relationship
between Castrol and Saigon
Petroleum is a synergistic one.
2 Set out the following:
8 Explain how each of the following
benefit from the joint venture:
● the existing strengths of Burmah
Castrol that will enable the
● the Vietnamese Government
operation to be a success
● Burmah Castrol
● the opportunities provided by ● Saigon Petroleum
Vietnam as a market for ● Vietnamese customers
lubricants
● consumers in the UK.
● possible threats to the success of
the joint venture in Vietnam.
9 What lessons can other Western
companies learn from this case
3 Why has the Vietnamese economy
opened up to Western companies in
recent years? Why is Castrol so
study in terms of developing
relationships in emerging countries?
important to the Vietnamese
economy? 10 Explain each of the following
business terms as they are used
in the context of the case study:
4 What information in the case study
suggests that the Vietnamese
market provides considerable scope
●
●
emerging markets
synergistic benefits
for successful profitability for Castrol
● priority investment
operations? Which sectors of the
● 100% equity
lubricants market appear to have most
● investment embargo
potential?
● joint venture
● multinationals
5 Why was the market research
process so important to Castrol
prior to setting up the joint venture in
● geographical expansion of core
business
Vietnam? ● brandless market.
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