THE ABB PBS JOINT VENTURE
IN OPERATION
ABB Prvni Brnenska Stojirna Brno, Ltd. (ABB-PBS),
Business for the joint venture in its first two full
years was good in most aspects. Orders
received in 1994, the first full year of the joint venture’s operation, were higher
than ever in the history of PBS. Orders
received in 1995 were 2½ times those in 1994.
The company was profitable in 1995 and ahead of 1994s results with a
rate of return on assets of 2.3 per cent and a rate of return on sales of 4.5
per cent.
The 1995 results showed substantial progress towards
meeting the joint venture’s strategic goals adopted in 1994 as part of a five
year plan. One of the goals was that
exports should account for half of the total orders by 1999. (Exports had accounted for more than a
quarter of the PBS business before 1989, but most of this business disappeared
when the Soviet Union Collapsed). In
1995 exports increased as a share of total orders to 28 per cent, up from 16
per cent the year before.
The external service business, organized and functioning
as a separate business for the first time in 1995, did not meet
expectations. It accounted for five per
cent of all orders and revenues in 1995, below the 10 per cent goal set for it. The retrofitting business, which was expected
to be a major part of the service business, was disappointing for ABB-PBS,
partly because many other small companies began to provide this service in
1994, including some started by former PBS employees who took their knowledge
of PBS-built power plants with them.
However, ABB-PBS managers hoped that as the company introduced new
technologies, these former employees would gradually lose their ability to
perform these services, and the retrofit and repair service business, would
return to ABB-PBS.
ABB-PBS dominated the Czech boiler business with 70 per
cent of the Czech market in 1995, but managers expected this share to go down
in the future as new domestic and foreign competitors emerged. Furthermore, the west European boiler market
was actually declining because environmental laws caused a surge of
retrofitting to occur in the mid -1980 s, leaving less business in the 1990
s. Accordingly ABB-PBS boiler orders
were flat in 1995.
Top managers at ABB-PBS regarded business results to date
as respectable, but they were not satisfied with the company’s
performance. Cash flow was not as good
as expected. Cost reduction had to go
further. The more we succeed, the more
we see our shortcomings” said one official.
Restructuring
The first round of restructuring was largely completed in
1995, the last year of the three-year restructuring plan. Plan logistics, information systems, and
other physical capital improvements were in place. The restricting included :
- Renovating
and reconstructing workshops and engineering facilities.
- Achieving
ISO 9001 for all four ABB-PBS divisions. (awarded in 1995)
- Transfer
of technology from ABB (this was an ongoing project)
- Intallation
of an information system.
- Management
training, especially in total quality assurance and English language.
- Implementing
a project management approach.
A notable
achievement of importance of top management in 1995 was a 50 per cent increase
in labour productivity, measured as value added per payroll crown. However, in the future ABB-PBS expected its
wage rates to go up faster than west European wage rates (Czech wages were
increasing about 15 per cent per year) so it would be difficult to maintain the
ABB-PBS unit cost advantage over west European unit cost.
The Technology Role for ABB-PBS
The joint venture was expected from the beginning to play
an important role in technology development for part of ABB’s power generation
business worldwide. PBS a.s. had
engineering capability in coal – fired steam boilers, and that capability was
expected to be especially useful to ABB as more countries became concerned
about air quality. (When asked if PBS
really did have leading technology here, a boiler engineering manager remarked,
“Of course we do. We burn so much dirty
coal in this country; we have to have better technology”)
However, the envisioned technology leadership role for
ABB-PBS had not been realized by mid – 1996.
Richard Kuba, the ABB-PBS managing director, realized the slowness with
which the technology role was being fulfilled, and he offered his
interpretation of events.
“ABB did not promise to make the joint venture its steam
technology leader. The main point we wanted to achieve in the joint venture
agreement was for ABB-PBS to be recognized as a full-fledged company, not just
a factory. We were slowed down on our
technology plans because we had a problem keeping our good, young engineers.
The annual employee turnover rate for companies in the
ABB-PBS had benefited technologically from its relationship
with ABB. One example was the
development of a new steam turbine line.
This project was a cooperative effort among ABB-PBS and two other ABB
companies, one in
Questions:
1. Where does the joint venture meet the
needs of both the partners? Where does
it fall short?
2. Why had ABB-PBS failed to realize its
technology leadership?
3. What lessons one can draw from this
incident for better management of technology transfers?
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