Keefer Energy Inc.
Keefer Energy Inc. enters into a joint venture with Energia Guerra S.A. to operate a coal-fired electric generating plant with an estimated useful life of 35 years. Keefer is from the United States while Energia Guerra S.A. is from Mexico. G/K S.A, the company formed from the joint venture, will own the building and land. Energia Guerra S.A. will have a shareholding of 80% and Keefer Energy Inc. will have the remaining 20%. G/K has entered into an agreement with Keefer in which Keefer Energy is to build and operate the plant and receive 95% of the profit generated for the first 20 years.
The primary challenge for the manager is determining the profitability of the coal plant in the first twenty years of its operation.
Justification for the Problem
Given that Keefer Energy Inc. has to build and operate the plant, and receive 95% of the profits generated in the first 20 years, the company must at least be able to recoup all its establishments’ costs within this period. In the same breath, the manager must regard the viability of this investments over alternatives since he/she is not only interested in recouping his/her company’s establishment costs, he/she wants to maximize the shareholders’ value by engaging in the most profitable investments. The problem is compounded by the fact that Keefer Energy Inc. is an American company and is unfamiliar with the Mexican market. In this case, it is unaware of the Mexican’s work culture, business regulations, and importantly, its policies on environmental pollution and also the country’s demand for electricity. Keefer Energy Inc. unfamiliarity with Mexico’s business environment may make it have a challenge in establishing a viable business. Further, it may have a problem in recruiting and retaining competent employees to work in the mines. In worse cases, it may lack personnel with the competence needed for its mining and managerial operations of the coal plant.
Currently, there has been an increase in the demand for clean energy in all countries. Although coal mines are still used in most states, they are becoming unpopular as most of them are turning to more environmentally friendly sources of energy. In light of this, the manager has a challenge in determining whether he/she will find a viable market for the plant’s electricity in the first 20 years of its operation. Also, he/she has a challenge in identifying if the Mexico’s government will be willing to allow the Keefer Energy Inc. to repatriate the profits it will earn to its American shareholders in its first 20 years of operation. In most cases, such profits are highly taxed, which can at times make some investments unworthy. In this regard, the primary problem is in knowing whether this business is profitable.
Evaluation of Alternatives
Wholly Owned Venture
One alternative for Keefer would be to enter the market on its own. This strategy would require the company to comply with all the laws in the host country and establish a subsidiary in the host nation. The funding for the subsidiary will originate from the parent company based in the United States. Where the law of the host company allows such 100% foreign-owned subsidiaries, this would be an attractive option.
Keefer Energy Inc. would be able to make the necessary investments and enjoy all the profits. The funding for the company having originated from a foreign country would mean that the company could transfer its profit to the primary company. In turn, this would lead to a reduction in its liabilities in the host country. However, this alternative is only plausible when the law of the host country allows wholly owned foreign companies to operate in the state. This opportunity is difficult, especially in sensitive industries such as electricity generation, which may have issues of national security.
The main disadvantage of establishing a wholly owned business in a foreign market is in understanding the culture of the host country. Keefer Energy Inc. would face a lot of challenges when setting up its operations due to lack of knowledge of the work culture of Mexicans (Myers & Myers, 1982). This difficulty may make the company unable to establish a successful organization in Mexico.
Keefer Energy Inc. may face the risk of being taxed highly on its profits. In most countries, foreign companies are always taxed more than local businesses. In addition, most of them always put measures that limit the amount of capital that companies can repatriate to their home countries.
Keefer Energy Inc. can acquire another coal energy mining company that is based in Mexico. In this case, Keefer will purchase 100% of the company’s shares.
Keefer Energy Inc. will benefit from the organizational structures that have been established by the locally owned company. In this regard, Keefer will avoid the costs of training, hiring, and setting up many operational and legal requirements with local governments. These available facilities will enable Keefer Energy Inc. to start its operations immediately.
Keefer Energy Inc. will also benefit from having a management that is aware of the local business environment. Besides the most senior management that will be replaced by some of Keefer’s managers, the company will retain most of its local workers. Accordingly, it will acquire mid-level managers that are familiar with Mexico’s business environment, and how the company can navigate the country’s business terrain.
Keefer Energy Inc. will also acquire customers that are owned by the local company. The importance of any organization is to sell its products. The acquisition will enable Keefer to get its established networks of customers. This acquisition will help Keefer to penetrate Mexico’s market easily.
The main disadvantage of acquisition is that Keefer Energy Inc. may have an unfriendly stakeholders relationships, especially if it was a case of a hostile takeover. There may be cases of go-slows as some employees may be afraid that they may be replaced or fired (Schaffer, Agusti, & Dhooge, 2015). Similarly, competitors may tarnish Keefer’s name in fear that they may also be acquired.
Keefer Energy Inc. may also have a challenge of establishing its work culture in the new company. Since Keefer will be acquiring an organization that has its unique way of operating, it may have challenges in establishing new tactics and methods of doing business. The variation in work-culture may make the company unable to make its investment profitable.
Partnership occurs when two or more companies jointly agree to carry out a project and share the returns using an agreed format. In this case, Keefer Energy Inc. may decide to partner with a local company in the establishment of the coal plant. This partnership should last for twenty years or less after the mine starts operating.
The use of a partnership agreement will enable Keefer Energy to spread its risk. In this case, the Keefer will only lose its part of the establishment costs if the project fails to become profitable. Further, the company will have a wide pool of experts (local company and Keefer’s) who will advise the partnership on important strategies that will enable it to avoid losses.
Keefer Energy Inc. will also benefit from the local company’s knowledge of Mexico’s business environment. As a result, Keefer Energy Inc. will be able to penetrate the local market and get new customers easily. Similarly, it will be able to acquire licenses and permits for its operations easily.
Keefer Energy Inc. will be faced with challenge of making decisions. In most cases, partner businesses usually have conflicting ideas on how various business challenges or opportunities should be handled. These conflicts at time aggravate to levels that make the partnerships ineffective in its work.
Keefer Energy Inc. may also have a problem due to its cultural difference with the partner. Differences in culture may make the partnership ineffective since they may result in various challenges when implementing business strategies. For example, one partner may prefer to use kickbacks to get government approvals and licenses while the other may want to adhere to government regulations.
Walking out simply refers to Keefer Energy Inc. not accepting to build and operate the coal plant for G/K S.A company for 20 years. Keefer Energy Inc. is not obliged to accept the deal; therefore, if this offer is not worthwhile the company can simply walk out.
Keefer Energy Inc. can avoid losses by not accepting the offer if its experts conclude that it will not be profitable. Given that there is a global trend with most countries preferring clean energy, the company should be careful when reviewing G/K S.A. proposal. If there is a likelihood that Mexico will require businesses to use clean energy, it should walk out from the deal.
Keefer Energy Inc. can use the finances needed to build a coal plant for G/K S.A. in other alternative businesses. In particular, the company can expand its current operations. It can also invest in the production of clean energy.
Keefer’s decision to walk out can damage its relations with Energia Guerra S.A. Energia Guerra S.A. may view Keefer Energy as being uncommitted in their partnership in G/K S.A. The ruined relationship may make the joint venture formed by these two companies unsuccessful.
Keefer Energy Inc. can miss out on possible opportunities that it can realize only after establishing the coal plant for G/K S.A. For example, it can miss all profits that could be earned from the operation of the facility. In addition, it may fail to get a direct knowledge of Mexico’s business environment. This experience can be particularly important when informing the company on whether to expand its operations in Mexico.
The recommendation would be for Keefer to enter into a joint venture with Guerra. Being the local company, Guerra will be in charge of conducting due diligence to ensure that the joint company G/K S.A will comply with all the legal requirements of the host country. Keefer as a company should also ensure that they conduct due diligence to ensure that their venture in the foreign country complies with all the laws regarding such a venture in the host country.
In addition, the joint venture will have documents that should be comprehensive enough to include all the details of the agreement. For instance, the relevant stakeholders should document all shareholding of the joint company including details of the responsibilities of each of the parties in the venture. The profit sharing agreement should also be included in the documents forming the joint venture. This would explain that Keefer would take 95% of projected profits for the new company as a way to recoup the investments it will make in the building and operation of the plant. This analysis provides the selected recommendation since it will allow the company to operate in the host country while complying with all its laws.
Myers, T., & Myers, G. (1982). Managing by communication: An organizational approach. New York: McGraw Hill.
Schaffer, R., Agusti, F., & Dhooge, L.J. (2015). International business law and its environment (9th ed.). Stamford, CT, USA: Cengage Learning