Rus Wane Equipment Case Study Joint Venture In Russia
Michael G Rutkowski
Upper Iowa University
Abstract
Wane Machines Inc. engages in the manufacturing, installation, and maintenance of large scale heating and cooling equipment for office and apartment buildings. In February 1990 a joint venture was formed called Rus Wane Equipment with NLZ, a medium sized factory outside Moscow, that manufactured similar equipment, but of much lower quality. This case shows the difficulties that can arise if a company does not follow the organizational structure, management systems, and the human resources policies of the company. And how changing government legislation in a rapidly changing business environment like Russia, can have serious financial impacts and decline the advantages of a joint venture. This case shows the situations and difficult problems that can arise from a joint venture between Wane Machines, Inc and NLZ the Soviet partner company. Wayne Machines started in New York City and specializes in manufacturing, installing, and maintaining large scale heating and cooling equipment. The corporation is divided into four divisions that unite 50 companies in 160 countries. After exploring markets in Eastern Europe and the Soviet Union a Soviet-Belgian joint venture was formed in February 1990, called Rus Wane Equipment. Rus Wane established another joint venture with a St. Petersburg partner, to install and service its products in Russia. The market potential in the Soviet Union during the late 1980s was approximately 100,000 units annually; 60.000 provided by Soviet companies, potentially leaving 40.000 units available for Rus Wane. In October 1990, Rus Wane began construction of a plant in the Moscow area to produce heating and cooling equipment. By September 1993, the factory was producing 85 units per month with projections of 5,000 units annually by 1995. The units produced required only half the energy to operate, and the quality was more than four times that of Russian competitors. The pricing policy was not to exceed twice the price of the Soviet models. The business strategy between Rus Wane and NLZ under the Joint venture was (a) No profit for the first three years, (b) Developing export potential for Eastern Europe, (c) and the future potential for the ruble to become convertible currency. The joint venture with the St. Petersburg partner to sell, install, and service its products in Russia was quite successful. The Western style maintenance service, with 150 recruited personnel from Moscow and service installation agencies, were performing service to numerous Russian companies and foreign organizations that could afford it, during this time period of the breakup of the Soviet Union. The economic conditions were deteriorating and monthly inflation rates were exceeding twenty percent (Thomas). Other obstacles that Rus Wane had to confront were an unexpected downturn in demand; prospective customers were suffering a cash shortage, brought on by hyperinflation, and reduced government subsidies. Securing reliable suppliers was difficult and the company had to turn to enterprises that produced for the military sector, even these suppliers had difficulties meeting the standards set by Rus Wane. Unpredictable economic environment and legal issues from the Russian government ended up freezing the companies bank accounts in 1992 for a period of six months. The Russian government also introduced a value-added tax (VAT) after the construction of their new factory building had been completed; Rus Wane was forced to pay 1.5 million in taxes (Thomas). Another legal issue that had advantages for doing business in Russia was the Joint Venture Law of 1987, this provided foreign companies with privileges and preferential tax breaks, this law was withdrawn in 1994, just four months after the completion of their new factory building. Despite the effects of these obstacles, the main issue of this case involves the fact that if management would have adhered to policies and due dates, the outcome might have been much better for Rus Wane? According to the agreement Rus Wane was responsible for sending three experienced executives to serve as a general manager, a manufacturing manager, and a financial manager, for a two to three year initial period, then Russian nationals would take over (Thomas). Five other management positions were to be filled by local nationals, because they involved regular contact with Russian customers and required a thorough knowledge of local culture and employment practices (Thomas). Lev Novikow, a mechanical engineer and the general manager of NLZ for the last15 years, was appointed general manager of Rus Wane Equipment and would manage both locations. The remaining three positions for management that Rus Wane was responsible for filling was delayed, because finding experienced management that would relocate to Russia was not easily accomplished. Lev Novikow delayed hiring a human resource position, preferring to handle this himself. Ron Chapman worked for Rus Wane at the European headquarters in Brussels as the country manager of Russia and would visit once a month to review the joint venture. John Swift, an American that had just graduated business school, was appointed deputy general manager in late 1991. Jean-Pierre Dumont an engineer from France was appointed manufacturing manager, and Jeff Nichol, an Englishmen that worked as a corporate auditor for Rus Wane, was selected as financial manager in October 1991. Jeff Nichol received training in Brussels for six months before arriving at Rus Wane in the spring of 1992. Lev Novikow suggested to Ron Chapman that because of Jeff Nichols inexperience and age he should be a consultant for a while, instead of assuming the financial manager role. Ron agreed and Jeff spent the next year traveling between Moscow and St. Petersburg learning the business, language, accounting methods, and developing financial procedures. In 1993 a financial manager was selected for the St. Petersburg location, and Jeff Nichols reported to Rus Wane expecting to be the financial manager. Lev Novikow did not respond to Jeff Nichols appointment of financial advisor and after John Swift confronted Lev again he was told that Jeff could not be financial manager. The finance department now had eight employees, Jeff Nichols chosen to be financial manager in 1991, Katya Karaseva chief accountant formally from NLZ in charge of the finance department at this time, and six accountants mostly from NLZ. Jeff Nichols immediately noticed that this department was not able to work together, the employees did not know who their boss was, and the accountants expressed their disappointment in participation, decision-making, and compensation. Katya did whatever she wanted too, not participating in training sessions, and not communicating to Jeff except by interoffice mail. Lev Novikow would not respond to memos from Jeff and neither would the vice-president of finance for Wane Europe. Ron Chapman, country manager for Russia, would not concern himself with any of the issues brought up by John Swift regarding Lev Novikow, and allowed him to continue business as usual. All of these problems with personnel are relative to the fact that Lev Novikow never appointed anyone to the Human Resource Manager position, preferring to administer this function himself (Thomas). This led to no accountability for members of the finance department, Lev Novikow, and other top management executives. Allowing free reign to pursue personal and even competition related acts against Rus Wane. According to Human Resource Policies for Rus Wane Equipment, the Human Resource Manager position is responsible for the whole process of selection, hiring, promoting, and feedback from employees and managers. This would have eliminated filling positions with unqualified personnel, by Lev Novikow the general manager. Other managers and employees could have spoken with human resources and resolved problems using policies and the organization chart. Lev Novikow would have been accountable for sharing information, answering memos, hiring friends, and not showing up for ten days in a row. The conflict of interest of never resigning from NLZ and being the manager of the competition, while also being the manager of Rus Wane, would have been addressed as well. Ron Chapman would have had to answer to human resources about concerns brought up by John Swift regarding Lev Novikow. Ron might have been working with Lev Novikow to take over the general manager position, after Lev turned the old factory into his private property? This is after all where Lev spent all his time, while working for Rus Wane. In 1995 Lev Novikow left Rus Wane to work exclusively for NLZ. Ron Chapman became acting general manager of Rus Wane while keeping his job as Country manager for Russia.

References
Thomas, D. C. (2008). Cross-Cultural Management: Essential Concepts. Thousand Oaks, California: Sage Publications.