Castrol_IrisV1 14/10/98 9:58 am Page 1

Building a Joint Venture in an Emerging Market

This case study focuses on a joint to Singapore, Thailand and Malaysia, makes good sense - a well-connected,
Introduction to Burmah Castrol venture between Castrol, Burmah which are all now highly profitable established local partner with access
Burmah Castrol is a leading international marketer of specialised lubricant Castrol’s lubricants business, and economies for Burmah Castrol. There to foreign currency can help the foreign
and chemical products and services. With operations in over 50 countries, Vietnam’s Saigon Petroleum. It sets is little reason to doubt that following investor greatly, making a joint venture
Burmah Castrol employs some 20,000 people world-wide. out the rationale for the joint venture reform of the economy, Vietnam will the most appropriate strategy.
and examines the benefits to the two enter an accelerated growth period and
Burmah Castrol’s organisation is based on a number of business streams
parties. offer similar significant opportunities
which operate in the lubricants and chemicals sectors. The lubricants
for the sale of Castrol lubricants, even
Vietnam’s lubricants
business, which operates under the name Castrol, supplies specialist
products and services to the Consumer, Industrial, Commercial and Marine What is a joint though Vietnam is currently one of the market
markets. Castrol is the world’s leading independent marketer of specialised poorest nations in the world.
lubricants and lubrication services.
venture? Market research information
available to Castrol in the 1990s
Economic problems increased when
A joint venture means that two separate Vietnam invaded Cambodia in 1979 estimated the automotive market
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 and became involved in conflict with (consumer and commercial) and the
specific project, for example, a well the Khmer Rouge and other resistance general industrial market at
businesses - Foundry, Construction, Printing Inks, Releasants, Steel - and established Western multinational
a Specialities Group. Once again, the chemicals businesses are highly movements within Cambodia. This approximately 37 million litres each,
works with an established South East invasion brought further political giving a potential market of 75 million
international with operations in over 40 countries world-wide. Asian producer. The joint venture will isolation from Western countries and a litres of lubricants. Market growth is
hopefully bring synergistic benefits to US-led trade and investment estimated to be about 6% per year, so
Emerging markets the organisations, i.e. the ‘sum’ of the
embargo, which was maintained until that in the early years of the next
two organisations working together has been essentially confined to the
In recent years we have seen the development of a truly global economy. Political background 1994. century, the market will be worth about
will be of greater value than if each
We have moved forward from the days when the world was seen as being marine sector. With the joint venture, 130 million litres. Demand in the
worked alone. The joint venture is Vietnam is ruled along classic Marxist- Until recently, the maintenance of a 1.3
made up of First World (capitalist), Second World (communist) and Third Castrol aimed to broaden its presence consumer market is expected to rise
based on shared ownership between Leninist lines where the Communist million strong army was also a
World (less developed countries). Clearly, divisions continue to exist in Vietnam. rapidly, with market research indicating
the participants in the venture. For a Party of Vietnam and the Government considerable drain on Vietnam’s
between the nations, particularly in terms of income per head, but new that the greatest part of the demand will
joint venture to work effectively, there are totally fused. Following the much economic resources. However,
markets are developing and strengthening all the time. be in Ho Chi Minh City and the nearby
has to be agreement between the Vietnam - as an publicised period of Doi Moi economic reforms since 1987 have
provinces.
The development of new market models in former communist strongholds participants on how the joint venture (Renewal) in Vietnam, it now appears helped lead to a turnaround in the
in Eastern Europe and parts of South East Asia provides a tremendous will be managed.
opportunity likely that pursuit of a free market economy. By allowing peasants once Since the supply of lubricants from the
opportunity to well-established companies in the West. There is great Positioned at the centre of the fastest economy through stage by stage again to own land and sell their produce USSR stopped in 1990, Vietnam has
reform is the aim of the Vietnamese
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 growing economic zone in the world,
Government. Doi Moi has opened up
at market prices, Vietnam has been had to procure its own lubricants at
Vietnam offers a unique opportunity transformed from a net rice importer to world market prices. Foreign currency
will enable them to improve home-based production techniques greatly. Castrol seeks to expand its business by for Burmah Castrol to continue Vietnamese markets to foreign the world’s third largest rice exporting shortages have created considerable
entering countries in which it has little geographic expansion of its heartland investors and companies. nation. difficulties in buying lubricants from
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 business. In 1990, the Soviet Union cut back abroad. This situation has provided the
long-term potential. Vietnam is Like other South East Asian
new emerging markets. heavily on direct aid in the form of joint venture with a tremendous
believed to be one of these countries. Land and people economies, Vietnam has been
subsidies to Vietnam. The resultant loss opportunity to develop branded
Castrol has been involved in the experiencing rates of growth which are
Vietnam is situated on the eastern of cheap lubricants, previously lubricants in Vietnam - a previously
Vietnamese market since 1981 but this the envy of the West. Vietnam
seaboard of the Indochinese peninsula. supplied by the Soviet Union, has led brandless market.
possesses enormous mineral resources
Neighbouring countries are China to the Government to liberalise the
and recent foreign investment in
the north and Laos and Cambodia to the lubricants industry and elevate it to a
offshore oil exploration activities has
west. Vietnam has a land area priority investment category. Market
finally borne fruit. Successful
approximately one third larger than the reforms, therefore, are taking place but
processing of these finds will provide
UK. the Government is not prepared to
much-needed US dollars and a catalyst
engage in the sort of widespread
The population of Vietnam is 75 for economic growth.
reforms that would threaten the existing
million people. The two major cities political system. Whilst the foreign investment law of
are Hanoi in the north and Ho Chi Minh Vietnam allows foreign companies to
City (formerly Saigon) in the south. Economic background invest at 100% equity, the preferred
The majority of the population lives in Prior to the Vietnam war in the 1960s investment route of the State
rural areas and is evenly spread through and early 1970s, Vietnam was at a Investment authority is through a joint
the countryside. similar stage of economic development venture with a local partner. This

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Castrol_IrisV1 14/10/98 9:58 am Page 2

dollars per annum and is one of the Castrol Vietnam today

largest earners of foreign exchange in
the country. It therefore has the facility Today, Castrol Vietnam works with TASKS & ACTIVITIES
to provide foreign exchange for 7,000 retailers and employs about 160
importing base oils and additives.
Foocosa itself is wholly owned by the
people in Ho Chi Minh City, Hanoi and
Da Nang. The joint venture has worked
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
People’s Committee of Ho Chi Minh hard to develop strong relationships venture is a much better option for economy.
City (effectively the Municipality). The producing and trading in Vietnam than
with local retailers and distributors by
creation of the joint venture in the early
1990s was built on a number of years of
close co-operation involving the
providing detailed technical assistance
and support. It has become standard
setting up a 100% Burmah Castrol
owned operation. 7 Explain why the relationship
between Castrol and Saigon
Petroleum is a synergistic one.
distribution and test marketing of new practice to provide funds for upgrading
and existing lubricants in Vietnam. petrol stations as well as arranging trade
loans. Marketing campaigns have been
2 Set out the following:

8 Explain how each of the following

benefit from the joint venture:
Castrol and Saigon Petroleum ● the existing strengths of Burmah
particularly successful, with Castrol
established the joint venture under Castrol that will enable the
Vietnam offering gifts such as key rings ● the Vietnamese Government
Vietnamese law to construct and operation to be a success
operate a lubricant blending plant and and pens to encourage sales. ● Burmah Castrol
to market and sell lubricants in ● the opportunities provided by ● Saigon Petroleum
The joint venture has been particularly
The consumer market The general industrial Vietnam, trading under the name
successful in changing customers’
Vietnam as a market for ● Vietnamese customers
lubricants
The passenger car market market Castrol Vietnam Ltd.
perceptions about lubrication, whether ● consumers in the UK.
Castrol owns 60% of the joint venture ● possible threats to the success of
Vietnam’s key industrial sectors include the customer be a car or motorcycle
The car market in Vietnam is primarily the joint venture in Vietnam.
made up of vehicles which are ten years
mining, fishing, sugar, textiles,
shipbuilding, power generation,
and Saigon Petroleum owns 40%. Both
sides have a blocking vote.
owner or an industrial customer. Castrol
Vietnam has played a major part in
9 What lessons can other Western
companies learn from this case
old or more. In recent times, the
Vietnamese Government has been very
railways and cement. These industrial
markets are likely to grow with the
Vietnamese law allows the setting up of
joint ventures providing they can meet
changing consumers’ buying habits,
from low quality and regenerated
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?
restrictive on the importation of new
stimulus of increased overseas one of three success criteria: and other Asian nations for processing. important to the Vietnamese
foreign cars in order to prevent the
outflow of scarce foreign currency.
investment. The lubricants for these
industries supplied previously by the
● bringing about considerable
lubricants, to oil blended to
international standards. The use of transformer oil produced by
Castrol Vietnam will help save Vietnam
economy? 10 Explain each of the following
business terms as they are used
in the context of the case study:
improvement in the appearance
Market research and test marketing USSR were of inferior quality and After the lubricant blending plant had
show that a key requirement for success
in the automotive market is a regular
resulted in many inefficiencies - for
instance, avoidable lubrication
and quality of the products and an
increase in output been operating successfully for several
years, Vietnam’s first transformer oil
money as its prices will be around 10%
lower than imported oil. At full 4 What information in the case study
suggests that the Vietnamese
market provides considerable scope
●

●
emerging markets
synergistic benefits
creating products which Vietnam production, the plant will be able to
supply of quality lubricants. There is problems have cost the Vietnamese ●
for successful profitability for Castrol
processing plant was opened by Castrol meet around 80% of the local market’s ● priority investment
railways up to $40m in losses per year. urgently needs or producing operations? Which sectors of the
also a clear preference in Vietnam for in Ho Chi Minh City in March 1998. demand and is part of an ongoing ● 100% equity
import substitutes
well-known branded lubricants because Constructed at a cost of US$1.5 million, lubricants market appear to have most
investment programme. ● investment embargo
of their perceived higher quality. Joint venturing ● achieving considerable savings in the 3,000 tonne per year transformer oil potential?
● joint venture
terms of raw materials and energy.
The motorcycle market partnership plant utilises modern technology and
Conclusion ● multinationals
With the recent growth of incomes in The marketing information provides a
strong case for Castrol’s involvement in
Castrol Vietnam clearly met all three of
these criteria.
equipment from the UK and will use
raw materials imported from Singapore At the end of the day, running a
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, there has been a large increase successful joint venture is a matter of
Vietnam. There is clearly a gap in the Vietnam? ● brandless market.
in motorcycle ownership. This country give and take. One disadvantage, of
has a unique consumer channel of wash market for the supply of high quality,
performance lubricants. course, is that Castrol does not have
shops (Rua Xe) where motorcycle
100% of the ownership and takes only a
owners take their bikes for a wash and Castrol’s association with Vietnam
part share of profits and dividends.
oil change. The vast majority of Castrol began in the early 1980s through a link
outlets are such establishments, which However, this is counterbalanced by the
with Vosco Shipping, Vietnam’s
are the Vietnamese equivalent of a premier overseas shipping line, which, benefits of working in partnership with
‘Quick Lube’/automatic car wash. This at that time, was having vessels a local company - a better
clearly presents a strong market constructed in the UK. The ongoing understanding of the culture, market
opportunity. link between Castrol and Vosco grew and ways of operating in an emerging
from strength to strength and Castrol nation.
The commercial vehicle market developed a dominant share (90%) of
the Vietnamese marine market. As a Castrol Vietnam is almost exclusively
Commercial vehicle consumption
result of this link, Castrol was run by local Vietnamese people, who
counts for a large percentage of total
introduced to Saigon Petroleum in have the best understanding of the local
lubricant consumption. The truck and
1988. market and of appropriate ways of
bus population is predominantly old
dealing with local customers. The
and poorly maintained and the Saigon Petroleum is a former
operators, in general, use cheap, low Vietnamese Government is also far
subsidiary of the Food Company of Ho
quality lubricants. However, as the Chi Minh City (Foocosa). Foocosa is more likely to favour business
economy is improving, increasing one of the most successful capitalist organisations in which the power and
http://www.castrol.com
numbers of operators are turning to organisations in Vietnam. It has a sales decision-making basis has a strong
higher quality lubricants. turnover in excess of 200 million US local flavour. Whilst every effort has been made to ensure accuracy of information, neither the publisher
nor the clients can be held responsible for errors of omission or commission.

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