DINA Yugoslavia 1990: Case study search for a foreign partner

DINA YUGOSLAVIA: SEARCH FOR A FOREIGN PARTNER

DINA Yugoslavia 1990: Case Study Search for a Foreign Partner THOMAS CUMMINGS, Research Fellow, IMD, Lausanne; YURY BOSHYK, Professor of International Geopolitics and the Business Environment, ZMD, Lausanne; CHRIS MARTIN, Founder, Marex Consultancy, UK

This is a case study written for senior international managers of a US-based multinational company, General Electric. It was first discussed during a GE sponsored four week programme at IMD International on the political and economic changes of Central and Eastern Europe. The programme included two weeks of meetings with company managers and government officials in five Central and Eastern European countries.

The case study is about a company, in the former Yugoslav Republic*, in the petrochemical industry. DINA was seeking a global partner to develop its plastic producing capabilities and to leverage its land and geographic assets. The company representatives from DINA believed that the recent changes in Eastern and Central Europe as well as changes in Yugoslavian law put the companyin a favourable position for joint venture discussions with an appropriate partner.

DINA had had experience with a western partner in the past. In 1977, INA-DINA had been formed through a joint venture between Dow Chemical and Industrija nafte Zagreb (INA). Dow was responsible for the early technology transfers and joint development of DINA’s petrochemical facilities until changes in the market and issues in the partnership caused DOW to withdraw from the agreement. This was a major factor affecting DINA’s partnering possibilities.

DINA’s prospects for finding a new partner were also hampered by the company’s relatively weak financial position, limited access to end markets and upstream raw materials, and the inertia of a consolidating industry. Nonetheless, the new management of the company had aggressively restructured the business around their installed

* Since this case study was written, the Croatian and Slovenian Republics have declared independence from Yugoslavia. For the purposes of this case, the old title is retained.

base of two petrochemical products, and were optimistic about the changing Yugoslavian and European economies. The case study revolves around a series of strategy review meetings among DINA’s top managers.

Marijan Pejcic slowly edged his way through the early morning traffic on the Tito Bridge, preoccupied with the board meeting he was attending that day. As business development manager for INA-DINA, Pejcic was to present his department’s report on a new business strategy that had been requested during a board meeting held the previous year, in mid-1989. Since this was his daily route from mainland Yugoslavia to the company’s petrochemical facility on the island of Krk, he only occasionally glanced at the spectacular view afforded by the bridge’s towering spans. He knew he could do nothing about the traffic, so he allowed his thoughts to turn to the late 197Os, when the company’s first western partner, Dow Chemical, had withdrawn from a joint venture agreement.

Background INA-DINA had been formed in 1977 by Dow and Industrija nafte Zagreb (INA) as an equity joint venture. The chemical processing facility they planned to build on Krk would be well positioned to conquer new markets in Eastern Europe.

There were several strategic and operational reasons why Dow had wanted to terminate the agreement: a drop in petrochemical prices, an impending oversupply, and complications with Yugoslavian bureaucracy. Pejcic also suspected that only a few people at Dow had been fully aware of the seemingly insurmountable obstacles that INA’s management had had to overcome to negotiate the parinership.

He recalled how DINA’s board had expressed concern at the 1989 meeting over the recent decline in profit margins for the company’s primary products. Producers of petroleum feedstock (the raw materials used to

60 EUROPEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992


rranufacture DINA’s products) had increased their prices at the same time that prices for DINA’s products h,ld dropped sharply due to a surplus in world markets. Sirenja Branimir, the company’s general manager, had al\o called attention to DINA’s lack of vertical integration, which would always place the company in a weak position vis-&vis its competitors in the ptntrochemical market (see Exhibit 5).

Ai though efforts to attract short-term investment capital had been successful, the company would sustain losses in the current fiscal year. The board knew that, without a :lew strategic plan, there was little hope for relief.

Tile dramatic political shifts in Eastern Europe made it even more imperative that the company take an aggres- si\re planned approach to secure DINA’s future. For thI:se reasons they had asked Pejcic’s department, with thl: assistance of an outside consultant, to conduct a review of DINA’s financial position, products and m,lrkets.

Pejcic hoped that the board would accept his team’s analysis of DINA’s options. He was somewhat appre- hensive about their response because the report recom- mcanded that DINA seek a new joint venture partner, despite the unhappy experience with Dow, to ensure th.lt DINA’s development plans be fulfilled. And even though the report described all that DINA had to offer, Pelcic still wondered what a joint venture partner would expect and whether anyone could predict how the winds of change sweeping through all of Eastern Europe would affect the company’s ability to attract a suitable partner.

When he arrived at DINA’s offices he went directly to :he boardroom. The meeting would not begin for sncjther ten minutes, so he started to read the report ag,lin, looking for clues about the company’s past that night help him steer the discussion in a positive Iirection:

DINA was formed in 1977 as a joint venture between a division of INA (Industriju nufte Zagreb), a mostly Croatian vertically integrated oil company, and Dow Chemical, the third largest US chemical producer. In 1974, negotiations began between Dow and the INA oil refinery in Rijeka to jointly develop a petrochemical facility. The project was intended to support Dow’s strategy of increasing worldwide development in petrochemicals. At that time, 45.8% of Dow’s sales and 57.6% of its operating income had come from the company’s foreign operations.

One reason Dow had pursued INA as a partner was because it saw Yugoslavia as a suitable entry point to Eastern Europe. The oil and petrochemical industries of Yugoslavia were centrally planned, and several Yugoslavian petrochemical producers profited from protective tariffs that allowed them to sell their products 30% higher than current world prices. When Dow had first held discussions with the INA board, the domestic economic situation in Yugoslavia, as well as in several Eastern European countries, seemed to be stabilising, and a healthy demand for petrochemicals had been forecast.

Following year-long negotiations, DINA was founded in 1977, under restrictive Yugoslavian joint venture laws. Later that year, the first phase of a three-phase construction plan began on the island of Krk, one of the Dalmatian islands located in the northern Adriatic. The deep waters of the Adriatic provided an easy entry point for raw petroleum feedstocks being delivered to INA’s petroleum refinery in Rijeka and were considered a strategic location for DINA’s future growth.

The joint venture agreement was abruptly terminated in 1983. Reasons for its failure were numerous and have been documented in court proceedings and board records. A legal advisor responsible for the case put the failed partnership in a cultural perspective: ‘No marriage can last when the couple are from such different back- grounds and have so little in common.’ Other board members pointed out that great progress had been made considering the many obstacles that faced the partnership.

Marijan Pejcic looked up as the other members of the board of management entered the room. From their initial remarks he sensed that his colleagues were prepared to discuss DINA’s future, but that the experience with Dow might colour the discussion. Then Pejcic took the floor. He pointed out that DINA had accomplished a great deal over the last several years. The failure of the joint venture had not prevented the completion of the first phase of construction. On the contrary, with DINA’s strong technical capabilities, its close ties to technical institutes in Rijeka, and engineering assistance from INA headquarters in Zagreb, two petrochemical plants had been completed in 1984-85, one for the production of low-density polyethylene (LDPE) and the other for vinyl chloride monomer (VCM). He suggested that DINA should view the Dow partnership as part of the supporting foundation of DINA’s work.

Another board member quickly pointed out that without Dow’s operational assistance, DINA had had difficulty operating the petrochemical facilities at 100% capacity. And, while the company appeared to be gaining profitability from 1986 to 1989, a heavy debt combined with high inflation and a poor domestic economic situation had eroded the company’s cash position (see Exhibit 1).

Pejcic and the other board members could agree that, with Dow’s help and through their own good fortune, there had been a few early successes. But by mid-1989, DINA’s future had become uncertain.

They also had to consider that the political environment was changing rapidly. Many Eastern European countries and the Soviet Union were moving toward a market economy. It seemed likely that Yugoslavian companies, too, would soon be facing the free market and would encounter new competitors. The board agreed that urgent and significant changes in DINA’s operations were required and that further construction was needed. It would be in DINA’s best interests to complete a fully integrated petrochemical facility.

Pejcic cautioned that there were many steps to take

EUROPEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992 61


before full integration could be realised. The first order of business was to analyse the current situation and develop a business strategy for DINA’s future. But the board members, most of whom had learned their management skills while working for INA, felt they needed assistance to formulate and execute a new strategy. The meeting concluded with an agreement that Pejcic would continue to work with a group of con- sultants to develop a plan. The issues the strategy review would address were:

l How critical was the present situation? l What strategy or strategies would secure DINA’s

future? l Would DINA be attractive to a foreign partner?

One manager urged the board to take a broad perspective. He noted that, since the joint venture with Dow, petrochemical prices had rebounded, Yugoslavian laws were changing to favour market activities and the currency was predicted to stabilise. Everyone believed that the creation of a new joint venture with a foreign partner was a potentially favourable solution. But most wondered how this could be achieved quickly and effectively.

History of the DOW-INA Joint Venture The original plan for DINA had called for eight petrochemical manufacturing plants, based on Dow technology and utilising INA’s engineering expertise, to be undertaken in three phases.

l The first phase of construction would provide facilities for the production of LDPE (70,000 tons/year), ethylene dichloride (EDC) (150,000 t/y) and VCM (200,000 t/y).

l The second phase would comprise a styrene unit (200,000 t/y) and an ethylbenzene unit (240,000

t/Y). l The third phase would include a naphtha cracker

with ethylene production (400,000 t/y), a benzene plant (180,000 t/y) and a high density polyethylene (HDPE) plant (50,000 t/y).

slavian joint venture law required that the general manager be a Yugoslavian national, the commercial, financial, construction and production managers were all Dow employees from Europe and the United States.

The island of Krk, two hours by car from Trieste, Italy, and five hours from the borders of Austria and Germany, was selected as the construction site. There were regular flights in the summer between Northern Europe and the island. The Tito bridge, the highest single span bridge in the world, connected Krk with the mainland. In addition, the island was moderately developed with tourist accommodations and marina facilities.

DINA’s management had taken early steps to resolve a potential conflict between industrial development and tourism on the island. As a consequence, DINA was one of the most environmentally conscious plants in Europe. Every day, well-equipped laboratories on the plant site monitored effluent concentrations in the air, sea, and local fresh-water supply.

As early as 1978, Dow had foreseen the general erosion of profitability in the world petrochemical market, yet the company continued to encourage the development of several joint ventures similar to DINA. Three of Dow’s nine major chemical complexes were located in Europe, and Dow had developed a total of 29 manufacturing locations in 13 European countries.

Earthmovers began to clear the Krk site in 1979. Civil engineering work proceeded through 1979-80, with the construction of the utilities and Phase 1 petrochemical facilities. Progress was frequently frustrated by Yugoslavian laws that restricted capital item imports. Major equipment had sometimes been held in bond for months at a time, until import quota restrictions could be lifted. To add to these complications, the construction management was frequently hindered by a duplication of effort on the part of Dow and DINA managers. By late 1981 it was clear that construction costs would be over budget and that the Phase 1 deadlines would not be met. In a meeting at the end of that year, the joint venture management agreed to concentrate on the completion of Phase 1 and to postpone the other phases.

For economic, safety and environmental protection reasons, major utility plants were also to be built. These included a 25 MW power station and an air liquefication plant, with provisions for steam and water cooling. The industrial site would be equipped with a fire station, a medical centre and an environmental monitoring facility (see Exhibit 3).

Dow management was continually frustrated by the effects of the hard currency, capital equipment and raw material import quotas which were enforced by the Yugoslav government during this period. Construction was frequently held up waiting for an item of capital equipment which had been physically imported and was in the bonded warehouse on the Krk site. Con- struction engineers and technicians had nothing to do

DINA engineers and operators had been selected from but wait until the end of the month when the equipment the best of Yugoslavia’s substantial pool of well-trained might be released by a government bureaucrat. Dow felt graduate engineers, scientists and technical specialists. that the authorities and local management were not Key Yugoslavian engineers were seconded to Dow acting in the spirit of the joint venture agreement. If plants in the United States and Europe for training. The nothing else, the delays were endangering the economic majority of the staff - from secretaries through to senior viability of the project. These frustrations were a major management - spoke fluent English. Although Yugo- cause of the joint venture failure. Pejcic was pleased to

62 EUROPEAN MANAGEMENT IOURNAL Vol 10 No 1 March 1992


see that all restrictions of this nature had finally been el Iminated.

A; the same time, Dow’s senior management in midland, Michigan, approved a new strategic plan. The kiv intent of the company’s new strategy was to reduce iti. debt burden, and to shift the company’s business portfolio from bulk petrochemicals to more specialised chemical sectors and pharmaceuticals. Over the next several years, Dow sold more than $1.8 billion worth of plants and ended several pe~~hemical joint ventures in Japan, Saudi Arabia, and South Korea,

M’ithin a year of the new strategic plan, Dow m~~nagement informed DINA that it intended to ter- m~nate the joint venture agreement. Dow management cit<*d its ~s~ation with capital import delays and INA’s sk)w payments for specific imported items as the reasons fol, termination of the agreement. It was later learned th,lt Dow had carried out a research study which had confirmed that the DINA joint venture could be sue-cessful only with favourable market conditions. If m,irket conditions were difficult, the plant would pn’bably be uncompetitive.

The so-called ‘divorce’ was not amicable. A process of arbitration through the International Chamber of Ctlmmerce in Paris lasted until the final settlement in September 1984. The settlement resulted in Dow’s equity being transferred to a $43 million debt that would be underwritten by INA. (The remaining debt burden due to the transfer of Dow’s equity is shown in Exhibit 2.) The additional debt burden of Dow’s equity, combined with the eroding position of the Yugoslavian e~(~norny, prevented DINA management from gaining access to investment capital for the remaining phases of the investment.

Equity entitled the owner to a share in the profits up to a pre-determined level. At any time, the company could purchase the equity from retained earnings and above this ievel, at the issue price. The directors had agreed, however, that every effort had to be made to provide the equity holders with a fair return on their investment. Equity holders were involved in most major decisions affecting the company’s value.

A positive development for the company’s financial situation was its declining debt burden. A major portion of the debt due in 1986 was in Yugoslavian dinar. Due to the dinar’s enormous inflation, the dollar value of DINA’s outstanding debt dropped from $190 million to $96 thousand, Nonetheless, DINA’s hard currency loans totalled $90 million, and an additional $30 million of Dow equity credits underwritten by INA, had to be repaid. Debt was available on the secondary debt market. Debt discounts in 1989 were between 50% and 60%; however, as the Yugoslavian economy improved, the discount rate fell,

DfNA’s Products and Markets

The Polyolefines Market The business development group cited two main factors that segmented the petrochemicals market: geography and quality. The geographical influence was due to transport costs (which were especially high for VCM, EDC, and ethylene) and tariff barriers. The main tariff blocks were divided amongst Yugoslavia, the EEC, Japan, the United States, the non-aligned countries, OPEC, Eastern Europe and the USSR, the Pacific Rim, and the rest of the world.

Through unilateral trade agreements, INA limited preferential access to several of the following markets (in descending order of value):

At the time of the joint venture break-up, 80% of the first phase of the project had been completed and most of the utilities, off-sites (jetty, fire station), and cleared land (necessary for all three phases of the construction) had been completed. The investment in productive as<ets amounted to a book value of $123 million, with an overall investment of $294 million.

* Domestic Yugoslavia * EEC o Non-aligned countries (e.g., India, Egypt) * Eastern European Comecon members

In addition, transportation costs were lower than for many competitors with eastern Mediterranean ports.

DINA’s Perception of Its Business Marijan Pejcic and his colleagues knew that it would be difficult to find another potential partner. Before the search began, his group formulated a strategy based on the information about the current state of the company, its products, technologies, and markets.

DINA’s Financial Position

in two ways. First, there was a quality hurdle or The petrochemicals market was segmented by quality

threshold that had to be met for any product to gain acceptance in the world market. Second, the sophis- ticated markets (e.g. West Germany, France, United Kingdom) were differentiated by the quality of product supply and of associated services. DINA’s main products were vinyl chloride monomer (VCM), and low density polyethylene (LDPE).

In early 1990, the major equity holders were three member companies (divisions) of the INA group. Thise three divisions owned approximately 80% of the equity. The remaining 20% was owned by 41 domestic cuctomers of DINA and a social ownership structure comprised of INA employees.

Ethylene Market The ethylene market, based on ethylene pyrolysis cracker technology, was a mature one. The price of ethylene tended to be fixed at a levei providing a reasonable return on capital for the most economical

EURI~PEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992 63


producers (5-10% ROI @ 80-90% utilisation over the previous I2 years). These producers had tended to be large oil companies with access to cheap gas supplies and naphtha sources. In addition, ethane-rich natural gas had become an increasingly economic feedstock for ethylene pyrolysis.

The ethylene market was influenced by underlying prices in the fuel and natural gas markets and by world ethylene production capacity. Since the petroleum fuel market was far larger than the petroleum feedstocks market, ethylene prices were a margin above the underlying petroleum feedstock prices. These in turn were influenced by fuel cost trends.

Pyrolysis cracker capacity had expanded worldwide, especially in Saudi Arabia and the Far East. The proximity of cheap feedstock and rapidly expanding domestic markets for cracker products was pushing ethylene production capacity and giving new producers a stronger domestic purchasing position. Libya, for example, had access to cheap feedstocks and a pyrolysis cracker. But poor access to downstream technology had been preventing that country from pursuing vertical integration further.

Industry observers noted that the development of a naphtha-to-ethylene conversion capability was not, in itself, an attractive economic proposition. The returns on investment and equity, even for the best-run plants, were not likely to be above market rates. In addition, a reliable source of ethylene and stable prices were a minimum requirement for a petrochemical complex. The construction of a pyrolysis cracker may have been the only way for DINA to achieve this position.

DINA had no agreement with Enimont, Italy’s largest petrochemical producer. Enimont had been formed by the merger of two Italian companies, EN1 and Montedison. Enimont was a toll converter of Yugo- slavian naphtha, supplying it to DINA in exchange for a toll conversion fee. EVC, an Enimont joint venture with ICI, a British petrochemical producer, was one of DINA’s direct competitors in the VCM market, even though the company was a major supplier of ethylene to DINA. Moreover, it was believed that Enimont was legally prevented from forming any other joint ventures in the VCM market, due to an agreement with ICI. Enimont had also been plagued by internal political problems resulting from the merger of EN1 and Montedison.

The DINA board noted that the present position of DINA’s ethylene procurement was unsatisfactory and that any strategic planning process had to take this issue into consideration.

Vinyl Chloride Monomer (VCM) Market Overcapacity and environmental concerns led to relative stagnation in the VCM market. Growth of worldwide demand for this product was strongly linked to

increased use of polyvinyl chloride (PVC) for plastic piping and extruded plastic products. Consequently, the strongest demand for PVC and VCM was in those economies with an active building replacement and construction market. Since VCM was difficult to transport, DINA’s production was restricted to customers at home and in neighbouring countries along the eastern Mediterranean seaboard. The bulk of VCM would probably be polymerised in Yugoslavia.

Yugoslavia’s recent improvement in GNP figures suggested that the domestic consumption of VCM products would improve in 1980. VCM use in other Western European economies was expected to remain flat; over the previous 12 months the VCM world contract price had remained firm despite a rapid drop in the European spot price. Western European PVC producers, for example, were purchasing VCM on contract terms at around twice the current spot price. DINA was at a disadvantage at the time because the company was selling mainly to the spot markets.

In early 1990, the VCM price in Yugoslavia was pro- tected by a 26% import duty (except for large volume conversions). Yugoslavian petrochemical industry observers predicted that these tariffs would be reduced over the next several years, as the Yugoslavian economy became more open.

Lozu-Density Polyethylene (LDPE) Markrf Despite a weak LDPE market (compared to 1988 levels), DINA was able to generate enough revenues at the current selling price to finance its fixed costs and depreciation.

LDPE was relatively inexpensive to transport, and the European market tended to be homogeneous in its consumption patterns. The world market was served by a number of low-cost producers, namely Saudi Arabia and Western Canada, where feedstock costs were low because petroleum conversion capabilities were vertically integrated. This meant that, in the medium to long term, the LDPE market was not likely to be attractive to European manufacturers that were not vertically integrated producers. Even current major producers found the LDPE market unattractive.

The board discussed DINA’s limited market position in both the VCM and LDPE markets. It also noted that, given the company’s limited capacity as an intermediate player, it would be critical to seek a partner with complementary capacities or an interest in jointly developing some of DINA’s other geographic and potentially productive assets.

DINA’s Business Strategy The analysis conducted by Marijan Pejcic’s business development group revealed that DINA needed to attract new joint venture partners.



-

DINA’s Requirements from a Partner DINA needed to pursue partners with the following cclpabilities:

l access to additional petrochemical conversion technologies and plant facilities;

l access to investment capital for restructuring and new development;

l access to raw materials that would feed into VCM, LDPE, and potentially new productive capacity;

0 access to export markets that would be on equal terms with existing and potential competitors.

I’,lrtners would be informed of DINA’s two major strategic objectives:

1. To meet existing debt obligations; 2. To seek ways to insure the long-term survival of

the business.

A financial analysis revealed that DINA’s cash position w,rs too weak to purchase a significant share in any r;rrtnership; a potential partner would therefore have ttl seek ways to receive value through DINA’s existing or potential capacities.

Following further discussions with the DINA board, I’t’jcic, working with a consultant, formulated two objectives for a joint venture strategy.

1. An alliance should improve the net present value of existing productive plants through secure and favourably priced access to raw materials, feedstocks, and operating know-how.

2. A partner should be interested in long-term development and investment in DINA facilities on Krk.

They agreed that the asset value of the company was sti-ong enough to be able to negotiate a favourable position in an equity joint venture.

DINA’s Assets for a Partner B! the spring of 1990, Pejcic’s business development gr up, the workers‘ council, and the board had a clearer picture of DINA’s financial situation. They knew that in order to make the best use of the current and potential phvsical assets of DINA, they had to try to obtain an outside investment. An equity joint venture seemed the most appropriate way to secure this investment.

M,lrijan Pejcic noted that there were several reasons for trying to achieve the company’s goals through an alllance. First, each of the senior managers at DINA had had experience with a joint venture; and while their first experience had ended abruptly, they now felt more capable of managing the complexities of a new joint ve:lture. Second, most of the management and technical staff had had very good working relationships in their pnvious partnerships and felt that they had lived up to most of their partner’s expectations. Third, their an*llysis showed that a joint venture would be, by far,

the preferred route for securing profitable use of company resources.

But, even the most optimistic cash flow forecasts, including scrap value, showed only a small net present value for DINA. To offer real value to a potential partner, DINA would have to yield a significant proportion of the rights of an equity joint venture.

In the short term, however, DINA could offer a petrochemical conversion facility with excess capacity that would be valuable to a partner with ‘spare’ ethylene to be sold below spot market prices. Any deal that would reduce raw material costs and exploit this excess capacity would be worth entering into. This type of relationship would probably be either a medium-term buyer/supplier relationship or a hybrid of a conventional contract tolling arrangement in which feedstock would be exchanged for conversion capacity.

In the medium to long term, DINA could also offer a potential partner:

0 an existing petrochemical conversion facility; * a developed and serviced industrial site located on

the eastern Mediterranean seaboard; 0 a skilled workforce at competitive labour rates; * available capacity from existing utilities; 0 a strong env~onmental record and environmental

monitoring capabilities; l access to the Yugoslavian market and its trading

partners; 0 significant land holdings and facilities on Krk

suitable for tourist development.

Some of DINA’s senior managers felt that the company had completed the development of a valuable infrastructure that would support the production of petrochemicals, chemicals in general, or other industrial products. The site was attractive and well positioned for both industrial use and potential leisure development, given the right partner. Neither DINA’s parent company, INA, nor the current Yugoslavian government would be able to provide new financing. But analysis by Pejcic’s business development group illustrated that DINA’s existing asset value could be used as equity-in- kind in an equity joint venture. Use of this asset value would, however, require an exceptionally thorough partner selection process.

Potential Partner Groups Three main potential partner groups were identified:

1.

2. 3.

Western and Japanese integrated petrochemical companies; Middle Eastern ethylene producers; Non-petrochemical producing companies, trading companies, construction companies and financial institutions.

The DINA directors saw Group 1 as the most attractive



(Western and Japanese companies) and Group 3 as the least attractive.

Initial contacts with Western integrated producers of petrochemicals suggested that they were not likely to be interested in bulk petrochemical production in Yugoslavia in the near future. Many had a high regard for Dow and, knowing that Dow had pulled out of Yugoslavia, suspected that Dow had had good reasons to cut its losses. Pejcic and board members had confronted this issue during discussions with several firms. They pointed out that the situation had changed substantially since Dow pulled out of the agreement in the early 1980s. The collapse of the Dow agreement was largely due to a change in Dow’s strategy that, at the time, called for reducing the company’s worldwide debt level. In addition, given the experience with Dow, DINA’s internal management was well equipped to work effectively with a partner.

The board of directors felt that Japanese companies might be more interested in a partnership which would increase their trading activities in Yugoslavia and Europe, but not for long-term asset development.

Pejcic thought that Middle Eastern countries would have more reason to be interested in DINA as a manufacturing site. In particular, a Libyan company that would suffer from import constraints on certain technologies would be an interesting potential partner. Yet the board was concerned that an alliance with such a company, while attractive on paper, would impair DINA’s ability to trade freely with Western Europe and the United States. There was general unease about this course of action among DINA managers.

Exhibit 1 DINA Financial Information

ASSETS 1986 1989 Changes in balance sheet

Current Assets Cash $0.51 $0.82 $0.31 Accounts Receivable $10.04 $10.04 Inventory $12.30 $6.62 ($5.68) Total Current Assets $12.81 $17.48 14.67

Fixed Assets Equipment $228.54 $235.57 $7.03 Licences $8.58 $858 $0.00 Accumulated Depreciation $0.00 $54.88 $54.88 Net Fixed Assets $237.12 $122.12 ($115.00)

Other Assets Land $1.20 $1.20 $0.0 Preproduction Costs $27.54 $27.54 $0.00 Capitalised Interest $53.04 $53.04 $0.00 Government ‘Loan’ $2.77 $2.77

TOTAL ASSETS $331.71 $224.15 ($107.56)

Note: all of the above values have been changed for reasons of confidentiality

Construction companies would be keen to find ways to develop DINA’s facilities and would have had good, albeit arms’ length, contact with the major technology producers. Finding a contractor to provide the technology would not be difficult, but finding a partner to finance the investment, as well as ways to secure raw material supplies and market access, would be more problematic.

Banks and financial institutions would benefit from a profitable partnership. The board felt their services would be very useful in the process of alliance formation but knew of few banks that were really active in this area.

A Call for Action After the spring 1990 board meeting at which Pejcic presented his report, Strenja Branimir called another meeting that was to be followed by a full meeting of the workers’ council. The internal analysis of DINA’s financial situation and future options had been completed. Branimir noted ‘There is a need to change. We cannot, by ourselves, make the investments which would best utilize our assets.’ Based on the analysis carried out by Marijan Pejcic and other senior managers, DINA’s board agreed that an action plan was required. There were solid financial, technical, and market reasons to seek a partner. DINA had much to offer, and the economic situation in Yugoslavia seemed to be stabilising. Only one set of questions remained: How would the potential partner groups that had been identified through the strategy review assess DINA?

LIABILITIES 1986 1989 Changes in balance sheet

Current Liabilities Short Term Debt Accounts Payable Total Current Liabilities

Long Term Debt Long term loan Dinar Loan Hard Currency Loan Total Debt

Equity INA Equity DOW Equity Shareholders Equity Total Equity

Special Reserve

TOTAL LIABILITIES

$11.50 $3.24 $3.24 $11.50

$7.70 $190.18 $0.10

$47.97 $46.51 $238.15 $54.30

$44.45 $44.45 $43.37 $30.42

$2.51 $2.51 $90.32 $77.38

$80.98

$331.71 $224.15

$8.26

$7.70 ($190.08)

(1.46) ($183.85)

$0.00 ($12.95)

$0.00 ($12.95)



RATIO ANALYSIS 1986 1989 Changes in balance

sheet

Industry Standards

Profitability Ratios Return on Equity Return on Assets

Return on fixed assets Profit Margin

Gross Margin Leverage and Liquidity

Assets to equity Debt to Assets Debt to Equity

Gearing (E/D + E) Times interest earned

Current Ratio Acid test Turnover-control ratios

Asset turnover Inventory turn over

Collection period (Days) Days sales in cash

0.00% 0.00% 0.00% 0.00% 0.00%

0.00% 0.00% 0.00% 0.00% 3.18%

14.74% 30.00% 4.29% 1.20%

15.58% 3.40% 5.12%

19.79%

3.67 71.79%

263.66% 27.50%

-0.70 3.95 0.16

2.90 24.23% 70.18% 58.76%

-0.26 1.52 0.94

40.00% 1.74

1.60 1.00

0.12 3.45

0.33 10.84 49.46

4.05

6.10 60.00

4.60

INCOME STATEMENT 1986 1989 Aggregate for years 1986-88

Exhibit 2 DINA’s Debt Servicing Burden, 1989-2000

Income IDomestic Sales Export Sales Other

c.,sts Total Costs

G-ass Profit

Operating Expenses Overheads VVages

Oserating Income

NN)n Operating Costs Interest Contribution

Workers Fund Dividend Reserves

Profit

Dltpreciation

Nltt Profit

$31.19 $37.88 $5.05 $35.31 $4.27 $74.07

$210.24 $140.86 $371.55

$298.01

$73.54

$5.20 $16.08

$52.26

$0.00 $30.04

$0.00 $0.00 $0.78 $2.02

$19.02

$77.39

($58.37)

7

1 1989 I 1990 I 1991 I 1992 0 i993 I i994 B 1995 0 1996 B 1997 0 1998 I 1999 0 2000

$42.39

($1 .aa)

$71.72

$2.35

$0.53 $2.07

($4.48)

$0.90 $3.41

($1.95)

$6.44 $0.00

$7.37

($10.92) ($9.32)

$10.37 $16.12

($21.29) ($25.44) Payments DOW

-

EUIIOPEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992 67


Exhibit 3 Plot Plan of Facilities

LIQUID CHEM. LIQUID CHEM

UNDEVELOPED

UNDEVELOPED SITE

ECOLOGY

/ MAIN ENTRANCE

Exhibit 4 Main Technical Data

Location: INA-Petrokemijska industrija Omisalj is situated at the northwest end of the island of Krk, about 7 nautical miles southea: of Rijeka, the largest harbour and one of the most important Yugoslav industrial centers. The island of Krk is connected to the mainlan by Tito Bridge, while Airport Rijeka (5 km from the plants) offers domestic and international flights. The vicinity of the Rijeka Refiner and neighbouring Yugoslav Pipeline Terminal, the prospective railroad connection to the mainland, as well as the forthcoming constructio of the Adriatic Coast highway make this location almost ideal.

;t d

‘Y n

Area: . Total area available for development = 470 ha . Total area = 155 ha . Area occupied by production plants and warehouses = 337 ha

Infrastructure: . Area covered by roads = 77,000 m2 . Total pipeline length between the plants = 53,000 m . INA-Petrokemijska industrija Omisalj’s harbour has a jetty for chemicals which can receive ships up to 60,000 DWT tons (sea depth

15.8 m); a jetty for liquefied gases for ships up to 15,000 cubic meters capacity (see depth 11.4 m); and a general purpose pie 1

r 100 m long with a sea depth of 5.8 m.

if

/ :

Jlant Production Capacity: . Low density polyethylene (PE-LD 70,000 tons/year) . Vinylchloride monomer (VCM 200,000 tons/year) . Ethylene dichloride-oxyonionnation (EDC 150,000 tons/year)



Exhibit 4 (continued)

Power: A high voltage (110 kv) connection with the external energy system Internal electric power capacity = 200,000 MWhla Steam production = 280,000 tons/year Oxygen production (gas) = 21,000,OOO m3/a Nitrogen production (gas) = 25,000 m3/a

Exhibit 5 DINA’s Position on the Petrochemical Value Chain

I I Oil majors (BPIShelllExxon)

OPEC Producers

Exhibit 6 Glossary

Naphtha Cracker (Pyrolysis) Term used to describe the process plant for converting crude oil distillates to a number of petrochemical feedstocks including ethylene.

Polyolefine The basic plastic resins derived from simple petrochemical feedstocks from the cracking process. The raw materials for many

ELJKOPEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992

of the common plastic goods in everyday use, e.g., bags, pipes, packaging, etc.

Vinylchloride Monomer The monomer building block for PVC. Produced by reacting EDE and ethylene over a catalyst.

69


Exhibit 6 (continued)

Raw Petroleum Feedstocks The raw materials input into the petrochemical conversion processes. These are derived from distilled and cracked fractions from crude oil and natural gas.

Polyethylene A large molecule resulting from the polymerisation processes. These are derived from distilled and cracked fractions from crude oil and natural gas.

Low density The most common form of ~lyethylene resulting in a nearly clear resin of reasonable physical and electrical properties.

High density A form of polyethylene that is opaque but of high strength.

Linear low density A form of polyeIhylene that has superior physical and electricai properties for speciaiised applications.

Ethylene Dichloride (EDC) One of the raw materials for the production of PVC, EDC is a highly toxic and volatile material, and is expensive to transport.

Styrene Unit The plant which converts cracker products into styrene. Styrene is the raw material for polystyrene, a relatively rigid plastic with many commercial uses

Ethylbenzene Unit The plant which converts cracker products into ethylbenzene. Ethylbenzene is a commercially important intermediate product and solvent.

Toll Conversion The arrangement by which conversion plant capacity is effectively rented to a company that supplies the raw materials and receives the product(s) of conversion in consideration of a conversion fee (toll).

i

/

Teaching Notes Although much of the financial information has been converted to reflect Western European accounting standards, DINA Yugoslavia is an actual management situation, based on best available information drawn from the managers of the company. The political, economic and company situation are changing almost daily.

Objectives The primary objective of the case study is to prepare senior managers of Western companies for some of the general issues that emerge when partnering with an Eastern or Central European company. To meet this objective, the case study has been written from the perspective of an Eastern European firm seeking a Western partnership. Teams are assigned to evaluate the potential partnership from both the Eastern European and Western market perspectives.

Teaching strategy

Case Study Timetable (guidelines)

Evening before Preparation: the case is distributed to the participants. They are asked to read the case and prepare for general discussion.

Fullowirrg day 30 minutes 5 minutes

1 hour

Open discussion Groups adjourn to study rooms Blue groups prepare case from perspective of “Western Development Corporation” Red groups prepare case from DINA board’s point of view Break

/

/ j

I 70

15 minutes

40 minutes

60 minutes 45 minutes

10 minutes

Group presentations and consolidation of issues Case discussion (O~~io~~l) Open forum with guests evaluating the presentations Case wrap-up

A. Preparation Participants should receive the case study the evening prior to the case discussion. They should be asked to take general notes and be prepared for group discussions.

The class list is divided into groups of five or six. Half the teams are assigned as blue teams and the other half are assigned as red teams. (In the GE course, there were three blue teams and three red teams.)

B. First General Class Discussion The instructor should ask a participant to summarise the key points of the case study for the class. After a brief (10 minute) discussion, the instructor should prepare the class for group work assignments, by outlining the roles of the blue and red teams. Key points to discuss in the opening session:

‘DINA Yugoslavia 1990: The Search for a Foreign Partner’, is a case about a Yugoslavian petrochemical firm that is reappraising its business strategy in the light of a changing political and economic environment. What is the situation?

Marijan Pejcic, head of business development was asked to make a presentation to the board of management. In the presentation, he had to address three questions:

EUROPEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992


-

0 How critical was the present situation? l What strategy or strategies would secure DINA’s

future? 0 Would DINA be attractive to a foreign partner?

The objective of the initial discussion is to get class participants excited about addressing some of the issues faced by the company, and then to reflect on issues that n~lght be specific to an Eastern European company.

C. Allocate teams, hand out discussion material and have the teams adjourn

Company Position Issues for DINA’s Board Why should a Western company partner with DINA?

e What are DINA’s assets? l What concerns might a partner have about

forming a joint venture with DINA?

What changes in company structure could be proposed that might make DINA more attractive to a potential partner?

Should DINA seek partners from industry sectors other than petrochemicals?

The Red Team is instructed to take the position of DINA’s board

What would be the most appropriate form of partnership (e.g. equity joint venture, tolling arrangement, licensing agreement, leasing arrangement)?

It is the board’s responsibility to prepare for an initia1 meeting with a potential foreign partner. Documents h‘rve been prepared by your company‘s business dt*velopment manager and are included as a part of the case study. Please prepare a ten minute presentation th,lt will convince your potential Western partner to proceed with negotiations.

The Blue Team is instructed to take the position of the Western Development Corporation

Company Position Issues for the Western Development Corporation Why should your company partner with DINA?

l What are DINA’s assets? a What concerns might a partner have about

forming a joint venture with DINA?

Should the failure of the Dow-INA agreement be of concern?

Western Development Corporation is a business dtvelopment group responsible for identifying potential pilrtners in Eastern Europe and carrying out initial nrgotiations. It is this group’s responsibility to prepare fctr an initial meeting with the board of DINA petrochemical, a company in Yugoslavia. Documents have been sent from DINA by their business development

What would be the most appropriate form of partnership (e.g. equity joint venture, tolling arrangement, licensing agreement, leasing arrangement)?

D. Case Discussion m<lnager and are included as a part of the case study. Prepare a ten minute presentation that will clarify your company’s interests and concerns regarding a partnership with DINA, before deciding whether to proceed tv.th the next stage of partnership negotiations.

During the group discussions, each team will consider thI* following questions and prepare a brief presentation.

Key Group Discussion Points To encourage team participants to carry out their roles as representatives of DINA or of Western Development, the first red team is asked to make a ten minute presentation, followed by a blue team. The teams should alternate in this way until the presentations are completed. Between each presentation, the instructor or class participants should be asked to clarify points

Political and Economic Environment or share their observations. The following is a list of issues that may be raised.

How do the recent changes in the Yugoslavian and E‘lstern European political environment affect DINA’s pcl\;ition as it seeks a partner? Political and Economic Environment

l Changes in the ownership structure l

Industry Dynamics Private property: current status and future trends

0 Influence of country structure on business \-S hat are the main dynamics of the LDPE and VCM environment (confederation, republic, etc.) inllustries in the 199Os? How might DINA, through a l Changes in accounting and tax structure partnership, be better positioned to exploit these - Beware of creative accounting d\ namics? - How closely does the accounting structure

match Western standards? How are the major Western petrochemical producers - Taxes on revenue rather than profit? liktaly to respond to the opening up of the Eastern - Is ‘profit’ an accepted term? European markets? 0 Currency trends: stability or instability?

EUFOPEAN MANAGEMENT JOURNAL Vol 10 No 1 March 1992 71


Tariff barriers: increasing or decreasing, and for which products? Import quotas on capital items Discount rate on secondary debt: increasing or decreasing? Legal environment: increasing clarity or uncertainty? - Which international laws are advocated by

executives? Management structures: What is legally possible? What is the tradition? Role of the worker councils Cultural factors (work ethic, cross cultural experience, etc.) Relationships with neighbouring countries

Industry Dynamics These should be considered from a country, trading block, and global perspective

l

l

l

State of the industry (young, mature, commodity, cyclical, etc.) - As seen from the host country’s perspective

as compared to Western industry Major trading partners - Countries - Companies The role of intermediaries, trading companies, etc. Degree of vertical integration among key players Products and markets Are products known outside home markets? State of plant, equipment, and technologies - As compared to western standards - Capacity utilisation - Improvement costs - Scrap value - Size of committed capital (active/inactive) Environmental considerations Market growth in relation to GNP Transportation costs of primary products

Company Position The following are a few generic issues to be raised:

l Beware of overly optimistic company presentations Reasons for partnering: long vs. short-term interests Experience with Western companies (joint ventures, buyer agreements, etc.) General management experience Company valuation: how is this established? - Are there capital markets for this company? - What is the effect of inflation on a company’s

value? Financial structure: possible to change? Hidden assets? Workforce - skill level - labour rate trends

Case Wrap-up: Current Status of DINA Marijan Pejcic has been appointed Managing Director of DINA.

l

Ownership still remains unclear - this is a problem for potential partners. The past partnership with DOW does not pose a problem, and is seen by DINA management as a positive learning experience for future alliances. Until recently, petroleum system was centrally planned in Yugoslavia, DINA now has some autonomy. DINA continues to trade through a trading company. Many Western chemical companies are visiting DINA as part of scouting tours of East Europe. DINA’s LDPE technology is competitive in cost/ton terms, but the petrochemical market is quite volatile. There are problems with VCM technology, since revenue barely covers variable costs. Ethylene prices remain firm. Motivation to consolidate position in recent past was poor. Personnel reward system of DINA is not perform- ance related.

- redeployment possibilities l Company environmental record l Relationship to holding or parent company l Portfolio of businesses of company 0 Ownership structure 0 Existing relationships to suppliers and customers

in home country, EEC, abroad 0 Underdeveloped assets l Real influence of political uncertainty on opera-

tions of the company

Open Forum with Guest Evaluator In the initial design of the DlNA case study, Marijan Pejcic was invited to present his review of the case discussion and to highlight the current activities of the managing board. Instructors are encouraged to use this session to host someone from academe or business who has carried out work or has recent experience with the Yugoslavian market.

- insolvency legal position unclear - management authority complex - now changing rapidly but little experiences

in the management of change.

Recommended Additional Reading Materials: Case Studies Restructuring European Petrochemicals: The DOW Chemical

Company, Harvard Business School Publishing Division (1984)

Note on the Ethylene and Commodity Plastics Industries, Harvard Business School Publishing Division (1984)



Note C ,jpyright 0 1990 by the International Institute for hl.magement Development (IMD), Lausanne, Switzerland. N. )t to be used or reproduced without permission. Printed here i\ lth kind approval of the authors.

EM] is also grateful for permission from Mr Jose Maria de Anzizu, founder of the Centre for Organisational Studies in Barcelona to publish this Case Study. Dina Yugoslavia was one of the prize-winning cases submitted to a competition on an East-West Theme, organised by EFMD Brussels, and sponsored by the Anzizu Foundation, in 1991.

IMD 2000 research p thtrough Corpomte Al Eireka Project EU-30

Netherlunds and the 1 candidate at the Univ

THOMAS CUMMINGS, IMD International, 23 Chemin de Bellerive, CH-1001 Lausanne, Switzerland

Thomas Cummings is currently a Research Fellow at IMD International. He is co- founder, with Professor Francis Bidault, of the 1MD Workshop on Business Alliances, a co- principal investigator in the ject on Technology lnnovation mces, and a participant in

With degrees from the ;A, he is currently a PhD sity of London.

YURY BOSHYK, IMD International, 23 Chemin de Bellerive, CH-1001 lausanne, Switzerland

DY Yury Boshyk is Professor of international Geopolitics and the Business Environment at IMD International. He specialises in Eastern Europe and the Soviet Union, and most recently has been advising

Western corporations wishing to pursue an involvement in that region. An author of many articles and books, he has degrees from Oxford University and the London School of Economics.

CHRIS MARTIN, Murex Technology Limited, Cowes, Isle of Wight, UK, PO31 7AW

Dr Chris Martin is the founder of Marex Consultancy, a division of Marex Technology Ltd. He is concerned with business and alliance strategy formulation and imple- mentation pmjects in Eastern Europe. He also leads projects

in the EEC in manufacturing and IT strategy development. He is a graduate of Aston and Oxford Universities, and lM1 Geneva.


DINA Yugoslavia 1990: Case study search for a foreign partner

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