Managing a partnership 7,000 miles away

June 13, 2011

The big idea: When partnerships 7,000 miles away go awry

The scenario: On Thanksgiving Day in 2008, Jeremy Leahman, president of Filtroil, based in Richmond, was on a plane headed to China. One of the Chinese partners, Liu Li, was making demands: a monthly raise for himself and his wife, a new company car and an increase in profit-sharing. The other Chinese partners, Qian Kai Nam (Qian) and Shea Kai Young (Thomas) who ran Shenzhen Filtroil were upset. Money was only part of the problem; Liu’s attitude was the rest.

The original Filtroil partnership was somewhat serendipitous. Just as Leahman was strategizing how to get Filtroil to Asia, Thomas contacted him with a proposal: Manufacture the filtration system in China for 75 percent less than in the United States, and let him be the distributor. Thomas also proposed that another gentleman, Qian, could manufacture Filtroil products and be general manager for a joint venture. Leahman connected with them instantly. Shenzhen Filtroil, a 50-50 joint venture between Filtroil and Qian and Thomas, was born.

Liu had the technical and operational capability to manufacture Filtroil products. And he needed the Filtroil business; his factory was on the verge of bankruptcy.

Once settled into making Filtroil products, however, Liu revealed his secret — a special recipe for making zinc. Zinc was too soft a material to make Filtroil canisters, but it was good for parts with low-rpm applications, and it was 40 percent less costly than aluminum. A new partnership emerged, a merger between Shenzhen Filtroil and their supplier, Liu, to create an estimated $10 million zinc business. Both businesses would operate under the same roof. Liu owned 10 percent of the merged factory, and Shenzhen Filtroil owned the rest. Liu would have guaranteed business with growing sales insuring his daughter would be able to attend school. Qian would manage Filtroil and add the zinc business. Thomas would add zinc to his monthly trade shows. All seemed good.

By 2008, however, the merged factory was not operating well. The friendship and buyer-supplier relationship Qian and Liu had developed was eroding. They used to sit in the corner, smoke cigarettes and have serious metallurgy conversations. Now, Liu was in one corner and Qian in another.

The Sunday before Thanksgiving, Leahman got a phone call from Thomas on Qian’s behalf. Liu was making extraordinary demands. The 30 percent commission Liu wanted would wipe out the business’s profit and more. Qian and Thomas said a decision needed to be made about Liu’s involvement. Was there an option that could save the partnership? Was the zinc business more important than the relationships involved?

The resolution: Leahman spent two days discussing options with Qian and Thomas. No one wanted to abandon the zinc business, yet Qian and Thomas no longer trusted Liu. The partners talked about the financial implications of Liu’s demands on the business, which Liu didn’t seem to fully realize. In the end, Leahman, Qian and Thomas decided to sever all ties with Liu. Ten months later, Shenzhen Filtroil moved back to Shenzhen, and Liu was merely one of several suppliers. There was no zinc business.

The lesson: When strategic partnerships are involved, the relationships between the partners and the spirit of the alliance — an implicit understanding of why they are in business and how they will work together — can transcend business concerns. Liu’s demands didn’t fit with the intangible understanding that helped launch the business. In the end, the relationships were worth more than the business.

— Lynn Isabella

Isabella is an associate professor of business administration at the University of Virginia’s Darden School of Business.

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