Cobalt Systems and SilverLight Electronics

Role of SilverLight

By Catherine Tinsley

You represent SilverLight Electronics. You have stake in a JV. Additionally, you could face a public
been searching for a U.S. Joint Venture partner for relations disaster if the government and public
some time, because your company would like to perceive SilverLight to be giving up Korea's future.
collaborate on research and development. The PC The public is aware of SilverLight's talks with
industry is advancing too fast for any one company to Cobalt, and a Samsung spokesman has already
stay ahead of all technological developments. You warned that, 'Alliances like those being discussed by
risk falling behind in this industry if you do not team SilverLight and Cobalt do not serve Korea well.
up with another company. Moreover, the weakening Korean manufacturers don't have any chance to learn
of the yen makes Japanese imports less expensive about technology, thus these alliances could weaken
and your competition fiercer both within Korea and the whole Korean computer manufacturing base.'
in other markets. You would like as much equity ownership as
possible. To accept anything less than half
Cobalt Systems would not necessarily be your first ownership, you must be satisfied with your outcome
choice as a partner. You remember the 1995-1996 on several of the other issues outlined below. Thus,
negotiations when Cobalt insulted SilverLight. your options are:
During those negotiations, Cobalt's attitude suggested
that SilverLight's management and operations were a. Above 51% equity ownership for SilverLight.
inferior. It was impossible to work with this b. 51% equity ownership for SilverLight.
patronizing attitude, and SilverLight was forced to c. Below 51% equity ownership for SilverLight.
terminate the negotiations. Now, you would prefer to
negotiate with a small U.S. computer company that is
likely to have the technology you are seeking, that Top Management Team
has a flexible structure, and does not have a superior
attitude. However, these companies do not seem Although SilverLight and Cobalt's corporate cultures
interested in forming a Joint Venture right now. are somewhat similar (treating employees like family,
Preliminary negotiations with Cobalt have already emphasizing the importance of education and
produced seven issues, as well as three options on development), you are quite sure that a large
each of the seven issues. You may think of other American multinational corporation can not enter
options, but if you do, you must communicate those into the business environment in Korea without a
options to the other party prior to the negotiation. local and well-connected Korean partner. SilverLight
management has local Korean connections, thus they
should make up the majority of the JV's top
Equity Ownership management team (of: CEO, CFO, Director
Marketing, Director Sales, Director Personnel,
You find Cobalt's traditional policy of 100% Director Operations, Director of R&D, and Director
ownership in foreign countries insulting. Since of External Relations). Moreover, Cobalt's strong
Cobalt is seeking some sort of JV, obviously they are corporate culture and centralized decision making
not interested in 100% ownership in these may hurt the ability of the JV to be flexible and
negotiations. Yet, you are pretty sure they will insist respond rapidly to any changes in the relatively
on a high percentage of ownership (such as 70%). volatile Korean PC market. It makes sense for the
You could never agree to this. Although government Directors of Marketing, Personnel, and External
regulations will allow you to take less than 50% Relations to be from SilverLight, as these positions
ownership, SilverLight has never accepted a minority have the greatest need of local knowledge. You

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understand that some top management need to be SilverLight. There are two products SilverLight is
from Cobalt, but certainly it is not right to have a particularly interested in: 1) Cobalt’s world-
Joint Venture wherein all top management is from renowned notebook technology, and 2) their new
one partner. Your options are: multimedia technology that is currently under
development.
a. CEO, Operations, and R&D from Cobalt; all
others from SilverLight. Cobalt’s notebook technology is already under U.S.
b. CEO, Operations, R&D, and Finance from patent, which expires in 14 years. Sometimes
Cobalt; all others from SilverLight. companies sharing such patented technology ask for
c. All top management from Cobalt, with local up to a 7% royalty fee; however, you would argue
middle management hires expected to move to that since the technology is to help the Joint Venture
upper management eventually. produce better products, Cobalt should pitch in the
technology at a reduced fee as part of their
contribution (just as you will be contributing
Financial Accounting Practices marketing know-how). It is always possible for
SilverLight to reverse engineer Cobalt’s notebook
You suspect Cobalt will try to insist on using the U.S. once it does hit the market. The Korean government
based General Accounting Accepted Practices does little to discourage reverse engineering and
(GAAP), rather than the more flexible International building on each other’s products. Indeed, it often
Accounting Standards Committee (IASC) practices grants Korean patents to reverse-engineered products
that SilverLight Electronics now uses. You see this as that are only slightly modified and then submitted as
an example of Cobalt having a very heavy hand in a ‘new’ product. The government claims this reverse
managing its operations overseas. Besides, IASC engineering and modification process results in
standards are much more flexible and are accepted by product improvement and industry development.
an international body of accounting experts. These However, your preference is to get direct access to
IASC standards, for example, permit choices that are this technology, through Cobalt, to maintain good
prohibited under U.S. GAAP, such as revaluation of will and save development costs.
assets and capitalization of development costs.
Moreover, if Cobalt needs some standardization You are also eager to get access to Cobalt’s new
across its businesses (which are likely to use GAAP multimedia technology and to help Cobalt further
since this is required for quarterly filings at the develop this product. Your interest in collaborating is
Security and Exchange Commission (SEC), there are to win one of the Korean government's cherished
formulas for converting IASC-based reports to Industrial Achievement Awards. To be eligible for
GAAP reports. You suppose you could agree to keep this award the majority of the R&D has to be done in
two sets of books (one using GAAP standards and the Korea. Winning this award could be a win for both
other using those of IASC), even though paying for companies. SilverLight would gain the national
two quarterly performance reports is obviously more prestige associated with the government medal, and
costly than paying for one. Thus, your options are: Cobalt could develop its technology faster with
collaboration. Moreover, both companies would
a. Use IASC standards for the JV benefit from the positive publicity. Consumer tastes
b. Use both IASC and GAAP standards (two sets and government tax policies favor locally made
of books) products. Winning this award would demonstrate a
c. Use GAAP standards commitment to Korean development. It would silence
the critics of SilverLight's Joint Venture, give
employees reasons to be proud, and may make it
Access to Technology possible to apply for government tax favors. If your
technology won the coveted Industrial Achievement
A major reason for SilverLight to form a JV is to get Award, it would be published in the government's
access to state-of-the-art technologies. The Korean prestigious Achievement Award Papers, allowing
government encourages international investment in other firms access to your invention. The purpose of
Korea, in part, in order for Korean industries to the Industrial Achievement Award is to honor the
acquire technologies from abroad. Foreign firms innovative firm, but then allow the other firms to
investing in Korea know these rules of exchange-- build on this innovation, so that the industry as a
sharing technology in return for investment and whole develops.
market opportunities. It would be counter-normative
for Cobalt to withhold its technology from This publicity is of little concern to you, however,
since you calculate it would take your competitors 18

2 Cobalt Systems/Role of SilverLight

months to reverse engineer, modify, and bring a Joint Venture Name
modified version of the multimedia PC to market. A
government award, on the other hand, is an asset to Brand identity is important to SilverLight. When you
SilverLight and the Joint Venture, forever. Your first entered the U.S. television market 20 years ago,
options are: you made the mistake of selling to low cost retailers,
which weakened your brand image. Since then you
a. Receive access to both Cobalt’s notebook have worked hard to establish a worldwide identity
technology (at some negotiated royalty rate) that means high quality and high service. Thus, you
and their multimedia technology. would like the JV, which will be producing high-end
b. Receive access to Cobalt’s notebook technology products, to carry the SilverLight name.
technology (at some negotiated royalty). As well, you think it makes perfect sense that the JV,
c. Receive access to neither technology. which will be based in Korea where SilverLight
already has enormous brand recognition, carry the
SilverLight name. Your options are:
Access to U.S. Market
a. Only SilverLight identity in the JV name.
One other motivation for forming a joint venture with b. SilverLight identity as well as Cobalt identity
Cobalt is to increase your exports to the U.S. market. in the JV name.
Of course, the Korean market is still important to c. No SilverLight identity in the JV name.
you; you want to be seen as a leader in your home
market. Yet, the Korean government continues to
promote an export driven growth strategy that Access to Korean markets
companies are expected to pursue. SilverLight's ratio
of exports to total sales is now 75% (up 5% from last You know that Cobalt’s major reason for establishing
year). Due to regional economic difficulties, Korean a JV is access to sales, distribution, and after-sales
exports to Japan and Europe fell for the first quarter service networks. In Korea there are no independent
of 1998, while those to the U.S. rose. Thus, to distributors to channel a product to retail outlets. All
continue the government's export strategy means distributors are linked to their own manufacturers.
SilverLight must have greater access to U.S. markets. There are also no local companies to provide
This could be access for the PC’s made by the Joint independent customer support. The margins on PC’s
Venture, meaning they would be marketed and sold are simply too low to support this service, thus all
through Cobalt’s existing marketing and distribution customer support companies are also linked to the
channels. Cobalt could also open its existing manufacturer. Usually the manufacturer, distributor,
marketing and distribution channels to other and support company are all part of one Chaebol.
SilverLight products for a fee (typically 5% of Although an outside company may be able to buy an
revenues). Thus, your options are: equity share in both a distributor and after-sales
servicer, these firms will not give the outsider the
a. Access to Cobalt’s marketing and distribution same attention they give to the electronics firm that is
channels for JV products and other part of their same Chaebol. Thus, a U.S. firm may
SilverLight products. form a JV with a Chaebol firm (such as SilverLight
b. JV access to Cobalt’s marketing and Electronics) in order to use its distributors and after-
distribution channels. sales servicers. As well, Cobalt may try to gain
c. No access to Cobalt’s channels for either the access to SilverLight’s networks for other Cobalt
JV or for other SilverLight products. computer products. The options are:

a. Neither the JV nor other Cobalt products have

access to SilverLight’s networks.
b. JV has access to all SilverLight’s networks.
c. Both the JV and other Cobalt products have
access to SilverLight’s networks.

3 Cobalt Systems/Role of SilverLight

 Cobalt Systems and SilverLight Electronics
Planning Document for SilverLight

1. Assume that you have 100 percentage points to allocate to the 7 issues. Please distribute the 100 percentage
points, according to the importance of the issues for you. For example, if the first issue (Equity Ownership) was
extremely important to you, and all the other issues were equally less important, you might allocate your 100
percentage points as follows,

Example:
40% Equity Ownership
10% Top Management Team
10% Financial Accounting Practices
10% Access to Technology
10% Access to U.S. Markets
10% Joint Venture Name
10% Cobalt’s access to Korean Markets
100% TOTAL

Your Allocation:
Equity Ownership
Top Management Team
Financial Accounting Practices
Access to Technology
Access to U.S. Markets
Joint Venture Name
Cobalt’s access to Korean Markets

100% TOTAL

2. Now assign a value of 1 to 100 points to each option. The only requirement is that the points for option ‘a’ must
be the largest and the points for option ‘c’ the smallest, since option ‘a’ is always the best choice for SilverLight
and option ‘c’ always the worst. For example, you may decide that more than 51% equity ownership is worth
100 points and that 51% is worth 50 points, and below 51% is worth 10 points.

_______% Equity Ownership (percentage from your answer to Question #1)

Assign from 1 to 100 points to each option below:
______ a. Above 51% equity ownership for SilverLight
______ b. 51% equity ownership for SilverLight
______ c. Below 51% equity ownership for SilverLight

4 Cobalt Systems/Role of SilverLight

 Cobalt Systems and SilverLight Electronics
Planning Document for Representative of SilverLight (cont’d)

_______% Top Management Team (percentage from your answer to Question #1)
Assign from 1 to 100 points to each option below:
______ a. CEO, Operations, & R&D from Cobalt, all others, SilverLight
______ b. CEO, Operations, R&D, and Finance from Cobalt, all others, SilverLight
______ c. All top management from Cobalt

_______% Financial Accounting Practices (percentage from your answer to Question #1)
Assign from 1 to 100 points to each option below:
______ a. Use IASC standards for the JV
______ b. Use both IASC and GAAP standards (2 sets of books)
______ c. Use GAAP standards for the JV

_______% Access to Technology (percentage from your answer to Question #1)

Assign from 1 to 100 points to each option below:
______ a. Receive Cobalt’s notebook and multimedia technology
______ b. Receive Cobalt’s notebook technology
______ c. Receive neither Cobalt’s notebook nor their multimedia technology

_______% Access to U.S. Markets (percentage from your answer to Question #1)
Assign from 1 to 100 points to each option below:
______ a. Access to Cobalt’s marketing and distribution channels for JV and other SilverLight
products
______ b. JV products have access to Cobalt’s marketing and distribution channels
______ c. No access to Cobalt’s channels

_______% Joint Venture Name (percentage from your answer to Question #1)
Assign from 1 to 100 points to each option below:
______ a. Only SilverLight identity in the JV name
______ b. SilverLight identity as well as Cobalt identity in JV name
______ c. No SilverLight identity in JV name

_______% Cobalt’s access to Korean Markets (percentage from your answer to Question #1)
Assign from 1 to 100 points to each option below:
______ a. Neither JV nor other Cobalt products have access to SilverLight networks
______ b. JV has access to all SilverLight’s networks
______ c. Both the JV and other Cobalt products have access to SilverLight’s networks

In order to analyze the value to you of a potential agreement with Cobalt Systems, multiply the percentage
weight times the value of the option chosen from Question 2 and sum across issues.

FINAL NOTE: Assume for this negotiation that if you cannot get an agreement with Cobalt, your “going it
alone” strategy would be worth 30 points.

5 Cobalt Systems/Role of SilverLight