Joint Ventures to Grow Revenues, Reduce Costs, and Mitigate Risk

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A joint-venture is a business agreement between two (or more) parties to create a new entity, with new assets, resources and management control. The goal of the new entity is the same one as all other business endeavors: to grow revenues and/or reduce costs and/or mitigate risk.

The term “joint-venture” (JV) is understood quite differently from country to country around the world. The global regions and each specific country have different laws and understanding of what constitutes a “joint venture,” especially as it relates direct capital investments.

Even within the European Union there are numerous terms for forms of JVs (Groupement d’Intérêt Economique, Konzern, Unión Temporal de Empresas, Gemeenschappelijke Onderneming…) and each form has slightly different set of legal and common law requirements, as well as business practices involving partnering solutions.

The so-called BRICS (Brazil, Russia, India, China, and South Africa) have been targeted for massive investments over the past twenty years, forcing their governments to update JV laws and international collaborative Agreements, mostly involving rules of engagement of capital flowing into and out of their countries.

Most international JVs involve some form of equity investments, and public authorities in the high growth emerging markets want to ensure that most if not all eventual profits stay at home to grow the domestic economy. In India, for example, in less than a generation, foreign investment has moved from US$100M thirty years ago to nearly US$100B today. In China, foreign investments have been even more impressive.

JVs are one form of the many collaborative frameworks which are changing the way we work in the new networked society. All forms of partnership models are proliferating at a remarkable rate in all sectors and across all geographies:

• Strategic Alliances – formal agreements to work together
• Mergers & Acquisitions – financial control and ownership
• Consortium Development – member firm organizations
• Commercial Partnerships – selling and reselling partnerships
• Multi-Channel Networks – distribution ecosystems

These new models of organization are being designed and implemented in all functional areas of private companies, non-profit and non-government organizations: from marketing & sales to production, operations, research & development, and all the back office functions.

Collaborative architecture to design the best network partnering solution to implement for each firm is critical to success. The issues concerning the optimal value are centered on two key concepts:

• Open versus closed system/platform/processes/membership
• Hierarchy versus flat structure/decision-making/organization

International joint ventures in particular are becoming more popular, especially in capital-intensive industries such as oil and gas exploration, mineral extraction, and metals processing.

But all sectors are implementing advanced value networks. For example, manufacturing is also a huge beneficiary of joint venture development, motivated by the lower costs of labor and overall operating expense. In this case, the basic reason for the JV is simple: to save money on production costs, especially on labor.

Joint ventures are extraordinarily helpful to some companies in gaining access to foreign markets. Neither party may really be interested in the primary project, but they participate simply to gain access to the new market. Such projects generally represent a direct investment, which is sometimes limited by laws in the country in which the operation takes place. One of the aims of a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a project. This explains why some countries do not permit foreign companies to hold majority interests in their domestic business ventures.

What are the benefits and advantages of JVs?

• Grow Revenues – access to new sales opportunities & markets
• Grow Capabilities – expand knowledge and expertise
• Reduce Costs – shared facilities and resources
• Mitigate Risk – explore initiatives in a safe, low-risk structure
• Low Capital Investment – learn optimal partnering solutions
• Spin Off – transition a business unit to another firm
• Worldwide Coverage – complementary geographies
• Limited Term – test and pilot project for controlled initiatives
• New Product Development – new structure for new products

What are the concerns and pitfalls of JVs?

• Governance – lack of agreed to decision-making processes
• Imbalance – investment and/or resource perceived inequalities
• Leadership – compensation and/or unequal recognition for JV
• Cultures – conflicting styles outside parent JV companies
• Contracts – inappropriate focus on legal and contractual issues
• Nationalization – foreign governments can preempt rule of law

Joint Ventures are one form of collaborative frameworks which contain huge potential benefits for the parent companies who create them.

JVs are similar to but different from acquisitions, mergers, strategic alliances and pure venture capital investments. Cooperative agreements to share technical services, for example, can adapt a JV structure without equity investments.

Contingency planning is of course a necessary step in the formation of any joint venture. But the overall benefits, weighed against the mitigated risks and limited costs make JVs, as well as strategic alliances and other collaborative frameworks a very attractive, flexible business proposition.

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