Joint ventures

Sep, 09 2020

What Is a Joint Venture?

A joint venture is an arrangement between two or more business entities or individuals that agreed to start a new business activity. Each entity contributes assets to the joint venture and agrees on how to distribute income and expenses.

Each entity in the joint venture could be also groups of individuals, companies, or corporations. A joint venture may be set up by agreement of the parties that defines resources, such as money, properties, and other assets, each entity will bring to the joint venture company. The agreement also establishes how the venture will be managed and controlled.

A joint venture might involve two companies with different areas of commercial activity collaborating to produce new items or deliver a new service. This type of business is also very beneficial if a company strives to expand a new market in a foreign country. 

Salient Features of Joint Venture

1) Companies involved in a joint venture have different qualities.

2) Joint venture is a deal with combination of diversified culture, geographical differences, and increased profit generation.

3) Partners share control over all essential business processes, operations and administrative tasks.

4) Partners allocate their resources, such as technology, capital, and staff. By sharing expertise and resources, innovative products are created.

5) Joint ventures exist for a limited period. Two companies come together for a specific purpose, and once that purpose is fulfilled, the companies can call-off their venture, or they can get into a longer partnership if both companies agree.

6) No special name to the firm. Both companies can use the brand names that they already have to get into a joint venture.

Advantages of Joint Venture

1) Provide companies with the opportunity to gain new capacity and expertise;

2) Enter related businesses or new geographic markets or gain new technological knowledge and advantage;

3) Access to greater resources, including specialized staff and technology; 

4) Share risks with a venture partner;

5) Joint ventures can be flexible. For example, a joint venture company can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business’ exposure. 

6) Companies can gradually separate a business from the rest of the organization, and sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

Objectives of Joint Venture

1) Joint venture companies are helpful to gain economies of scale.

2) Joint ventures will help you to extend your business horizons, even on international scale.

3) Companies can use resources and strengths of each other to boost their benefits and profits.

4) Joint ventures involve low risks, since losses are also shared.

Joint Venture vs. Partnerships and Consortium

A Joint Venture is not a partnership. Joint ventures join two or more different entities into a new one, which may or may not be a partnership.

The term “consortium” may be used to describe a joint venture. However, a consortium is a more informal agreement between a range of different businesses, rather than creating a new one. 

Requirements for Joint Ventures

The key elements to a joint venture may include (but are not limited to):

1) The number of parties involved in a deal;

2) The scope in which a joint venture company will operate from the view of business geography, products, technologies;

3) What kind of contribution each party can provide to the Joint Venture;

4) Structure of the Joint Venture. The parties should weigh up all pros and cons, develop a term sheet and set goals they want to achieve;

5) Proportion of Initial contributions and ownership for each party;

6) Arrangements and conditions for closing the deal;

7) Manner of the Joint Venture control and management;

8) How the JV will be staffed

Examples of Joint Ventures

The international business history is replete with many examples of successful joint venture projects, the most known of them are described below.

1. Google parent company and the pharma company Glaxo and Smith decided to enter into a joint venture agreement to produce bioelectric medicines the ratio of the ownership was 45%-55%. The joint venture lasted and was committed for 7 years with a capital of Euro 540 million.

2. The goal of the joint venture between the taxi giant UBER and the heavy vehicle manufacturer Volvo was to produce driverless cars. The ratio of the ownership is 50%-50%. The business worth was $350 million as per the agreement in the joint venture.

3. Sony and Ericson’s deal is also a good example of Joint Venture, because they joined their best practices and resources to manufacture smartphones and gadgets. After several years of mutual business activity, Sony eventually acquired Ericson mobile manufacturing division.

4. The 2008 Joint Venture deal between NBC Universal Television Group (Comcast) and Disney ABC Television Group (The Walt Disney Company) is also well-known globally. The objective of the Joint Venture was to create a video streaming application or a website named “HULU”. This product provides streaming quality content which is on computers, laptops or mobile phones. The product became very popular with the offering lining up to $1 billion.

5. Another famous example of Joint Venture formation is the agreement between Kellogg and Wilmar International Limited. Kellogg International entered the market to expand its presence in the Chinese market to sell cereals and other snack foods to consumers in China. Joining hands together with Wilmar resulted in a profitable synergic relationship for both the companies as Wilmar International provided extensive distribution and supply chain network to Kellogg International and also Kellogg managed to enter into a new geography with this agreement and relationship.

6. A limited and B limited has both different skill sets. A has a spare land where also he has manpower and labor supply in abundance. On the other hand, B limited has expertise in the construction of commercial and residential complexes for housing but needs land to construct in upon. Hence this becomes a pure example of a true joint venture where A Limited and B Limited decides to enter into a joint venture agreement and do business.

7. One of the more well-known joint venture deals is the “Caradigm” venture between Microsoft Corporation and General Electric (GE) in 2011. The Caradigm project was launched to integrate a Microsoft healthcare intelligence product with various GE health-related technologies.

It is interesting that at many firms, joint ventures and partnerships will play an outsize role in those efforts, both as a vehicle for sharing costs and reducing capital needs during the crisis and as a way to position themselves for growth once it ends. After all, in industries experiencing great pressure—like automotive, retail, and upstream oil and gas—joint ventures are quite common. GM and Volkswagen, for example, each have several dozen, and JVs account for almost 80% of the upstream production of the largest international oil and gas companies. At these and other energy businesses, joint ventures are also key to managing the transition from fossil fuels to renewables. More than 50% of the largest assets in offshore wind and solar are structured as joint ventures—and such investments are a critical way for companies like Royal Dutch Shell, BP, Total, and Equinor to share risks, build capabilities, and meet ambitious targets to reduce greenhouse gas emissions.

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