Joint Ventures Explained

Contract Journal - 06/06/2007

In today’s rapidly expanding global economy, we are surrounded by organisations whose chosen route to market is Joint Venture (JV). But what is the reality behind the brand, how can a Joint Venture be used, and when should it be avoided? David Blake, Chairman of commercial and contract management consultant Blake Newport takes a look at the good, the bad, and the ugly…

Defined by the European Commission as ‘undertakings which are jointly controlled by two or more other undertakings’, you’d be forgiven if ‘Joint Venture’ is a term that leaves you more than a little confused. So what is the truth behind partnerships such as Balfour Beatty Skanska, and Sony Ericsson?

Put simply, a Joint Venture is a commercial undertaking entered into by two or more parties, often by setting up a separate joint-venture company in which all parties have shares. By agreeing to contribute equity, this in essence allows each individual party to share in revenue, expenses and control of the enterprise, as well as benefit from the skills and resource available. The venture can be for one specific project, or a continuing business relationship such as the Sony Ericsson. But if you’re thinking that a Joint Venture is simply a strategic alliance you’d be wrong.

Whilst a strategic alliance requires no equity stake by participants, and is overall a much less rigid agreement, in contrast a Joint Venture encompasses a broad range of operations from merger-like set-ups to co-operation for particular functions, such as research and development, production, or distribution. The focus is generally upon the purpose of the entity and not the type of entity, meaning that a Joint Venture may be a corporation, a limited liability company, a partnership or other legal structure depending on a number of constraints such as tax and tort liability.

So you’re clear on the basics, but are Joint Ventures of any commercial benefit?

The more industry-centric of you may be surprised to hear that JV’s are not restricted to the construction industry, but rather are now common in many market sectors, especially the oil and gas industry. Often collaborations between a local and foreign company, Joint Ventures are seen as a viable business alternative in this sector, allowing companies to complement their skill sets while simultaneously offering their foreign counterparts a geographic presence.

The advantages of this approach are clear. Internally, the undertaking allows you to build on your company’s strengths, spreading cost and risk, improving access to financial resources, and new technologies and customers, whilst ultimately generating economies of scale. There is a competitive element to this too with Joint Ventures often pre-empting the competition by creating stronger competitive units that offer greater agility and speed to market and are invariably influencing the structural evolution of industry.

But it’s not all a bed of roses. The Osborn study of 2003 showed a Joint Venture failure rate of 30 – 61%. Of those undertakings listed, 60% ceased to exist within five years, or simply failed to start at all. Joint Ventures involving government partners are seen as particularly risky, showing a higher incidence of failure than their private sector counterparts, and overall, any Joint Venture faced with a situation of highly volatile demand or rapid change has a very low chance of success.

However, with any new venture comes a certain element of risk. But, if properly managed and entered into with a degree of caution, Joint Ventures have the potential to offer major strategic benefits including business synergies; transfer of technology and skills; and true diversification - and when they succeed, they really succeed. Just be clear on your obligations, risks and liabilities.

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