Definition A joint venture is the long-term commitment of funds, facilities and services by two or more legally separate interests, to a combined enterprise for their mutual benefits. A joint venture need not be a separate legal entity or company. Other forms of joint ventures include an agreement to work together formalised through a Heads of Agreement or a Strategic Cooperation Agreement.
A Manufacturing Joint Venture Joint ventures are most commonly entered into to get around a trade barrier that is preventing your entry into a target market. Another way of circumnavigating a trade barrier is to establish a wholly owned manufacturing or assembly subsidiary in an overseas market, however, many companies find the joint venture route a better option. A joint venture achieves many of the advantages of a fully owned operation, without the long lead-time and at a fraction of the cost. What a Joint Venture Involves A joint venture involves: 1. A high level of commitment, funds, time 2. A degree of risk 3. A management voice for both parties 4. Equity participation by each partner
Critical Success Factors
1. Personal rapport between the two partners – get to know each other and fully recognise, understand and accept the other’s requirements in advance 2. Communication channels must be kept open and agreed reporting timetables and format adhered to 3. Positive results for both partners with a reasonable and agreed timeframe
LICENSING A license is a formal agreement between two parties, whereby the licensor gives something of value to the licensee in exchange for certain undertakings and payments from the licensee. Whereas licensing can to some degree be regarded as a “one off” deal, a joint venture will only work if both parties have an ongoing participation through shared contributions and responsibilities. Compared to licensing, joint ventures have the following potential advantages: 1. Better returns through equity participation as opposed to royalties 2. Greater control over production and marketing 3. Better market feedback 4. A direct identity and presence in the market 5. Less chance of your partner becoming a competitor 6. A more effective pooling of each partner’s strengths
Benefits There must be real benefits for both partners. If the partnership is successfully established, it will provide: • Shared financial commitment • Shared risk • Growth • Mutual learning & professional development • Increased research capacity • Widening markets / programs / opportunities
The Disadvantages of a Joint Venture 1. Potentially high capital cost plus ongoing financial support are required 2. Profitable returns may take some time to achieve 3. High level of commitment of staff and management 4. Time consuming (especially where a new venture is involved)
5. Potential for conflict with your joint venture partner 6. Cultural differences and communications difficulties 7. A minority equity position may work against you 8. Difficult to get out of quickly 9. Working in a different legal and commercial system 10. Political risks in the country where the joint venture is based
Steps to a Joint Venture
1. Recognise your options 2. Determine the resources you can commit – Time – Money – People 3. Select and understand your market – Consumer research to pinpoint the opportunities – Comprehensive assessment of the investment and legal environment to justify the risks and establish the costs of the proposed joint venture.
4. Determine a joint venture strategy – What type of joint venture – Where – With whom – What time-frame – How much will it cost 5. Determine the objectives of the joint venture – What do you hope to gain from the joint venture? – What does you partner hope to gain? – What will the joint venture actually do? 6. Select a Partner – Compatibility is crucial – Take time to get to know each other – Understand each other’s expectations 7. Exchange letters 8. Feasibility study: a) Establish a business structure b) Resolve investment and legal Issues – often a time consuming process c) Evaluate potential investment sites 9. Agreement in Principle 10. Negotiation
11. Conclusion of a Heads of Agreement – this should include agreed Performance Targets and Exit Clauses - it is important to think about these at the start of the relationship when you and your partner are on good terms. 12. Joint Venture Agreement 13. Staged implementation 14. Joint venture fully operational 15. Review 16. Expansion
Steps if the Joint Venture Runs into Difficulties
1. Arbitration 2. Quitting 3. Dissolution
Bajaj auto plans JV in Indonesia
Bajaj has set up a joint venture in Indonesia with PT Abdi Raharja to expand its presence in south-east Asia. PT Abdi Raharja, owned by the Gobel group, is the sole distributor of Bajaj’s two-and three-wheelers in Indonesia. Bajaj Auto, the country’s second largest two-wheeler maker, has set up a joint venture in Indonesia with local partner Pt Abdi Raharja. The objective is to expand its presence in Southeast Asia. Bajaj auto, which has set up its first overseas plant for two-and three – wheelers in Indonesia, is keen to team up with a local partner to take on competition from market leader Honda and Yamaha. Bajaj Auto’s technology partner Kawasaki also operates in Indonesia through subsidiary company Kawasaki Motors Indonesia (KMI). PT Abdi Raharja, owned by the Gobel group, is the sole distributor of Bajaj Auto two-and three-wheelers in Indonesia. The three-member team had discussions with shareholders of the Indonesian company and also meet
representatives form local industry associations and banks. The team has prepared a comprehensive business strategy for the region which will be presented to the company’s board, which plans to increase its exports by 33.7% Indonesia, which sells around 2m two-wheelers annually, is a very big market for step-thru, while motorcycle sales account for just around 3 Lacs units. Honda is a clear leader with over 60% of the market followed by Yamaha, Suzuki and Kawasaki. Chinese and Taiwanese two-wheeler companies have, in recent years, been active in the Indonesian market. Besides, for Bajaj Auto, its proposed manufacturing unit in Indonesia will open up big opportunities in adjoining countries. The plant has also enabled the company escape the high import duties that are levied in Indonesia.