Joint Venture

A joint venture is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity. Each entity contributes assets to the joint venture and agrees on how to divide up income and expenses.

The creation of a joint venture is a matter of facts specific to each case. Although there is no statutory definition of a joint venture, courts in several states such as New York have recognized the following are the elements of this type of association:

• An agreement (written or oral) between the parties manifesting their intent to associate as joint venturers.
• Mutual contributions by the parties to the joint venture.
• Some degree of joint control over the single enterprise or project.
• A mechanism or provision for the sharing of profits or losses.
• A joint venture is not a partnership or a corporation, although some legal aspects of a joint venture (such as income tax treatment) may be ruled by partnership laws.

There are four main reasons why companies form joint ventures:

• Leverage Resources: A joint venture can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other company might have superior distribution channels.
• Cost Savings: By using economies of scale, both companies in the JV can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technology advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising or labor costs.
• Combined Expertise: Two companies or parties forming a joint venture might each have unique backgrounds, skillsets, and expertise. When combined through a JV, each company can benefit from the other's expertise and talent within their company. Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners' rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations, and the right to the profits, and the responsibility for losses of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.
• Enter Foreign Markets: Another common use of JVs is to partner up with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can usefully enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network. Some countries also have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.

Examples of Joint Ventures

• 1. 1 – Google’s Verily Life Sciences – GlaxoSmithKline Example: Google’s parent company Alphabet and GlaxoSmithKline, announced that they would associate themselves with a joint venture in the ratio of 45%-55% to produce bioelectronic medicines. Both of these companies got committed for 7 years and Euro 540 million.

• 1. 2 – Volvo Uber Example: Volvo and Uber have announced that they would form a joint venture to produce self-driving cars. The ratio would be 50%-50%. As per the agreement, they are making a $300 million investment for this JV.
  2. 3 – Bank’s Digital Currency Example: Even banks have formed a joint venture to create something new. Four world-class banks – Deutsche Bank, UBS, BNY Melon, and Santander, came together in a JV to produce a new form of digital cash. The purpose of this JV is to create an alternative to the bitcoin using the same blockchain technology.
  3. 4 – Starbucks and Tata Global Beverages: Perhaps the best example of a Joint venture is between Starbucks Corporation and Tata Global Beverages. Starbucks Corporation, a chain store of the USA serving coffee and such other drinks, pre-packaged foods, and evening drinks. It is famous for its coffee throughout the globe. Tata Global Beverages is the world’s second-largest producer of tea throughout the world and one of the largest producers of coffee in the world. Tata Global Beverages leveraged the goodwill that Starbucks holds for the coffee serving retail chains and captured the market of India by forming a Joint venture with Starbucks. Both firms came together and created a private limited company named as Tata Starbucks limited in 2012. It is 50:50 owned by both the firms, and presently they have around 140-retail outlets throughout the Indian Territory. Here, the basic model is that one has expertise in tea manufacturing and tea production, while the other has a brand image in the market of serving coffee at the market retail level. This combination has seen good success in the market.

Risks of Joint Ventures
There are several benefits to forming a joint venture, as detailed above, however, joint ventures can also create challenges. Forming a venture with another business can be complex in terms of the time and effort required to build the right business relationship. A new JV can cause the following problems:

• The new set of partners may have different objectives for the joint venture, and pursuing separate objectives may threaten the success of the venture. For this reason, it is important when forming a joint venture arrangement that the objectives of the venture be clearly defined and communicated to everyone involved at the outset.
• Cultural mismatches and different management styles between the two firms engaged in the JV can lead to poor integration and cooperation, again threatening the success of the enterprise. It’s best to pursue JV opportunities with companies that have a corporate culture similar to that of your own company.
• Imbalance in the levels of expertise, investment, or assets brought into the venture by the different parties may lead to problems between the two parties. One party or the other may begin to feel that it is contributing the lion’s share of resources to the project and resent a 50/50 distribution of profits. This can be avoided by frank discussions and clear communication during the formation of the joint venture, so that each party clearly understands – and readily accepts – its role in the JV.