1 Nov

Joint Venturesand Strategic Alliances

… are more and more corporations getting involved in

strategic alliances and joint ventures?

Why…

Growing a Company

• There’s only four ways a company can grow and/or increase in scale, scope or capacity:– Organic Growth (growth from within)– Strategic Alliance– Joint Venture– Merger/Acquisition

Basic Components of a Strategic Alliance

What is a Strategic Alliance?

• The mutual coordination of strategic planning and management that enable two or more organizations to align their long term goals to the benefit of each organization – generally, the organizations remain independent.

• Bottom line, strategic alliances are partnerships that stress mutual problem solving.

• Each party in the alliance maintains autonomy.

Basic Components of a Strategic Alliance

• Confidentiality agreement• Mission, vision, values statements• Long-term goals and objectives• Plan for implementation of activities• Plan for managing the process and measuring

success• Exit strategy

Other Characteristics of a Strategic Alliance

• May or may not be a contractual arrangement, but this is always recommended.

• Long Term Relationship• High Level of Trust• Win/Win (Mutual Advantage)• Top Management Interchange• Continuous Exchange of Ideas

• Business Process Re-engineering• Focus on Significant Value-Added• Mutual Dependency• Strategic Framework in Place• High Level of Commitment• Increased Capabilities/Capacities• Enhanced Business Opportunities• Improving Shareowner Value

Examples of Best Practices forStrategic Alliances

ALLIANCE• Long Term Relationship• High Level of Trust• Win/Win (Mutual Advantage)• Top Management Interchange• Continuous Exchange of Ideas• Business Process Re-

engineering• Focus on Significant Value-

Added

PREFERREDSUPPLIER• Longer Term Relationship• Trust Earned• Some Differentiation in

Products/Services• Quality Programs Implemented• Price & Quality Considered• Begins to Focus on Total Value

VENDOR• “Closed Book”• Little Differentiation in

Product/Service• Minimum Contract Life• Contract Drive• Focus on Lowest Price

Cultivating Strategic Alliances

Types of Suppliers

• Traditional Suppliers– Characterized by multiple sources of supply, emphasis on

price, and short term contracts.

• Preferred Suppliers– Characterized by a high level of quality, delivery or price

competitiveness, positive reaction to unforeseen needs, changes in volume or specifications. Preferred suppliers take initiative to suggest better services or products and provide advance notice of factors or conditions that may affect operations.

Types of Suppliers (cont’d)

• Alliance Suppliers– Characterized by longer term contracts for specific

products, services, and performance standards. – Large volume commitments and joint planning efforts are

common. – An in-depth analysis of financial strength, facilities,

location, capacity, technology, labor, management, costs, terms, conditions of performance, and other factors would be completed for these suppliers.

– Relationships with alliance suppliers should be based on mutual trust, support, information sharing, and joint continuous improvement efforts.

Basic Components of a Joint Venture

What is a Joint Venture?

• A “union” of two or more parties who contractually agree to contribute to a specific venture which is usually limited to a specific task for a specific period of time.

• A joint venture is a separate legal entity generally governed under partnership law—which varies from state to state.

• The JV parties can be individuals, partnerships or corporations that continue to operate independently from the other except for activities related to the Joint Venture.

REASON FOR JV’s

JV provides a lower risk option of entering into a new country. .example- Motorola entered

India in JV with blue star company, a brand with repute and vast distribution network.

It also provides an opportunity for both the partners to leverage their core strengths and increase the profits. It also provides a learning opportunity for both the partners.

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Others Reasons…

• Technology.• Lower Risk of Geographical Location.• Government Regulations.• Access to Capital.

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The Union• Clearly define common objectives on the kind of business and specific

activity to be undertaken• Establish measures of success; how they are to be quantified and

monitored• Every party need to know why they are a part of the venture and what

they plan to get out of it. These expectations should be detailed in a legally binding agreement to which all parties agree. Need to get legal representation involved early on. The more detailed and comprehensive the agreement, the better.

• The agreement should clearly define objectives and purpose of the JV, the roles of each party, and ownership, legal, financial and tax considerations.

• Key performance indicators should be established, mutually agreed upon, and documented

Ownership Considerations• To ensure success, each party should have some equity ownership or stake. This

must be spelled out to avoid disputes. • Parties must determine how each will nurture and care for their offspring. They

have to agree to strong commitment, expressing mutual obligations to each other and the child. Must agree to avoid competing and act in good faith towards one another. Must also agree to assist in procuring quality management and staff. Must determine who or what body will direct operations of the JV and what will those responsibilities be.

• Establish role of parties in management. Voting procedures, authority for expenditures, restrictions of parties, who can enter into agreements on behalf of the JV, who can obligate the JV

• Who will be the decision maker and on what matters? Will all parties have an equal say? Or, will one party have a major say in a specific area?

• How will internal/start up expenses be paid? Who will be in charge of accounts? Who will be the external auditors, bankers, and other professional service providers. Who will be the signatory on accounts.

• Need to provide for disputes and how and where they will be resolved. Will it be by conciliation or a from of arbitration?

Legal Considerations

• Structure• Liability sharing and insurance• Rights, duties, and restrictions• Increase or decrease in JV scope• Ownership/licensing of intellectual properties• State/local laws/regulations• Withdrawal from JV

Financial Considerations

• Control of bank accounts• Obtaining loans• Allocation of profits• Withdrawal of funds

The Separation

• When will the union end?• On what grounds will separation be allowed?• Who gets what?

– Assets/liabilities– Intellectual properties– Proceeds from sales– Distribution of profits/losses

Differences Between Joint Ventures and Strategic Alliances

JV vs. Strategic Alliance

• Contractual• Separate legal entity• Significant matters of

operating and financial policy are predetermined and “owned” by the JV

• May or may not be contractual

• Generally, not a separate legal entity

• Significant matters of operating and financial policy may or may not be predetermined but are “owned” by the individual participants

Joint Venture Strategic Alliance


• Exist for a specific time

• Exist for a specific project or purpose

• Limited with respect to future expectations

• Indefinite life or a specific time

• Fluid and allows for greater amounts of ambiguity



Companies remain independent

Companies A and B combine to form a new company C


A B

C

A B

A

B


• A strategic alliance is usually easier to get in/out of due to due lack of combined legal structure

• A strategic alliance is generally viewed as being less risky

JVs in Indian context

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Pre-Liberalization Scenario• Indian industry was unaware and unconscious about

the danger of International Business.• Most businesses lacked economies of scale by global

standards.• Control on collaborations restricted the choice of

technology and manufacturing methods.

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Post-Liberalization Scenario• Foreign players saw India as a land of opportunity to

take advantage of size and low cost of production.• International players become major threats because

of their limitless resources.• Indian players had only two options either to

increase production or entering into JV with Global players.

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INTERNAL REASONS

1) Building on company's strength.

2) Spreading costs and risks.

3) Improving access to financial resources.

4) Economies of scale and advantages of size.

5) Access to new technologies and customers.

6) Access to innovative managerial practices.

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COMPETITIVE GOALS

1) Influencing structural evolution of the industry. 2) Pre-empting competition. 3) Defensive response to blurring industry boundaries. 4) Creation of stronger competitive units. 5) Speed to market. 6) Improved agility.

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STRATEGIC GOALS

1) Synergies.

2) Transfer of technology/skills.

3) Diversification.

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SECTORS PERCENTAGES

Mining (commercial) 51%

Banking (Pvt), Airport (Existing) 74%

Insurance 26%

Telecommunication 74%

Alcohol distillation and brewing, Floriculture, Horticulture , Animal Husbandry, Petroleum and Natural gas, Construction and Development, SEZ’s and Free Trade Warehousing Zones, Trading etc..

100%

Regulations governing JV in india


• Press note 18• Denied the use of the automatic investment route and

required a foreign investor who had an existing joint venture, trademark or technology transfer agreement in the “same or allied” field in India to seek FIPB approval for further investments in India.

• The foreign investor also had to prove that the new investment would not harm the existing joint venture or its stakeholders and obtain a No Objection Certificate from the Indian partner.

• Foreign investors often felt that such restrictions held them hostage to their Indian partners..

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• Press note-1• Whereas Press Note 18 required government approval for

investment in “same or allied” field, Press Note 1 requires government approval only if the foreign investor invests in the “same” field

• While Press Note 18 completely denied the use of automatic route, Press Note 1 permits the automatic route where investments are made by venture capital funds registered with SEBI as Foreign Venture Capital Investors or where either of the parties have less than 3% investment in the existing joint venture or where the existing joint venture is defunct.

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• Press note 1 cont..

• Earlier the onus to justify and prove to the satisfaction of the government that the new proposal would not jeopardize the interests of the existing Indian joint venture partner or technology/trademark partner was only on the foreign investors or technology suppliers. Now, The onus to provide requisite justification to the govt. that the new proposal would or would not in any way jeopardize the interests of the existing partner or other stakeholders would lie equally on both.

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• Press note 1 contd..

• Press Note 1 provides that all joint ventures entered into after January 12, 2005 may contain a “conflict of interest” clause in the joint venture agreement. Such a clause is critical because, if drafted well, it essentially provides the foreign investor with a type of no objection from the Indian partner regarding foreign investments in the “same” field.

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• There are cases where Indian partners of failed jv’s alleged to have made efforts to block foreign partners from ventures referring to PN1, without any sound reasons.- In 2001 Walt Disney’s local partner, the KK group objected to Disney’s attempt to establish a wholly owned subsidiary in India.- TVS group , for about three years, kept denying the much needed no objection certificate to Suzuki to start a new investment venture in India after the TVS- Suzuki joint venture was called off in 2001.- Wadia group is objecting to Danone’s investments in Bio- nutrition firm Avesthagen.

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Problems of JV’s

1. Valuation Problems.2. Transparency.3. Conflict Resolution.4. Division of management responsibility and degree

of management independence5. Dividend Policy.6. Marketing and Staffing Issue.7. Cultural Problems.

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So, Before entering a Joint Venture..

• Both partners should appreciate the need for the joint venture.

•The partners should clearly agree on the way the joint venture will be managed.

•Take measures to be sure that the partner has a compatible work culture..

• It is important that both partners work towards a system based on trust and transparency.

• To make for the long term success of the joint venture, it is also important that both partners are equally able to service its growing need for capital as the business expands.

• Need to have a clear long term goal and set the terms and conditions of the JV.

• Clearly define the role and responsibility of each partner.

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Before entering a Joint Venture..

Successful joint venture require:• Each participant has something of value to bring to the

venture. • The participants should engage in careful preplanning. • The agreement or contract should provide for flexibility in

the future. • There should be provision in the agreement for termination

including buyout by one of the participants. • Key executives must be assigned to implement the joint

ventures.

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Example :-

• Virgin Group and Tata Tele Services• Maruti Suzuki

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Concerns of doing a JV

• Change of strategy of either of the partners creates rift in certain JV’s

• The JV between Hotline group(india) and Haier(china) missed at that point.

• Haier planned to increase its share to 49% to introduce wide ranges of products including washing machines, multi-split AC’s etc.

• Haier wanted to focus in imports.• Hotline disagreed to theses, the JV broke off before the

operations started• Haier re-entered indian market with a 100% susidiary in 2003.

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• In some cases access to technology or capital provides sufficient confidence in the partners to go alone, making the JV redundant

• For example- JV between TVS group (INDIA) and Suzuki (Japan) formed in 1983 was called off in 2001.

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• At times either of the partners are accused of breaching the terms of the JV creating tensions in it.

• For example- Wadia accused Danone of using the popular Britannia brand Tiger products outside India, not permitted as per the existing agreement between the two.

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There are cases of JV falling apart due to lack of synergy.

• For example- the 40:60 JV between Godrej and GE formed in 1993 , was called off in 2001because-

• The JV failed to meet the projected turnover of Rs 35 billion and managed only 1.83 billion in 1998-99.

• There was poor cultural integration between the two partners. GE alleged lack of professionalism in the Indian

partner.

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Reasons for failure of a joint venture• Inadequate preplanning for the joint venture. • The hoped-for technology never developed. • Agreements could not be reached on alternative

approaches to solving the basic objectives of the joint venture.

• People with expertise in one company refused to share knowledge with their counterparts in the joint venture.

• Parent companies are unable to share control or compromise on difficult issues

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Example :-

• Lufthansa and Modi Group• Kinetic Honda• Tata IBM• LML Piaggio

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FUTURE of JV• The number of joint ventures will continue to

increase in the near future• More and more companies are adopting the

JV approach as a part of their growth strategies.

• Foreign companies can benefit mutually by combining their technological and monetary resources and taking advantage of respective market conditions.

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1 Nov

Economy & Finance

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