Joint Ventures

and Strategic Alliances

 Why…

… are more and more

corporations getting involved in
strategic alliances and joint
ventures?
 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 • Business Process Re-
contractual arrangement, but engineering
this is always recommended. • Focus on Significant Value-
• Long Term Relationship Added
• High Level of Trust • Mutual Dependency
• Win/Win (Mutual Advantage) • Strategic Framework in Place
• Top Management Interchange • High Level of Commitment
• Continuous Exchange of Ideas • Increased
Capabilities/Capacities
• Enhanced Business
Opportunities
• Improving Shareowner Value
Examples of Best Practices
for
Strategic Alliances
Cultivating Strategic Alliances

ALLIANCE
• Long Term Relationship
• High Level of Trust
• Win/Win (Mutual Advantage)
• Top Management Interchange
PREFERRED • Continuous Exchange of Ideas
• Business Process Re-
SUPPLIER engineering
• Longer Term Relationship • Focus on Significant Value-
• Trust Earned
VENDOR • Some Differentiation in
Added
• “Closed Book” Products/Services
• Little Differentiation in • Quality Programs Implemented
Product/Service • Price & Quality Considered
• Minimum Contract Life • Begins to Focus on Total Value
• Contract Drive
• Focus on Lowest Price
 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.
December 8, 2021 14
Others Reasons…
• Technology.
• Lower Risk of Geographical
Location.
• Government Regulations.
• Access to Capital.

December 8, 2021 15
 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
Joint Venture Strategic Alliance

• Contractual • May or may not be

• Separate legal entity contractual
• Significant matters of • Generally, not a
operating and financial separate legal entity
policy are • Significant matters of
predetermined and operating and financial
“owned” by the JV policy may or may not
be predetermined but
are “owned” by the
individual participants
 JV vs. Strategic Alliance
Joint Venture Strategic Alliance

• Exist for a • Fluid and allows

specific project or for greater
purpose amounts of
• Limited with ambiguity
respect to future
expectations
 JV vs. Strategic Alliance
Joint Venture Strategic Alliance

C A
A B
A B B

Companies A and B
combine to form a Companies remain
new company C independent
 JV vs. Strategic Alliance
• 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

December 8, 2021 26
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.

December 8, 2021 27
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 two options either to
increase productivity or entering into JV with
Global players.

December 8, 2021 28
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.

December 8, 2021 29
 COMPETITIVE GOALS
1) Influencing structural evolution of the industry.
2) Pre-empting competition.
3) Creation of stronger competitive units.
4) Speed to market.
5) Improved agility.

December 8, 2021 30
STRATEGIC GOALS

1) Synergies.

2) Transfer of technology/skills.

3) Diversification.

December 8, 2021 31
Regulations governing JV in india
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 100%
and Development, SEZ’s and
Free Trade
Warehousing Zones, Trading
etc..

December 8, 2021 32
 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..
December 8, 2021 33
 Regulations governing JV in india

• 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.
December 8, 2021 34
 Regulations governing JV in india

• 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.
December 8, 2021 35
 Regulations governing JV in india
• 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.

December 8, 2021 36
 Regulations governing JV in india
• 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 was objecting to Danone’s investments in Bio-
nutrition firm Avesthagen.

December 8, 2021 37
Problems of JV’s
1. Valuation Problems.
2. Transparency.
3. Conflict Resolution.
4. Division of management responsibility and
degree of management independence
5. Dividend Policy.
6. Marketing and Staffing Issue.
7. Cultural Problems.

December 8, 2021 38
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.
.
Before entering a Joint Venture..
• 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.
December 8, 2021 40
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.

December 8, 2021 41
December 8, 2021 42
 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 these, the JV broke off before the
operations started
• Haier re-entered indian market with a 100% susidiary in 2003.

December 8, 2021 43
 Concerns of doing a JV
• 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.

December 8, 2021 44
 Concerns of doing a JV
• 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.

December 8, 2021 45
 Concerns of doing a JV
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.

December 8, 2021 46
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
December 8, 2021 47
December 8, 2021 48
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.
December 8, 2021 49