Strategic partnership: an introduction to joint ventures (JV)

Introduction

Setting up internationally, when you want to develop through export, raises the question of the model under which to operate?

Especially since the forms that the entity established abroad can take are multiple, from the representative office to the Wholly Foreign-Owned Enterprise, the partnership company or even the joint venture.

In this article, I suggest that you go further in understanding in which cases a joint venture can be useful? How is it implemented? What are its advantages and disadvantages?

When to use a joint venture?

The search for synergies is one of the main motivations for the joint venture. In practice, these synergies can be of various and varied natures.

This may involve pooling technological know-how, patents, with a view to creating a new innovative product or offering a new service in the case where the companies come from the same sector.

Its constitution can be motivated by the sharing or access to strategic resources essential to the sustainability of activities, or by bringing together production sites.

From a commercial point of view, the joint venture can be set up in order to increase the volume of sales by combining distribution channels. The effect of size also plays a role: certain markets will be more accessible to players with a dominant position and increased reputation.

The joint venture is particularly interesting for any foreign company wishing to establish itself in a country deemed to be complex. This is the case, for example, of relatively closed domestic markets, such as China. Moreover, the joint venture is sometimes a must. Indeed, in some countries, a company whose capital is entirely held by foreigners cannot access the domestic market. Iran, for example, imposes this constraint, enshrined in law. Setting up a joint venture with a local partner makes it possible to circumvent all these obstacles, while respecting the law in force.

The creation of a joint subsidiary with local companies is also desirable to penetrate durably and effectively certain markets characterized by cultural or commercial differences, distribution networks, it is in particular the case of Brazil or Japan for example. Better experienced in the administrative procedures of his own country and more at ease with the official language, your local partner can take charge of all questions relating to the registration of the subsidiary or any other administrative procedures, numerous in China for example.

How to create it?

The structure of a joint venture can be either solely contractual (collaboration contract), or both contractual and corporate (collaboration contract + joint subsidiary).

Conclusion of a collaboration contract

It constitutes the framework of the joint operation and contains at least the following information:

The definition of the objectives of the joint operation: this statement will be very useful in the event of a dispute over the interpretation of a clause.

The procedures for setting up management committees and their operation

The withdrawal clauses providing for the terms and conditions of the departure of one of the partners.

Hardship clauses: they provide for the revision of the terms of the contract in the event of the occurrence of external and unforeseeable events upsetting the economics of the contract.

The contributions of each party to the agreement: commitment to meet the financial needs of the operation by advances, loan guarantees, transfer of technology and distribution of results.

The means of settling any conflicts: by means of amicable settlement (expertise, conciliation), or by arbitration. A clause conferring jurisdiction on a court is desirable

Creation of a legal structure

It can be considered by the partners in order to reinforce the cooperation agreement.

The form adopted can be a structure with or without legal personality (joint venture, etc.). It is necessary to choose a legal form with regard to the legislation of the country of establishment and to carry out the formalities of incorporation required there. The provisions of the basic contractual agreement and the articles of association of the company (if a legal structure is created) must coincide both in terms of their duration and in terms of operating procedures. Indeed, the joint venture contract generally provides for a joint system which may conflict with the statutory clauses of the legal form adopted.

What is the tax status?

Cooperation through a contract

The profits derived from this operation are distributed among the companies according to a breakdown defined in the contractual agreement. Each partner is then taxed for his share of profits due to him according to the tax legislation of the place of establishment

Cooperation through contract and joint venture

The profits made by this subsidiary are taxed according to the tax regulations of the country of establishment.

What is the social status?

The employees of a company created within the framework of a joint venture are subject to the labor law rules of the country of establishment.

Legal flexibility: the main advantage

It is a collaboration agreement which can take different forms and in particular that of the joint venture which does not require registration in the commercial register. The companies sign a partnership while retaining a certain independence, which they can fully regain when the objectives of pooling resources are considered to have been achieved.

From a strictly financial point of view, the union of several companies in theory makes it possible to generate economies of scale with the synergies of the respective means of production, and thus to reduce the costs which could have been prohibitive if they had had to be engaged by a simple isolated company.

Finally, the risks thus make it possible to be diluted for a substantial expected return on investment in the long term.

The main disadvantages

On the one hand, companies must be able to establish, in terms of management, a roadmap with well-defined contours and, above all, to stick to it for the duration of the contract.

A merger between several companies, whose differences in terms of corporate culture are significant, carries in itself the threat of divergences in the strategic vision likely to slow down the achievement of the profits pursued. If it turns out, during the process, that this original view is no longer shared by all the partners, the efforts and energy mobilized would have been in vain.

Examples of joint ventures

In 2014, Muntons, UK, a leading malted ingredients manufacturer, and Jebsen & Jessen, a leading distributor of nutrition and life science ingredients in South East Asia, signed a 50:50 joint venture agreement to manufacture specialty malted food ingredients in Thailand. In 2019 Muntons completed the full purchase of their malted ingredients vacuum band drying manufacturing plant in Thailand. The plant is now wholly owned by Muntons PLC and the facility is called Muntons Ingredients (Thailand) Limited. The purchase cements our position as a global manufacturer and supplier of malted ingredients.

In 2019, Puratos Group and Estonian Malt announced the signature of a joint venture agreement launching ‘Puratos Malt’. The JV was the result of six years of close collaboration between the two companies, and combines Estonian Malt’s expertise in sprouted and fermented wholegrains with Puratos’ business insights and distribution network. The business purpose of Puratos Malt is the production, sale and distribution of malt flours and sprouted grains for the professional bakery, food service and food industry sector and their customers.The JV benefits from Puratos' global purchasing power, extensive distribution network and services , and Estonian Malt's knowledge and expertise in malt flours and sprouted grains. Puratos and Estonian Malt have collaborated since 2013 under an exclusive distribution agreement to bring sprouted wholegrains to customers.

In 2022, Heineken disolved a joint venture of over three decades with Japan's Kirin Brewery, Nikkei has learned, with the Dutch beer maker deciding to fly solo in Japanese consumer sales starting next year. Heineken converted the joint venture, Heineken Kirin, into a wholly owned subsidiary. The name of the unit changed to Heineken Japan. Heineken controled 51% of the joint venture while Kirin owns the rest.

In 2023, craft brewery Brewdog is aiming to crack the Chinese market through a new joint venture with Budweiser China. Brewdog China will use Budweiser's sales and distribution network in order to sell beers such as Brewdog's Punk IPA and Elvis Juice. It aims to start selling its products in China next month.

Conclusion

The number of international joint ventures has increased considerably in view of the changes in the markets and the global economy. Companies are increasingly favoring joint ventures over other entry modes to penetrate foreign markets.

Indeed, these modes of entry are “more attractive” and more profitable than acquisitions and other forms of partnership. A company, whatever its size, can very rarely manage the creation of a joint venture by itself. The culture, the local knowledge make essential the legal consultants having several offices in the world or correspondent.

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