Strategy

Joint ventures: State of the unions

The ups and downs of sparking a joint venture.

As businesses struggle to do more with less, joint ventures can look more attractive. Companies can share their resources to unlock new markets, gain new products or enjoy economies of scale to save money. But like marriages, not all business unions have fairy-tale endings. About half of JVs fail, and some initial success stories, such as Sony Ericsson, aren’t immune from economic malaise. The Japanese-Swedish giant formed in 2001 had two profit warnings this year.

Indeed, external changes in the economy are the biggest reasons why joint ventures fail. That’s why it’s important to take the time to determine whether there’s a real strategic reason for entering a JV in the first place, says Paul Beamish, an international business professor at the University of Western Ontario’s Ivey School of Business in London. In his new book, Joint Venturing, Beamish shows how to beat the odds and make the hundreds of billions of dollars poured into JVs every year pay off. Beamish sets his book on a flight abroad and uses numerous international examples, which is fitting since between 25% and 40% of all foreign investment is in joint ventures. The most common motive for these deals is to either bring an existing product to a new market or to acquire a foreign product for an existing market.

An obvious reason for creating a JV — domestic or foreign — is getting access to deeper pockets. Something that’s too expensive today can become doable if multiple partners are blending their resources, says Joel Baum, a strategic management professor at the University of Toronto’s Rotman School of Management. Other motives include satisfying local government requirements (since emerging markets can require JVs for foreign entrants), risk reduction or simply being cheaper than an acquisition.

But there are also many pitfalls. For instance, don’t settle for the first prospective mate that looks good. A partner needs to be competent, and one that employees feel comfortable with, says Beamish. Due diligence also includes scrutinizing a prospective partner’s financials, since JVs are long-term commitments that don’t usually generate cash in the first couple of quarters, if ever. Rarely are JVs as quickly profitable as MillerCoors LLC, the American JV between Molson Coors and SABMiller PLC, which posted a 15% profit jump in its first quarter together.

But if a company’s problem is cash, a JV will not solve any problems, says Douglas Reid, strategy professor at Queen’s School of Business in Kingston, Ont. Such partnerships consume cash before they generate it, because they require an extraordinary search process, plenty of due diligence and formal contracts, and creating a new way of doing business, says Reid. “If you’re cash poor, you just don’t have time,” he says. “If the logic doesn’t exist in the good times for a JV, it won’t exist in the bad times.”

Other common reasons JVs fail are competition with local and third-country firms and conflicts with local partners and other inter-party issues. To resolve conflicts, Beamish suggests creating a set of guidelines that aligns the partners’ interests and empowers locally based foreign managers to make decisions. Conflicts can be avoided if each partner knows specifically what the other needs for the union to be considered a success.

What kind of JV you want — shared control, split control or having one partner make decisions in certain situations — also has to be decided. Split control, says Beamish, works best: “You control or manage those activities that you are contributing to the JV.” For instance, Sun Life Everbright, a union between Sun Life Financial and China Everbright Group, a large state-owned entity, to sell insurance products in China gave Sun Life responsibility for day-to-day operations, while Everbright shared resources, such as distribution networks and management’s local expertise.

JVs can seem appealing in an environment where access to credit is tightening. But to succeed, companies have to treat each other well. “Joint venturing,” says Beamish, “emphasizes things like trust and respect for what your partner brings to the table.