Joint ventures and strategic alliances allow companies to grow in four ways: organic growth, strategic alliances, joint ventures, and mergers/acquisitions. Strategic alliances involve partnerships where organizations remain independent while aligning long-term goals for mutual benefit. Joint ventures form a new legal entity governed by partnership law, where parties contribute to a specific venture for a set time period and scope. While similar, strategic alliances are generally less formal than joint ventures and allow for more flexibility.

1. Joint Ventures and Strategic Alliances

2. Why… … are more and more corporations getting involved in strategic alliances and joint ventures?

3. 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

4. Basic Components of a Strategic Alliance

5. 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.

6. 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

7. 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

8. Examples of Best Practices for Strategic Alliances

9. Cultivating Strategic 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 PREFERRED SUPPLIER 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

10. 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.

11. 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.

12. Basic Components of a Joint Venture

13. 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.

14. 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. November 11, 2009

15. Others Reasons… Technology. Lower Risk of Geographical Location. Government Regulations. Access to Capital . November 11, 2009

16. 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

17. 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?

18. 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

19. Financial Considerations Control of bank accounts Obtaining loans Allocation of profits Withdrawal of funds

20. 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

21. Differences Between Joint Ventures and Strategic Alliances

22. 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

23. JV vs. 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 Joint Venture Strategic Alliance

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

25. 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

26. JVs in Indian context November 11, 2009

27. 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. November 11, 2009

28. 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. November 11, 2009

29. 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. November 11, 2009

30. 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. November 11, 2009

31. STRATEGIC GOALS 1) Synergies. 2) Transfer of technology/skills. 3) Diversification. November 11, 2009

32. November 11, 2009 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 and Development, SEZ’s and Free Trade Warehousing Zones, Trading etc.. 100%

33. 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.. November 11, 2009

34. 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. November 11, 2009

35. 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 . November 11, 2009

36. 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. November 11, 2009

37. 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 is objecting to Danone’s investments in Bio- nutrition firm Avesthagen. November 11, 2009

38. Problems of JV’s Valuation Problems. Transparency. Conflict Resolution. Division of management responsibility and degree of management independence Dividend Policy. Marketing and Staffing Issue. Cultural Problems. November 11, 2009

39. 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 . .

40. 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. November 11, 2009 Before entering a Joint Venture..

41. 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. November 11, 2009

42. Example :- Virgin Group and Tata Tele Services Maruti Suzuki November 11, 2009

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44. 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. November 11, 2009

45. 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. November 11, 2009

46. 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. November 11, 2009

47. 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 . November 11, 2009

48. 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 November 11, 2009

49. Example :- Lufthansa and Modi Group Kinetic Honda Tata IBM LML Piaggio November 11, 2009

50. November 11, 2009

51. 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. November 11, 2009