Advantages Of Joint Venture Top 4 Advantages Examples

Advantages of Joint Venture

Here, we will discuss the most common advantages of forming a joint venture as listed below: –

Penetrating new marketsSynergy in M&AMaximum flexibility and limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners’ or investors’ personal assets are not at stake. Their accountability for business loss or debt doesn’t exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read moreDecreases go to market time

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Top 4 Advantages of Joint Venture

#1 – Penetrating New Markets

The joint venture allows companies to enter new markets without legal hassles or regulatory restrictions. Moreover, a joint venture makes this process smooth as the local player already takes care of these challenges. The firm, in such circumstances, can focus on its core operating activitiesOperating ActivitiesOperating activities generate the majority of the company’s cash flows since they are directly linked to the company’s core business activities such as sales, distribution, and production.read more and invest in learning more about target customers, consumer behavior, and product positioning.

The greatest example of a joint ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more would be Maruti and Suzuki, started in 1981 and initiated by the government of India. For Maruti, it helped gain market share and access to the technical know-how of the superior Japanese technology, which helped it survive the competitor’s threats like Hindustan motors and their popular brand ambassador. On the other hand, Suzuki was a great opportunity to enter a large, growing auto market, especially in the pre-1990 era, when India was a closed economyA Closed EconomyA closed economy is one in which no goods or services are imported or exported, implying that the economy is self-sufficient and has no trading activity from outside economies with the sole purpose of meeting all domestic consumers’ needs within the country’s borders.read more. It was not easy for foreign firms to open their offices here. Many multinational companies like Coke and Pepsi would close their existing offices in India. Hence, it was a win-win situation for both parties. This joint venture has stood the test of time and has helped create a firm that has provided multifold growth to its investors and shareholders and provided employment to many. As of 2018, Maruti Suzuki has the largest share (more than 50%) in the fourth-largest auto market in the world.

#2 – Synergy

Synergy is one of the implicit advantages of a joint venture. Both parties coming together has their strengths and weaknesses. The idea is to capitalize on these strengths. Two parties from different markets pool their resources and technical know-how to produce a better product.

source: economictimes.com

An example of such a collaboration is IFB and Bosch. Bosch, a German giant with superior German engineering, collaborated with an Indian-based engineering firm IFB. In this partnership, Bosch provided superior technical know-how and expertise while IFB capitalized on its network of established distribution channelsDistribution ChannelsA distribution channel is a network of intermediaries that facilitates product delivery from the manufacturer to the end consumer and transfers payments from the buyer to the producer. In other words, it is the route through which a product travels from the production end to the point of consumption. read more. Such collaboration has helped manufacture ideal automatic washing machines and reach the right customers through a well-established network channel. What happened is that each party has brought its strength to the table, leading to a much better, suited, and well-positioned product. Therefore, it should not be a surprise when this collaborated product boasts the largest market share in the washing machine segment of the Indian market.

#3 – Maximum Flexibility and Limited Liability

A joint venture is a very efficient and progressive collaboration between the two parties as it provides maximum flexibility and minimum liability. The two partners can focus on their core business and outsource their non-core activities, creating better products with limited risk. Also, this partnership provides a very flexible approach, as a legal contract does not bind the two firms. They can continue this partnership as long as they feel it benefits them. It is as easy to dissolve a joint venture as to start it. The advantage of the joint venture is that it promotes collaboration; the moment parties feel they are not gaining anything, they can come out of it. Thus, a joint venture can be of a limited lifetime, operational only till it benefits both parties. More than 80% of joint ventures end in a stake sale by one partner to another.

Hero Honda – a joint venture between Indian two-wheeler maker Hero and Japanese auto giant Honda is a great example of such a partnership. Their collaboration goes back to the 1980s (again, pre 1990s liberation era) when Hero Honda Motors Ltd. was set up in 1984. During the last two and half decades, the new entity has produced a great product line like CD Dawn, CD Deluxe, Pleasure, Splendor, etc. Not only has there been an enriched product line Product LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more, but they were also the pioneers in producing vehicles with better fuel thrift, low emission, and better mileage, eventually becoming the industry benchmarks. The growth has been phenomenal, with the joint venture posting double-digit growth numbers since inception. Lately, the two decided to part ways, ending the partnership due to internal disputes. However, the dissolution of the joint venture was as smooth as its foundation. However, the dissolution of the joint venture was as smooth as its foundation. The two agreed to provide mutual support and royalty for some time so that the transition could be plain sailing. Eventually, it dissolved, with Honda selling its 26% stake to the Munjal Group.

#4 – Decreases Go to Market Time

The advantage of a Joint venture is it helps firms in gaining access to new capacity, technological knowledge, and new markets in a reduced time frame without causing any detrimental effect on the quality. Most of the time, it helps firms make up for the lost time that might have given an edge to their competitors by getting into a joint venture. Thus, tackling competition with a better strategy and limited risk.

source: reuters.com

KDDI Corporation, a telecom major in Japan, got into a JV with Rakuten Group, Inc. in 2018. The joint venture aims at the mutual use of assets to counter the competitor threat and gain market share in the Japanese economy’s growing field of payments, logistics, and telecommunications. KDDI Corporation would provide roaming services to Rakuten Group, Inc., using Rakuten’s existing ecosystem of payments and logistics infrastructure. The joint venture has helped KDDI Corporation counter the competitor threat and compensate for the lost time as it was a late entry into the QR code payment ecosystem.

Conclusion

Even though firms operate as separate entities in a joint venture, their partnership helps build better products, eventually capturing more market share and providing a win-win situation with maximum gain and minimum commitment.