Joint Ventures between companies

“In the world of personal relationships, an open relationship seems to offer a dazzling chance to have your cake and eat it,” write Faelten et al. It is a state of being together but independent of each other—friends with benefits.

This relationship status means partnerships or joint ventures (JVs) in the corporate world. A JV gives companies access to industries or markets otherwise out of reach because they lack the necessary local or industry expertise, or the appropriate funding and scale, among others.


Psion partners with Nokia, Ericsson and Motorola

Before the Google’s Android rules Smartphones, for years Symbian OS dominated the mobile world in the mid to late 2000s. Very few today remember how huge, successful and innovative, Symbian once was.

The inception of the Symbian platform began with a system referred to as EPOC, an OS which was created in the 1980s by one company we now only have fond memories of: Psion. In return for funding in 1998, Psion formed a partnership with Nokia, Ericsson and Motorola. The partnership led to the formation of Symbian Ltd. EPOC hence became Symbian OS. The system was designed to run on ARM processors and was used to power some of the most powerful smartphones at the time.

A few years later, Samsung and LG joined Symbian Ltd. to have access to the operating system.


As rightly pointed out by Faelten, et al., the essence of all alliances is the same: two or more corporations agree to operate jointly for a common purpose that they each feel they are unable to achieve alone.

Flowing from this, they identify three main reasons for investing in a JV:

1.       It allows partners to pool resources.

2.       It gives partners access to new markets, either geographically or through new products.

3.      It is sometimes used as a precursor to M&A, allowing cultural and other due diligence over an extended period.


·         Pooling resources

An open relationship starts with your company identifying and understanding its strengths and weaknesses. Following closely is the realisation that your company’s weaknesses are others’ strengths, and vice versa.

In a bid to overcome its weaknesses, Yahoo! entered partnerships with several companies, including its competitors, during its reign. Such partnerships have been driven by access to finance, or technologies and skills that could not simply be bought.


Yahoo! open relationships

On June 26, 2000, Yahoo! and Google signed an agreement which would make Google power searches made on yahoo.com.

Yahoo! formed partnerships with telecommunications and internet providers to create content-rich broadband services to compete with AOL. On June 3, 2002, SBC and Yahoo! launched a national co-branded dial service. In July 2003, BT Openworld announced an alliance with Yahoo!. On August 23, 2005, Yahoo! and Verizon launched an integrated DSL service.

In July 2009, Microsoft and Yahoo! agreed to a deal that would see Yahoo!’s websites use both Microsoft’s search technology and search advertising. Yahoo!, in turn, would become the sales team for banner advertising for both companies. While Microsoft would provide algorithmic search results, Yahoo! would control the presentation and personalisation of results for searches on its pages.


·         Access to new markets

The birth of Cereal Partners Worldwide S A (CPW)

In 1990, General Mills Inc. wanted to expand its business beyond North America but did not want to build an operation from the ground up. Nestlé wanted to diversify into cereals, a growing business at the time. In order to achieve their unique purposes, the two companies established a 50-50 joint venture known as Cereal Partners Worldwide S A (CPW) and clearly defined what each partner was to contribute.

General Mills provided its expertise in making cereal and Nestlé added its brand recognition and distribution network in Europe and Asia.


Toyota’s first operation in a foreign market

Established in February 1983, New United Motor Manufacturing, Inc. (NUMMI) was Toyota’s first overseas operation. The company was a result of a 50-50 JV with General Motors (GM).


·         A precursor to M&A

In 2004, Nokia bought Psion’s share of Symbian and became the majority shareholder in Symbian Ltd. And by 2008, Nokia purchased the entire share in the JV.


·         Knowledge acquisition

Knowledge acquisition is another reason for investing in a JV, Hill et al. write. When entering an alliance, a company must take measures to ensure that it learns from its alliance partner and then puts that knowledge to good use within its own organisation.


General Motors and Toyota Motor Corp. agree to build Chevrolet Nova

The alliance (NUMMI), a factory based in Fremont, California, ran by both General Motors and Toyota, was entered for the creation of Chevrolet Nova cars for GM. Hill et al. write that for Toyota, the JV provided a chance to find out whether it could build quality cars in the United States using American workers and American suppliers. It also provided Toyota with experience dealing with an American union (the United Auto Workers Union) and with a means of circumventing “voluntary” import restrictions. For GM, the venture provided an opportunity to observe in full detail the Japanese approach to manufacturing.

Encouraged by its success at NUMMI, they write, Toyota announced in December 1985 that it would build an automobile manufacturing plant in Georgetown, Kentucky. The plant, which came on stream in May 1988, officially had the capacity to produce 200,000 Toyota Camrys a year. Such was the success of this plant, however, that by early 1990 it was producing the equivalent of 220,000 cars per year. This success was followed by an announcement in December 1990 that Toyota would build a second plant in Georgetown with a capacity to further produce 200,000 vehicles per year.

By 2012, Hill et al. continue, Toyota had 14 vehicle assembly plants in North America, 10 of them in the United States, which collectively produced 7 out of every 10 Toyota cars sold in the region. In addition, the company had six other plants producing a range of components, including engines and transmissions. The company also has two R&D and design centres in the United States, its only such facilities outside of Japan. By 2012, Toyota’s cumulative investment in the United States exceeded $19.5 billion. In April 2013, Toyota announced that it would move production of one of its luxury Lexus vehicles from Japan to the United States, marking the first time that the company produced a luxury vehicle outside of Japan. At the same time, Toyota announced that it would invest another $2.5 billion to expand U.S. production capacity.


JVs are great. However, a JV could be a disaster if relations are not professionally managed among partners.


Tiffany & Co ordered to pay almost half a billion dollars to Swatch

On December 21, 2013, a Dutch arbitration panel ordered the Tiffany & Co. jewellery chain to pay $448 million in damages to the Swatch Group.

Back in 2007, Swatch, one of the world’s biggest watchmakers announced a JV, Tiffany Watch Co., with Tiffany, an American luxury jewellery and specialty retailer, to make watches together under the Tiffany brand.

It all started out so peacefully. Then things went sour in 2011 when Swatch cancelled the cooperation.

The Swiss watchmaker alleged that Tiffany had been trying to block and delay the venture at the time. Tiffany, on its part, claimed Swatch had failed to provide appropriate distribution for Tiffany & Co. brand watches. Conflict between the parties led to legal issues.

Friends with benefits no longer beneficial.


The research-based magazine and digital platform for business executives published at the Massachusetts Institute of Technology, MIT Sloan Management Review, in an article in its Magazine Summer 2003 Issue Vol. 44 No. 4, notes that in order to maximise a JV’s potential over the course of its life, companies must pay more attention to the impact of partner relations on the performance of their offspring.

Bettina Büchel, who writes the article in the magazine, “Managing Partner Relations in Joint Ventures”, identifies and explains five minefields that can explode and damage relationships in an otherwise fruitful operation.

·         Unclear Partner Roles

Büchel explains that during negotiations between two potential partners, a lack of clarity about how closely the two sides intend to work together is a common problem.

She writes that some ventures require the active participation of both parents to be successful, while others do not. In a venture that has a clear majority owner, the minority partner may be contributing money, a brand name or rights to a technology and has no interest in being consulted on day-to-day decisions. In such cases, information flows primarily between the majority owner and the JV management team. A willingly passive partner is the key to the success of a majority-minority venture. Matters are more complicated in a venture structured to be a 50-50 or when the minority partner wishes to participate actively in the decision making.

In 50-50 joint ventures, Büchel continues, the companies expect to make roughly the same effort. But the key to a 50-50 operation is bringing together unique skill sets, so defining what constitutes an equal contribution of work can be tricky. The parents of a proposed partnership must articulate their assumptions and involve key people (who will continue to play a role in the venture) during the negotiations to define the contributions they will make and the benefits they expect.

The strategy for CPW works, Büchel comments. The JV has expanded operations to 130 markets and captured a substantial percentage of the international cold-cereal business.

According to her, keys to this success include the upfront definition of the joint intent and the involvement of key executives from both sides early in the negotiation process. In addition, the venture’s negotiators were able to check with top management to remove many of the ambiguities (such as the definition of “cereals” in this case) that are frequently associated with unclear intentions.

·         Unequal Sharing of Risks and Benefits

She writes that an important issue to resolve before finalising any deal is how the value generated by the venture will be distributed between the parents. When the reward earned by one company is perceived as exceeding the risks it is absorbing – possibly as a result of opportunistic behaviour on the part of managers during the initial negotiations – an alliance becomes ripe for early dissolution.

Ensuring an equitable risk-benefit ratio is crucial to the long-term health of the alliance. If such a ratio is to be clearly visible to the participants, Büchel cautions that another must be avoided: non-transparent payoffs to parents. Non-transparent payoffs occur when one parent is, for example, selling components to the venture and does not disclose to the other the margins generated through those sales. The lack of transparency means that one partner cannot be sure when, how and to what extent the other is profiting. Non-transparent payoffs are a source of distrust especially when the JV is suffering losses. One side often suspects that the other is profiting at the expense of the venture.

Büchel further cautions that equity in the relationship should not be mistaken for equivalence of earnings. In an equitable relationship, one parent may contribute more for a certain period of time, in the expectation that the other will contribute more in future years, yet the exact nature of the benefit may be different. The more the parents perceive that the right balance of contributions and rewards exists, the better JV performance will be.

Simply put, Büchel notes, in higher-performing JVs, each parent believes the financial return is fair, considering what each is contributing. So that suspicions of unfairness do not arise later, managers leading the negotiations should not always put the “deal” ahead of all other interests. Once the negotiating managers walk away, the deal has to be implemented. It will not work if trust is breached as a result of deal making that takes advantage of one side’s weaknesses or mistakes.

·         Distrust of the Joint-Venture Manager

Once the deal is signed, Büchel writes, the organisation’s board of directors meets for the first time and has its first contracts with the JV manager and their team. Distrust between either of the partners and the venture’s chief executive can seriously hamper the latter’s ability to make decisions and can consequently limit the new company’s competitiveness. It is important to establish a high level of trust at the outset so that the JV manager has the freedom to make decisions that are in the venture’s best interests.

She observes that when the chief executive is from one of the parents – as is often the case – he will have to go to extraordinary lengths to show the other parent that he can be fair. The JV CEO should spend time with executives from both sides that have business links to the venture but are not part of the board. In formal meetings, the JV manager has to lay out his strategy, show how the new organisation will have a positive impact on the parent’s business, and demonstrate sensitivity to the issues that are particularly important to that parent. Informal meetings are also useful, as the relationships that form may lead to the venture executive getting the benefit of the doubt in times of potential conflict.

But the responsibility for making things run smoothly is not solely the venture leader’s, Büchel continues. When the new operations manager has a time-bound contract, the implicit message is “We do not really trust your decision making.” And the original architects of the joint venture are responsible for aligning the two sides at the outset and selecting a general manager who can earn people’s trust.

·         The Inevitable Crisis

If a JV gets off to a successful start, it will settle into a normal pattern of operation and stable relationships, Büchel writes. Effective day-to-day routines will be established, and life will be somewhat predictable. The test of the JV will invariably come, however, when something out of the ordinary happens. The most difficult events are those that have the potential to pit the parents against each other.


The JV between HP and Ericsson

She moves on to narrate two events at Ericsson Hewlett-Packard Telecommunications (EHPT) that led to conflicts requiring renegotiations. One emerged at the April 1994 board meeting. Briefly, HP wanted to use a platform that it had developed internally as the basis for the JV’s core product (a network-management platform for telecom operators), while Ericsson felt that the HP standard did not have sufficient functionality to serve as a basis for public telecommunication customers; it wanted to continue the joint development of the product in the new venture. A year later, at the April 1995 board meeting, HP made the case that it should be allowed to sell EHPT products through its own sales organisation, but Ericsson had been designated as the sole sales channel for the JV.

In both cases, Büchel writes, compromises were reached. The key was the involvement of two of the original architects, both of whom were also on the board of the JV. The two executives resolved the difficulties that came up in 1994 and 1995 by aligning their respective organisational interests with the JV’s interest. They started by posing the question, why are we pursuing the JV? For HP, the answer was increased access to telecommunication operators; for Ericsson, it was to provide a standardised high-quality network-management product. Both board members worked with the JV manager on a business plan that was aligned with the goals of the parent organisations.

Having two board members, one from each parent, serve as problem solvers is ideal, Büchel observes. It is even better if they are the original architects of the venture. On the flip side, sometimes a manager from the JV can create the inevitable crisis, as the EHPT example also illustrates.

After the venture began, she continues, HP appointed an alliance manager, an HP employee who was responsible for the interface between the JV and HP. That manager, however, became a bottleneck for information sharing. The JV’s engineers needed to share information directly with HP engineers if the common EHPT platform was to be a technical success; more specifically, engineers from EHPT needed proprietary information about an R&D project within HP to work effectively. But HP’s alliance manager blocked direct contacts with HP engineers because she was afraid that such interactions would lead to an unwarranted transfer of intellectual property to Ericsson employees. She would not allow for direct contact until she got HP management approval, a process that took nine months – during which no work on developing the product was done.

Büchel therefore notes that an alliance manager should facilitate the sharing of information within the JV, which in part requires negotiating with the parent about what is and is not proprietary. At the very least, someone in this position should help ensure that the JV does not founder over conflicts about shared knowledge.

·         No Exit Mechanisms

When conflicts escalate beyond a certain threshold, and the parties no longer feel they can work with each other, it is vital to have a formal exit mechanism in place so that costly and time-consuming litigation can be avoided, explains Büchel.

In the EHPT joint venture, she writes, the venture’s business model came under scrutiny at a January 2000 board meeting. The question was whether in the future EHPT should focus on developing the network-management platform as well as providing network-management solutions or focus only on the latter. The venture had a contractual agreement in place that dealt with such deadlock situations, so the conflict was manageable (the platform business was transferred back into Ericsson).

Needless to say, she observes, if the venture is ending on a high note in which both parents have achieved what they wanted, the exit is not difficult to arrange. But if the venture is ending after years of poor performance, with one parent no longer able to absorb the losses, the exit negotiations are likely to be acrimonious.

When the Swissar Group decided in April 2001 to pull out of AOM/Air Liberté, Büchel illustrates, the French airline group went into bankruptcy. Swissair had no explicit exit clauses and owned 49.5% of the group. This led to tough separation talks that included the French government, which did not want to let Swissair out of the venture. In July 2001, a French tribunal ruled against the breakup of the airline group, approving a takeover bid led by a former pilot from the Air France Group, instead. Swissair was obliged to provide $174 million to give the airline a fresh start.

She notes that, in order to avoid a similar scenario, it is important to include deadlock provisions in the original agreement that make it possible for the various partners to exercise buy-sell options at a predetermined valuation price (EHPT had such provisions, which facilitated the smooth conclusion of that venture). Crafting exit clauses by thinking about worst-case scenarios has only recently become a commonly accepted practice. Explicitly discussing and formalizing procedures in case of escalating conflicts would be a useful extension of the ideas behind formal deadlock provisions and exit clauses.


An open corporate relationship status can be awesome. In fact, your company may not be able to survive (in the short or long run) without entering such affairs. However, before you have your cake and eat it, be sure you have the right cake containing the right ingredients.