Today in this article let us discuss
about the Joint Ventures and Types of ventures.
Joint Venture
Joint Venture is a legal entity which
is created by two are more companies for carry out a business activity or
project. Both the companies contribute to the equity of the newly formed
enterprise and they share revenues and expenses and also have a control over an
enterprise. Sometimes the joint ventures doesn’t have an equity stake rather
joint venture is for a more specific purpose like strategic alliance and it is
less rigid (Sony Ericsson).
Some of the famous Joint Ventures are
Hero Honda, Maruthi Suzuki, Bajaj Allianz, Standard and Charted Bank, Sony
Ericsson.
Rational Behind Joint Venture
Now let us try to understand why joint
ventures comes into picture or what is the objective or reason for coming
existence
§ Pooling of Complimentary Resources
§ Access to Raw Material
§ Access to New Markets
§ Diversification of the risks
§ Economies of Scale
§ Cost reduction
§ Joint Manufacturing
§ Tax Shelter
Let us now discuss each one of the reason or objective separately
and try to understand each reason or objective in detail
§ Pooling of Complimentary Resources
Companies form
a joint venture so that they can bring the complimentary resources together and
then can create a great product so that they can sell it and make huge profits
out of them and also both the resources can be effectively utilized.
§ Access to Raw Material
Companies do
form a joint venture when they want to access specific raw materials which will help both the
companies to produce the final product cost effectively and doesn’t face the
problem of raw materials in production. This venture takes place with supplier
of the company. Also these kind of joint ventures comes in existence when the
specific resource is scare or has very few suppliers.
§ Access to New Markets
Companies do
form new joint venture in order to acquire a new market and expand its area of
operation and serving so that they can earn good profits. Some of the famous
joint ventures that took place with an intention to access new market are Hero
Honda, Kellong and Wilmar International Limited and so on.
§ Diversification of the risks
Companies do
wish to minimize the risk by diversification of their portfolio so in order to
expand their product line and area of operation they enter into joint ventures
so that even when one product doesn’t perform or one market fails then the
other product or markets performs nullifies the effect and the company’s profits
doesn’t get affected.
§ Economies of Scale or Cost Reduction
Company’s ways
wants to minimize their cost and increase their profits. Thus in order to
minimize cost companies form joint ventures with certain companies that will help
them to lower their cost by providing certain specific product in production
cycle and achieve economies of scale.
§ Joint Manufacturing
Two are more
companies that offer complimentary products or having manufacturing certain
specific parts of a product come together in order to produce a final product
by gathering all the separate spare parts and form a whole new market that has
a good demand in the market and earn profits.
§ Tax Shelter
Companies in order to get tax benefits
do enter into the joint ventures and so that they can join tax shelter for a
specific period.
Types of Joint Ventures
There are two different types
of Joint Ventures. They are,
§ Equity Based Joint Ventures
§ Non-Equity Based Joint Ventures
§ Limited Co-operation
§ Project Based Joint Ventures
§ Functional Based Joint Ventures
§ Vertical and Horizontal Based Joint Ventures
Let us try to understand each in detail
§ Equity Based Joint Ventures
In this type of
joint venture both the companies bring forward equal amount of equity capital
to form a new joint venture and then carry out the joint venture to achieve or
accomplish a specific task. The revenue and the expenses that arises will been
shared by each company equally.
§ Non-Equity Based Joint Ventures
In this type of
joint ventures both the companies doesn’t bring forward equity rather they seek
help from each other in terms of technical aspect, expertise, usage of brand, management contracts and such
so that they will be getting help in production from the other company in their
operations.
§ Limited Co-operation
In this type of
joint venture both the companies come together and co-operate with each other
but only in few specific areas for which the agreement is done. The
Co-operation will be limited.
§ Project Based Joint Ventures
In this type of
Joint Venture companies come together in order to accomplish a specific task or
project or a research and once the project or research is accomplished they get
separated and the entity is liquidated. The revenue and the expenses that
arises will been shared by each company equally.
§ Functional Based Joint Ventures
The functional
based joint venture comes into existence when the companies want to create
synergic effect by coming together by bring the areas of expertise. The synergy
effect arising from the venture they share it mutually for their own
advancement.
§ Vertical and Horizontal Based Joint
Ventures
In a horizontal
based joint venture two companies share a supplier and purchaser relationship come
together in order to minimize the cost of production so that they can maximize
the profit.
In a vertical based joint venture
happens when they share same line of production. The plant and machinery in
other company is being used for the production for a specific period since the
plant and machinery needs a heavy investment to buy or they have advanced plant
and machinery for production of specific product which will produce a good
quality product with a reasonable or low cost of production.
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