Joint ventures in emerging markets could once again be high on the agenda, says Jeremy Butler, KPMG's UK head of new and emerging markets, based in Birmingham.
In 2000, joint ventures (JV) were often the most popular way of entering emerging markets. Instant access to the local workforce and management, as well as by-passing a plethora of regulation, meant the JV approach suited many companies.
Also, in countries such as China, certain sectors had restrictions on foreign participation which meant that partnerships were the only way to go.
However, this approach soon began to fall out of favour due to problems over the strategic direction of the JV. Indeed, in 2004, we undertook research in association with Taylor Nelson Sofres, surveying 136 consumer companies operating in China, sourcing from China or planning to operate in China. Of those businesses already operating within the country, 37 per cent were in some form of a JV. However, only 19 per cent saw it as the best way forward for their business. In contrast, the preferred approach was a Wholly Foreign Owned Enterprise (WFOE).
JVs succeed and fail for different reasons. One of the main reasons often given for choosing the JV approach rather than setting up an independent operation is that it gives instant access to the local market through existing relationships.
However, there have been many problems to outweigh this aspect including a divergence of goals, disagreements on how to expand the business and disputes over management style and roles.
Another well-publicised problem with JV agreements has been the difficulty that foreign entrant firms have in protecting their own intellectual property. For example, copies of companies' products, logos and production processes have all come to light after foreign firms have entered into partnership with a local business.
Despite these issues, JVs continue to be an option and in fact, are beginning to grow once again. Indeed, KPMG's recent data on the state of the JV market (sourced by Thomson Financial) shows that there were 1,759 JV deals globally during 2007. While this was well down on the 3,391 from the boom days of 2000, significantly, it was more than double the 810 deals registered in 2004.
With the global economic conditions changing and businesses still looking to do business, the idea of a JV will be on many board agendas. However, with the drawbacks of this approach still a reality, caution needs to be exercised.
To get a JV right, you have to be very clear as to why you are doing it, who your partner is and what their long-term aspirations are. Having the difficult conversation upfront about possible future scenarios is usually at the back of people's minds when concluding a deal, but it has to be done.
The trade-off between complete ownership and partnering will be different for every business - but get it right and a JV can still reap rewards.