Top 4 Types of Joint Venture (JV)
There are mainly four types of a joint venture which includes –
- Project-based joint venture – where the joint venture is done with the motive of completing some specific task.
- Vertical joint venture – where the joint venture takes place between the buyers and the suppliers.
- Horizontal joint venture – where the joint venture takes place between companies having the same line of business.
- Functional-based joint venture – where the joint venture is done with the motive of getting mutual benefit on the account of synergy.
Let us discuss each type of joint venture in detail –
#1 – Project-Based Joint Venture
Under this type of Joint Venture, companies enter into a Joint Venture in order to achieve a specific task which can be an execution of any specific project or a particular service to be offered together, Assignment, etc. Such collaboration is usually undertaken between companies for an exclusive and specific purpose only and as such ceases to exist once the particular project is completed. In other words, these types of Joint Ventures are bound by time or a particular project.
For Instance Axon Limited which is an Industry pioneer in the development of Residential Project entered into an exclusive Joint Venture with Trump Industries, an Industry pioneer in Marketing and Sales of Residential projects for their New Project “Living Rise”. Under the said Venture, Axon Limited will construct the Project “Living Rise” and Trump Industries will be the exclusive sales and marketing entity for it. Such types of Joint Ventures which are undertaken for an exclusive project is an example of Project-Based Venture.
Another example to understand this type of Joint Venture is reproduced below:
Cipla is a traditional pharmaceutical manufacturer and wants to enter the booming business of biotech. On the other hand, Biocon is a biotechnology firm. Cipla intends to utilize the research and development resources of Biocon to develop a particular drug for the treatment of some ailment. Now one way to achieve this objective is to buy Biocon, but in that case, Cipla indirectly is buying many other areas in which Biocon cater to, in which Cipla may not be interested and this will also result in an expensive way of gaining the research capability that it intends to gain from Biocon.
In order to make it a fruitful and synergize Joint Venture the two companies namely Biocon, which has research capabilities and Cipla which has in place a widespread marketing network can come together and enter into a project-based joint venture in which the two businesses come together for this one activity and may not necessarily do anything else together in the future. By doing such a venture both can gain from each other’s resources.
#2 – Functional Based Joint Venture
Under this type of Joint Venture agreement, companies come together to achieve a mutual benefit on account of synergy in terms of functional expertise in certain areas which together enables them to perform more efficiently and effectively. The rationale companies focus on before entering such Joint Venture is whether the likelihood of performing better is more together than doing it separately and more effectively.
Company A specializes in formulation business and has various patents trademarked under its name but due to lack of funding company is unable to put such formulation of commercial usage. On the contrary Company B is a cash-rich Pharma company that lacks in-house patents but holds experience in commercial success and also has adequate funding capacity. Together these two companies can mutually benefit and can complement each other by entering into a Functional Based Joint Venture.
#3 – Vertical Joint Venture
Under this type of Joint Venture, transactions take place between buyers and suppliers. It is usually preferred when bilateral trading is not beneficial or economically viable. Normally in such Joint Ventures, maximum gain is captured by suppliers while limited gains are achieved by buyers. Under these types of Ventures, different stages of an industry chain are integrated within to create more economies of scale. Usually, Vertical Joint Ventures enjoy a higher success rate and also deepen the relationship between the Buyers and Suppliers which ultimately help benefit the businesses in offering quality products and services to customers at reasonable prices.
Let’s understand the same with the help of an example:
Lincoln Corp has made investments in certain machinery and capital instruments that are required to produce Buyer specific products. Since the investments are made by Lincoln exclusively to meet the needs of the buyer (let say, Prawn International). By entering into a Vertical Joint Venture with Prawn International, Lincoln Corp can avoid the uncertainty associated with contracts which are usually for a specified time period only and can lead to discontinued business.
#4 – Horizontal Joint Venture
Under this type of Joint Venture, the transaction happens between companies that are in the same general line of business and that may use the products from Joint venture to sell to their own customers or to create an output that can be sold to the same group of customers. Managing a horizontal joint Venture is usually cumbersome and often results in disputes as the alliance is between partners which are into the same line of business. Also, these types of Joint Ventures suffer from opportunistic behavior between the partners due to being in the same general line of business. Under such types of Joint Ventures, the gains are equally shared by both parties.
Let’s understand the same with the help of an example:
Base International is an Indian company specialized in steel extrusion business and caters to various industrial units. Frank LLC is a US-based firm specializing in the molding of steel frames which has application in Industrial Units. The two companies decided to enter into a Horizontal Joint Venture under which Frank LLC the foreign partner will offer technical collaboration and foreign exchange component while Base International, the Indian counterpart will make available its site, local machinery and product parts and together a new steel extrusion product will be offered by the two companies to its existing clients. Thus by this type of Joint Venture, both firms were able to sell the product in multiple markets and also gain from each other expertise thereby putting resources to better usage.
The type of Joint Venture entered into is dependent upon the circumstances of each case and also the type of synergy companies intend to achieve but no matter whichever type of Joint Venture is opted for, it acts as a stepping stone through which companies can analyze and assess how well they work together and open getaways for future collaboration.
This has been a guide to Joint Venture Types. Here we discuss the top four Joint Ventures including Project-Based, Functional Based, Vertical and Horizontal Joint Venture. You may learn more about M&As from the following articles –