Joint Ventures: When Worlds Collide

Business is increasingly turning to joint ventures (JVs) over mergers and acquisitions (M&A) to develop new markets, achieve economies of scale, combine assets and share risk. A JV is a commercial enterprise where two or more companies share resources to accomplish a specific task, but otherwise retain their separate identities. Often, a JV is the simplest and most effective way for multiple parties to achieve a common goal.

While the term JV is usually associated with commerce, the principle of joining up with others to give more certainty of a desirable outcome applies to most walks of life, from political coalitions to charitable endeavors.

One reason why industry often prefers JVs to M&A is because they enjoy a higher degree of success in achieving the desired outcome. This is helped by JVs being subject to more homework at the outset. If an acquisition goes wrong, the owner is free to dilute or even abandon any goals intended as a result of the purchase. But if a JV hits difficulty, it is usually incumbent within the initial agreement that it gets sorted out by the parties concerned. Accordingly, JV agreements tend to have better provision for working together.

Positivity towards JVs is supported by US research which says JVs deliver 17% return on investment compared to the industry average investment return of 11%. According to a global survey by management consultancy Bain & Company of 253 companies that used JVs, more than 80% of the participants said the deals met or exceeded expectations.

Technology drives increase in JVs

Behind the increased number of JVs is the astonishing pace of technological advancement – a single organization, however large, cannot be expected to master thoroughly all the technologies involved in, for example, the modern automotive industry.

When it was deemed cars were not complete without radios, car makers simply sourced the device as an optional extra. Today, however, much of the technology in cars is not simply an addition but is intrinsic to the vehicle itself. An example of this is the forthcoming advent of the driverless car, where the software required is a specialism in its own right, often necessitating car manufactures to look outside their own field to find the expertise elsewhere. Another example is the electric car, which is enjoying increasing commercial success.

One electric car-related JV has recently happened between Peugeot carmaker PSA Group and Japan’s Nidec Corporation, an electric motor manufacturer. The linkup will equip all new Peugeot, Citroen, DS, Opel and Vauxhall electric cars with Nidec motors from 2022. Initial investment for the venture is €200 million. Nidec will operate the joint venture through Nidec Leroy-Somer, the French electric motor company it acquired in February 2017 for $1.2 billion. Headquartered in Angouleme, France, Nidec Leroy-Somer is renowned for its high-quality products which include alternators, electric motors, geared motors and variable speed drives.

The 50-50 PSA-Nidec venture is expected to have a production capacity of 900,000 motors per year from 2022. The JV has happened in part because Nidec expects the market for electric vehicle motors to double to €45 billion over the next two decades as consumers and governments increasingly demand alternatives to combustion engines.

PSA Group has explained that a future ban on new gasoline/diesel cars in some countries would make electrification the key to both solving global warming and controlling air quality. Meanwhile, Tetsuo Onishi, executive vice president for Nidec, said that the capital structure of the joint venture would remain equal at 50-50 once production began, but that Nidec would take control of sales.

Nidec and Peugeot are not the only firms signing partnerships in the car industry. Global engineering firm Bosch is working with two different companies on car-industry-related JVs: the first is with Nvidia, a semiconductor firm, to develop brains for driverless cars; the second is with car manufacturer Daimler on a partnership that could see  

driverless cars by 2020. The latter would operate similarly to a taxi service, with customers ordering the vehicle to a destination via their smartphones.

Industrial IoT JVs are thriving 

According to research and advisory company Gartner, the number of IoT devices reached 8.4 billion in 2017, outnumbering the world’s population for the first time. And Gartner estimates there will be 20.4 billion IoT devices by 2020, with spending on IoT by 2020 due to reach $5.9 trillion ($2.9 trillion on IoT devices and a further $3 trillion on IoT services).

Industrial IoT/ Industry 4.0 technologies will be a crucial part of growth in IoT. This year, the Hannover Messe industrial trade fair was heavily focused on industrial digitization and a key growing trend highlighted at the fair was the tendency for German industrial firms to sign JVs and industrial partnerships.

For example, in 2017, a group of companies including DMG Mori, Dürr, Zeiss, Homag and Schenck got together with Software AG, one of the largest software vendors in Europe, to form ADAMOS (ADAptive Manufacturing Open Solutions), which bundles knowledge in mechanical engineering, manufacturing and IT. They now offer networked production technology for a range of industrial sectors on an open IIoT platform.

Software AG is part of a wider trend for software/tech firms to move into Industrial IoT/ Industry 4.0. In fact, many of the largest tech companies have recognized the need to sign JVs in the industrial space. Another example is Amazon Web Services, which has recently signed a collaboration agreement with global Industrial PC company Logic Supply, that is focused on making industrial IoT development easier and more efficient.

With the IoT increasingly requiring complex technology to connect everything from cars to combine harvesters, the scope for new JVs is boundless. And if hi-tech companies are to develop their markets to the full, cooperation will be a crucial route to success. In this respect it is not just the approach to production that will change, but the dynamic of the marketplace itself.