Business

How global joint ventures can thrive in times of turmoil

Joint ventures could be even more relevant than mergers and acquisitions to company strategy.

Joint ventures could be even more relevant than mergers and acquisitions to company strategy. Image:  Product School/Unsplash

Rahul Khubchandani
Partner and Associate Director, Boston Consulting Group (BCG)
Ed Gore-Randall
Partner and Managing Director, Global Leader – Joint Ventures & Alliances, Boston Consulting Group (BCG)
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Horizon Scan: Markus Herrmann

  • Joint ventures are increasingly relevant, especially in times of geopolitical turmoil and economic uncertainty, some say more so than traditional merger and acquisition activity for company strategy, according to a Boston Consulting Group survey.
  • Most firms remain committed to their existing joint ventures, even when facing geopolitical challenges; however, many believe their companies are not fully prepared for the changing world.
  • Companies are changing their joint venture strategies, sometimes shifting their geographic focus, while many consider embedding “non-legal” protections into new partnerships.

In the past few years, the risks with international business have multiplied. Between warfare, climate change and the pandemic, among other global crises, the world has become a more complicated place than at almost any other time in recent history. Many of the arising geopolitical risks affect companies engaged in cross-border joint ventures.

Cross-border joint ventures are legal entities with joint ownership that allow companies to penetrate new markets more effectively by combining local insights with complementary resources and capabilities.

Such joint venture activity has remained highly resilient throughout political upheavals and economic downturns over the past 15 years and in July 2023, Boston Consulting Group (BCG) conducted a survey asking how cross-border joint ventures are withstanding the current state of the world.

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Bright future for joint ventures

In a survey of 159 executives from companies with worldwide joint ventures, a majority (58%) believed the current geopolitical landscape favours establishing joint ventures rather than mergers and acquisitions. A similar number (60%) said joint ventures are a more resilient vehicle for handling economic downturns. People from six sectors were particularly optimistic about joint ventures:

  • Metals and mining.
  • Automotive and mobility.
  • Consumer goods.
  • Telecommunications.
  • Media and technology.
  • Aerospace and defence.

Respondents from the aerospace and defence sector, for example, pointed to the sensitive nature of their industry as an important reason for forming joint ventures.

Joint ventures are more resilient and favoured than mergers and acquisitions in the current geopolitical landscape.
Joint ventures are more resilient and favoured than mergers and acquisitions in the current geopolitical landscape. Image: Boston Conslting Group

Two-thirds of all participants said they remain committed to their existing joint venture strategy even if they face challenges. However, global tensions have led a significant number (33%) to consider changes such as focusing on joint ventures in different regions, renegotiating terms, or exiting certain partnerships.

North American and European firms are the most likely to feel that they’re exposed to geopolitical risks, as a higher proportion of their joint ventures (about 70% in our sample) involve foreign partners. By comparison, cross-border ventures comprise only about 30% of all joint venture activity for Chinese companies and about 50% for companies in India and the rest of the Asia-Pacific region.

Moving around the map

Future joint venture activity will likely focus on different regions than in the past. For example, businesses in North America and Europe are looking to have fewer partnerships in China. This refocus may reflect several factors beyond geopolitics, including slower gross domestic product growth and the fact that China no longer requires foreign companies to set up joint ventures to operate there in certain industries.

At the same time, North American and European companies may also be looking at partnerships closer to home due to national security, green energy and industrial policy incentives.

Many Asia-Pacific countries outside China and India are also planning to increase joint ventures in North America, Europe, the Middle East and their own region, while Latin American companies are looking at more activity in North America, Europe and Latin America itself. These plans are likely the result of both geopolitical shifts and growth opportunities.

Businesses are considering joint ventures in new markets, including their home regions.
Businesses are considering joint ventures in new markets, including their home regions. Image: Boston Consulting Group

Strengthening strategy

As executives consider the opportunities and risks in a rapidly changing world, only 23% say they are well prepared to operate their existing joint ventures and execute their future ambitions at a time of heightened geopolitical risks. A majority (70%) say they are only somewhat prepared, while 8% say they do not feel prepared at all.

The best way to maximize future success is with a strategy that builds in resilience. All future cross-border venture agreements should contain some safeguards and even existing ventures can set up new mechanisms to protect all partners. In particular, we recommend the following five practices to help cross-border joint venture partners succeed in the current international paradigm.

Key practices to help cross-border joint venture partners succeed.
Key practices to help cross-border joint venture partners succeed. Image: Boston Consulting Group

1. Stress-test joint venture strategies and business cases against potential geopolitical shifts

Whether you’re considering your options in an existing partnership or examining the viability of a new venture, scenario modelling for a more volatile future should be a critical and continuous part of the decision-making process.

2. Recognize cross-border joint ventures differ across regions

Partners must be attuned to each country’s unique social, political, legal and financial frameworks. Cultural contrasts in any joint venture deal can have a lasting impact, beginning with early-stage negotiations and lasting throughout the partnership’s life.

3. Create a robust governance structure with non-legal protections and escalation pathways

Protective mechanisms that extend beyond the scope of the legal joint venture contract are one of the most valuable safeguards in a cross-border joint venture. Among the executives we surveyed, 32% say these protections have become more important over the last decade and 44% find them at least as important as legal protections, if not more so.

Non-legal joint venture protection mechanisms have gained importance over the last decade.
Non-legal joint venture protection mechanisms have gained importance over the last decade. Image: Boston Consulting Group

4. Establish deep personal relationships in the local jurisdiction

Foreign partners must also establish direct relationships with other customers and suppliers, in addition to government bodies, as a backstop in case their relationships with their local counterparts turn sour.

5. Ensure each party has a clear exit plan clarified in the agreement

The exit plan has become more important than ever to ensure that no partner lacks a viable way out or is forced to leave value on the table. If you are already in a partnership and finding your exit plan insufficient in a riskier world, you might take advantage of any opportunity that arises to renegotiate the original joint venture agreement. For example, if you and your partner want to expand into a new market, it can be an opener to change certain terms and draft a stronger exit mechanism.

A robustly structured joint venture can withstand most stresses but all partners must ensure that they’re adequately protected and recognize that the rule book of the past may need to be adapted to the uncertain world of the future.

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