Much is written about the unattractiveness of joint ventures. Barely a week goes by without a breakup appearing in the press. This summer, McDonald’s announced the termination of its joint venture in India and Starbucks terminated its joint venture in Taiwan. Management guru Peter Drucker captured the sentiment of instability years ago when he wrote, “Businesses used to grow in one of two ways: from grassroots up or by acquisition. In both cases, the manager had control. Today, businesses grow through alliances, all kinds of dangerous liaisons and joint ventures, which, by the way, very few people understand.”
Our research, however, tells an entirely different story: it shows that CEOs continue to flock to growth via organic investments and acquisitions, despite joint ventures generally yielding superior returns.
Past research, including studies by McKinsey & Company, the Boston Consulting Group, KPMG, and others, has given joint ventures a bad name. These studies, performed in the 1990s, concluded that joint ventures had, at best, a mixed track record of meeting owners’ financial and strategic objectives. The overall success rates calculated were around or well below 50 percent, depending upon the study – in other words, no better than a coin toss as to whether the venture would meet its targets.
“If well-conceived, joint ventures leverage local know-how and infrastructure, allow for a quick start and benefit from economies of scope.”
A different narrative emerged from our recent analysis of U.S. Department of Commerce (DOC) data, collected from more than 20,000 entities. According to the DOC data, foreign joint ventures of U.S. companies realized a 5.5 percent average return on assets (ROA), while those companies’ wholly-owned and controlled affiliates (the vast majority of which are wholly-owned) realized a slightly lower 5.2 percent ROA. The same story holds true for investments by foreign companies in the U.S., but the difference is more pronounced. U.S.-based joint ventures realized a 2.2 percent average ROA, while wholly-owned and controlled affiliates in the U.S. only realized a 0.7 percent ROA.
Examination of specific companies and industries underscores the overall trend. For example, over a similar period, ExxonMobil, the U.S. oil and gas major with massive investments overseas, had an overall median ROA of 10.5 percent. U.S. companies’ international joint ventures that focused on oil and gas extraction – including ExxonMobil’s – produced a 13.1 percent average ROA, whereas their controlled entities abroad produced a 9.4 percent average ROA. General Electric, the U.S.-based diversified manufacturer that realizes a significant portion of its sales domestically, had a median ROA of 2 percent. Meanwhile, foreign companies’ U.S. joint ventures focused on manufacturing yielded a 2.3 percent average ROA, versus the 1.6 percent average ROA yielded by their controlled entities.
It is worth noting that the lower returns yielded in the U.S. are likely to be, at least in part, explained by the high U.S. corporate tax rate, performance of emerging markets, and a series of market crashes that acutely affected U.S. companies.
Other recent research and conversations support this ROA analysis. Research analyzing joint venture life span data shows joint ventures are lasting longer – up from a median of seven years in the 1990s, to now more than 10 years. In discussions, we have conducted with over 200 joint venture board directors and executives over the past two years, two-thirds said their joint ventures at least met their targets.
Yet, despite superior performance by joint ventures, corporate investment, debt and equity, continues to be overwhelmingly allocated to wholly-owned and controlled affiliates, whether these are formed organically or via acquisition. Investment in controlled entities is more than ten-times greater than investment in joint ventures. It is only by exception that joint ventures are used.
So, why do joint ventures outperform common perception and what may have changed since the 1990s? If well-conceived, joint ventures leverage local know-how and infrastructure, allow for a quick start, and benefit from economies of scope. Over the years, companies seem to have changed their approach to joint ventures. Fewer companies today treat joint ventures like acquisitions or standard vendor arrangements. Instead of trying to win the negotiation, they are fostering open, mutually beneficial, and sustainable relationships.
Regardless of why joint ventures outperform or whether a seismic shift in performance has occurred since the 1990s, it appears quite clear that joint ventures are underutilized, whether because CEOs and their corporate development teams are making the wrong decision or they are consciously forgoing returns for control.
But, some companies appear ready to challenge the status quo: WeWork, a provider of shared work spaces and one of the most valuable venture-backed companies in the world, in July closed a 50:50 joint venture with SoftBank to grow in Japan, and AES and Siemens also recently announced an energy storage joint venture to address the intermittency issue for solar and wind power. Time will tell if these deals represent the start of a new and enlightened approach or just a one-off departure from the standard playbook.