Joint ventures in vogue but experts say half will fail

Joint ventures are an emerging trend on the Australian business scene, but half of them will fail to deliver objectives and two thirds will dissolve within two years of formation, according to PwC partner Mike Sum.

The comments come after a string of Australian joint ventures within the last few months, including Coles and GE Money and Sports Direct and OzSale.

“Here in Australia there has been a flurry of them recently and we think there’s going to be a significant increase,” Sum told SmartCompany.

“Unlike mergers, it’s not well understood that joint ventures tend to fail and I don’t think corporate Australia is ready to make them a success yet.”

Sum says the success rate of joint ventures has been around the 50-75% mark internationally for several years, made clear by several studies.

One of those studies included a global PwC survey from January, which showed 43% of Australian chief executive officers planned to enter a new joint venture or alliance in 2014, up from 28% in 2013.

Sum says alliances are already a common growth tool in the US market where over 40% of business is now conducted through such partnerships.

As well as the Coles/GE Capital and Sport Direct/OzSale joint ventures, last month Woolworths financial services partnered with Visa, while Telstra embarked on a joint venture with SNP Security and rail freight operator Aurizon began a partnership with Chinese steelmaker Baosteel.

While these examples come from the big business sector, Sum says many SMEs are also likely to consider joint ventures in the current climate.

“A lot of [SMEs] will be grappling with the same issues. They are probably fairly well capitalised at this point, they are looking at that next wave of growth. They may not want to, or there may not be targets available for a straight merger or acquisition on home territory,” he says.

“With that desire for growth comes the need to look at alliances.”

Sum says it is also very likely Australian SMEs are looking at joint ventures to enter the Asian market.

Peter Gahan, director for the Centre of Workplace Leadership at the University of Melbourne, told SmartCompany many Australian businesses have had to look at joint ventures to enter markets like China because of foreign regulations.

Gahan says there are number of reasons why joint ventures fail, including the unanticipated clash of company cultures.

“Research has shown that while joint ventures are typically based on a strong business case for the newly created enterprise, that there’s always a problem of turning that potential into reality,” says Gahan.

“Often the very things that create the potential become weaknesses. Where you have diverse companies coming from different cultures, it is often difficult to find a way to come together.”

Gahan says SMEs should be wary of partnering with larger firms because there is a large risk for a potential imbalance in the relationship.

“Over time the larger comes to dominate, “says Gahan, who recommends setting up governance structures that reflect both parties’ interests.

He also recommends thorough risk management work to be done before a joint venture.

Sum says joint ventures are a trend companies need to embrace going forward because traditional methods of growth won’t be as readily available.

“Those companies who are adept at alliances will succeed,” he says.