Joint venture is a contractual agreement between one or two parties in order to execute a particular business or project in order to maximize the profit of the business. It has mutual understanding between the parties to share the profits or losses of the undertaking business.
Joint ventures are co-operative of businesses in which two or more companies joined together. The companies on entering the joint venture may form a separate corporation or partnership. There are also some cases where the business entity retain their own individuality, while entering into joint venture agreement which is operated as a separate entity altogether.
What Happens In a Joint Venture?
During the process of joint venture the two companies should decide the terms and condition of the venture.
The terms are decided in order to get the benefits equally by all the companies in the joint venture.
When a joint venture is formed the parent companies pool together agreed resources like capital, human resources, profits risks etc.
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They share business expertise, technology, distribution channels and sometimes, even clients.
Joint ventures are usually viewed as strategic alliances.
Benefits of joint ventures:
The main advantages of joint venture, where the two companies combines their technology and research which helps them to cut the cost of research and improve the quality.
The pooling in of human talent also helps to increase the efficiency of the business.
All the economic and financial risks are shared by the companies in the joint ventures.
There is greater financial support among the companies, which helps them to improve the performance of the company and maximize the profit of the company.
Joint Venture Trends:
According to Ian Hewitt, "the primary goal of joint ventures is to form cross border alliances to serve growing markets"
As companies focus on their core objectives, and they fail to concentrate on their technology and innovation of new products.
To fill these gaps of technology, joint ventures are the best way for the company.
EX: ' X ' a company with all resources such as land, labour and capital but doesn't have latest technology which helps to improve the standard of the product, so it enters joint venture with the company 'Y' which has all latest technology but without resources like labour, place etc. So the both company X and Y made joint venture in order to achieve success in their field.
Types of Joint Ventures:
Equity Joint Ventures:
It is the joint ventures in which separate business entity was formed and the capital was contributed by all the partners involved.
Non-equity joint ventures:
In this type, the capital was not contributed by the parties to form separate entity. Instead, they made agreement to share their resources among the companies. It is also called invariable contractual agreements.
Joint ventures of Shell:
In August 2010: Shell International Petroleum Company Limited and Cosan S.A. signed joint venture: Raizen
The project is to produce and commercialize ethanol and power from sugarcane and distribute a variety of industrial and transportation fuels through a combined distribution and retail network in Brazil. It will develop the business opportunities to produce and sell ethanol and sugar globally. The value of the project is US$ 12-billion.
It is a holding company. It involved in the production of ethanol and sugar, the distribution and marketing of fuel and lubricants in Brazil. It also involved in logistics services in Sao Paulo, Brazil. It produces, sells imports and exports sugar, sugarcane, other sugar by-products and ethanol. It also involved in the distribution of fuel and other fuel by-products. It produces and markets electricity, steam and other co-generation by-products. The company is running the operation through Cosan, Cosan Alimentos S.A and Cosan Acucare Alcool S.A.(CAA).
Acquisition of Cosan Ltd:
On June 17, 2009, the Company completed the acquisition of Teacu Armazens Gerais S.A. (Teacu). On November 12, 2009, the Company completed the acquisition of 14.28% interest in Logispot Armazens Gerais Ltda. (Logispot). On November 24, 2009, the Company completed the acquisition of 26.7% of TEAS's capital. On June 17, 2009, the Company sold its aviation fuel business to Shell Brasil Ltd
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Joint ventures between Shell and Cosan Ltd:
Joint ventures of these two companies will made them to achieve leadership in their respective core businesses.
Shell is the global leading energy and petrochemical supplier and Cosan is the world leading producer of sugarcane ethanol and sugar producer.
These JV helps to develop the production of sugar and biofuels
These JV helps to develop the fuel distribution business in Brazil with the annual production of
Over 2 billion litres of ethanol
Shell contribution at IOGEN and CODEXIS will lead the JV to a unique position in the production of sugarcane ethanol
These JV helps to develop the Biomass technology between shell and cosan
The value of the share will also increase due the joint venture
Capital Structure of Joint Venture:
Cosan 51% Shell 51%
Sugar, Ethanol Co-generation
Contribution of Cosan and Shell towards Joint venture:
Total contribution -US $ 4,925 Million
Total Contribution - US $ 4,925 Million
Sugar and Ethanol Assets
Cash Contribution of $1,625 million
Sugar cane crushing capacity: currently ~60 million tonnes per annum from 23 mills
Brazilian downstream assets, including ~2,740 branded retail sites, supply and distribution assets, and the aviation fuel business, including the one recently acquired from Cosan
Ethanol production capacity:Â currently >2 billion litres per annum;Â
ItsÂ share interest in Iogen Energy;
All Co-generation plants
Its 14.7% share interest in Codexis.
Brazilian downstream assets, including ~1,730 retail sites, and supply and distribution assets;Â Â Â
Ethanol logistics assets
Net debt of approximately US$2.5billion
Additional debt of R$500 million from BNDES
Assets not being contributed:
Exploration and production businesses
Stake in Radar
Gas and power businesses
Manufacturing and marketing of its lubricant business
Manufacturing and marketing of its lubricant business
Future cogeneration assets
Shell trading business
Retail Brands DaBarra and União
Scope of the Joint Venture:
Increase in the production and sale of sugarcane ethanol and ethanol based products in Brazil
Continuing development in first generation technology in Brazil and second generation technology in international partnership
Increase in the production and sale of steam, electricity and other co-generation products in Brazil
Growth in the distribution, commercialization and retail sales of fuel products and aviation fuels in Brazil
The annual production capacity of about 2 billion litres and significant growth aspirations, the JV is milestone for the production of ethanol in the world. The graph below shows the Shell and Cosan joint venture is comparable to 1/8th of current ethanol production form sugarcane as of 2010 -2019.
Benefits arising from the joint ventures of Cosan and Shell Ltd:
Increase competition in the fuel and biofuels industry in worldwide
More access to ethanol market
Shell's interests in Iogen energy and Codexis, which make the venture to develop next generation biofuels technologies.
Building a unique platform for the second generation technology
Upgrading of debt ratios by increasing the capital which inturn increase the cash flow
Improved business intelligence
Access to the highest standards in corporate managerment
The project helps to generate electricity from sugarcane
According to Mark Williams, Shell Downstream Director "The proposed joint venture is set to pool our complementary businesses, enhance our growth prospects in ethanol production globally and support our growth platform for our retail and commercial fuels businesses in Brazil"
"Over the next 20 years, sustainable biofuels are one of the most realistic commercial solutions to reduce CO2 emissions from transport."
"While there is still plenty of integration planning to do before we launch the proposed joint venture, this is an important milestone in our effort to create one of the world's most competitive sustainable biofuels companies," said Rubens Ometto Silveira Mello, Cosan's Chairman of the Board and non-executive Chairman-elect of the proposed joint venture.