Joint Venture Risk Analysis

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Joint Venture Risk Analysis
Joint Ventures refer to a joint contractual partnership between two entities that are based on
profit-loss and risk sharing methodologies. For ELD and FIH, the joint venture would be
termed as an international joint venture with various risk pertinent to the professional
relationship. This report analyzes the risks ELD would be exposed to on its decision to go
ahead with the proposition placed forth by FIH for joint venture partnership. As the thorough
analysis conducted by the ELD about FIH, there are certain points that lie proportional to
ELD's expansion plans, for instance the rapid growth experienced by FIH, whereas, some
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contradict or appear as red flags to the company's anticipation of good returns, for instance,
no reported profits from time of inception up till the current date. However, through joint
venture proposition, better decisions can be taken to uplift the two companies in the UK
region, providing them with a joint understanding, with risk and reward sharing strategies, to
minimize the exposure of each of the company, whereas, ensuring the maximum returns are
reaped from the monetary and time-based investments conducted by each of the entities
involved.
Following are the four identified risks with the acceptance of the joint venture proposal:
1. Management Risk
2. Overseas Risk
3. Default Risk
4. Exchange Risk
Below is the brief description of each of the risk in the context of the joint venture proposition
of ELD and FIH in the UK region. Furthermore, a brief understanding of the four T's risk
management framework is developed in the same context, to better understand what risk
mitigation or management strategies are effective or useful for each of the mentioned risk
exposures.
Management Risk
The first risk that the company would be exposed to is Management risk. The usual issue
with joint ventures is the clash of cultures and management styles. At a higher level, it is a
joint effort to bring together to companies to achieve a common goal and partake a share in
risk and rewards that the venture entails. However, at a closer inspection, it is evident that
there is more that is at conflict then what meets the eye. The differences in culture of
workspaces along with management styles, can lead to clashes and probable delays in how
processes are effectively carried out on each of the individual entity. Furthermore, the
differences can lead to inefficiencies that further impact the viability of the joint venture,
risking the partnership before it even has time to mature.
For ELD, there is a substantial amount of management risk involved, considering the biggest
difference of US-UK best practices, that might not be correctly implemented, or may be
conflicting. This can cause bottlenecks in the projected progress of the company. To deal
with the management risk, a more open and welcoming culture can be introduced through
introductory meetups to get the employees and managers to interact at an informal level and
understand either of the company's best practices in their respective areas.
Overseas Risk
Another risk associated with proceeding with the joint venture is the overseas risk, that is
closely related to the management risk faced by the two entities. Since ELD intends to
initiate their joint venture in the UK and therefore, would need to invest time and money to
understand their cultural practices, their laws and taxation processes. The taxation laws may
be more relaxed in the UK than in the US, allowing a certain amount of flexibility, however,
changes in laws governing businesses and franchising can change and cause adverse
effects to the company. This risk is further analysed, and mitigation is suggested through the
four T's of risk management framework in the proceeding section. Conclusively, it is a
higher-level risk that cannot be mitigated through financial means and would require
termination and not dealing with it on an immediate basis.
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Default Risk
The default risk is referred to as the likelihood that a company will go bankrupt or be unable
to keep up with their end of the bargain, in this scenario, the risk-reward sharing in the joint
venture. FIH has experienced rapid growth over the last few years. However, one alarming
situation is it has not posted any profits till date from its inception in 2006. Further analysis of
the financial statements can add more clarity to the subject matter. However, the situation
can be assessed at a higher-level as requiring further investigation. Thus, the default risk is
more pertinent and would require effective mitigation tactic to hedge against it, provided the
company chooses to go through with the joint venture. Insurance and similar alternative
hedging products can allow for reduced exposure to the default risk caused due to partaking
in the joint venture. ELD is currently heavily insured and therefore, can look into moving
ahead with this decision of initiating a joint venture. It is recommended, however, to assess
and include more financial products for international businesses and related risk and
insurance.
Exchange Risk
Lastly, a major risk that international businesses are prone to be exchange risk. It is referred
to as undesirable fluctuations in the exchange rate of the currency of the home country and
the country where the business is being established. The exchange risk can drastically skew
the projected budgets and forecasted sales, causing anticipated profits to turn into
breakeven or much worse, as losses. Usually, political and economic scenarios cause
fluctuations in exchange rates. They are also heavily influenced by the involved countries.
The relationship between the UK and the US are strong and therefore, lesser at risk of
exploiting the exchange rate of the two countries. However, an internal matter of Brexit can
cause the UK pounds to drastically drop, as it was observed in the Brexit referendum in
2016, causing the pounds to sharply decline and depreciate in the open market. The risk can
be hedged against using specialised financial instruments and would require funds to ensure
the exposure to the exchange risk is reduced to as low as possible.
Three Risk Financing Solutions
Each of the suggested risk exposure would require a certain amount of risk financing. Risk
financing refers to the accumulation and allocation of funds to mitigate the risks, in this case,
of proceeding with the joint venture with an international company situated in another
continent. Following are the three suggested risk financing solutions that are suggested for
each of the above-mentioned risk exposure after analysis through the four T's framework of
risk management, as briefly discussed alongside each of the financing solutions.
1. Insurance
2. Derivatives
3. Do Nothing
Each of the risk financing solutions is discussed below with the intent to understand the
particular risk it targets to resolves, following its strategy used based on the T's of the risk
management framework.
Insurance
ELD is currently heavily insured and has a very low-risk appetite. Banking on the same
financing method, insurance is an effective and reliable method to mitigate some of the risks
that were discussed above. For instance, for management and default related risk
exposures, insurance products can be sought after that cover a certain portion of the risk
through regular premium payments made by ELD. Furthermore, through the transfer
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