Business Law & Compliance

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How collaboration can generate profit in the manufacturing industry

5 Mins

The report considers that global manufacturing could become increasingly regional. Now that there are relatively low-cost manufacturing centres in all regions, more consumer goods are likely to be made closer to home. BCG hopes that companies (supported by governments) will rethink the old assumptions about sourcing strategies and where to build future production capacity.

This new global landscape will not remain static, so what can UK manufacturers do to capitalise on their strong position?

Strong and effective collaboration with well-chosen partners, whether at home or abroad, may well prove vital to accelerate and facilitate innovation. Collaboration may be undertaken for a number of reasons: to reduce costs, open up new markets, develop new products, and introduce fresh expertise which is necessary to stay ahead of the market and steal a march on competitors.

There are three common structures or vehicles used for collaboration where profit generation is the key objective:

1. Joint venture entity 

This involves the creation of a separate joint venture vehicle, usually a limited company, to develop and commercialise a product or carry out a new business activity. An advantage of a limited company is that it keeps the collaboration activities separate from the day-to-day business of each participant. But there are several key considerations that should be taken into account when setting up a vehicle of this type. 

These include deciding what each party will contribute to the company and what stake each party will receive. Thought should also be given to how profits will be shared, how the joint venture company will be managed, and whether a company structure is appropriate from a tax perspective for the partners.

2. Partnership 

This comes into existence automatically (i.e. there is no need to register or incorporate a separate vehicle) when two or more persons carry on business together with a view to making profit. If two companies start collaborating and creating things without having sorted out how they are going to structure their collaborative venture, there is the potential for a partnership to come into being. In contrast to shareholders of a limited company, those in a partnership have unlimited liability for the partnership’s debts and obligations. 

Tax on any profits is paid by the relevant partners rather than the partnership itself. For these and other reasons, partnerships are not always suitable structures for collaboration. It depends on who the collaborators are, what they want to achieve, and the levels of risk around the venture.

If a partnership is the chosen model, similar issues arise as for a joint venture company. In particular, the partnership agreement will need to cover what share of the profits and losses each partner will bear, and when the profits are distributed.

3. Contractual collaboration 

It is possible to collaborate without setting up a new company or forming a partnership by working with one or more other parties under a contractual framework. This contract should be as detailed as possible (see below for common issues). If the project requires grant or bank funding, a formal collaboration agreement is likely to be required to access capital.

Issues common to all forms of collaboration include:

  • Goals, deliverables and timescales;
  • Project management;
  • Funding the collaboration;
  • Roles and responsibilities of each party;
  • Communication on progress (form, content, frequency);
  • Decision-making;
  • Dispute resolution;
  • The consequences of delay or failure of a party to perform; and
  • Termination (either of the whole arrangement or vis-à-vis one party) and the consequences.

Ownership and licensing 

Particularly where intellectual property rights (IPR) are being contributed by a party or are likely to be created during the collaboration. It is important to identify clearly who will own any IPR created as a result of the collaboration, the manner in which it should be commercialised, and how jointly created IPR will be dealt with at the end of the collaboration.

Identifying whether parties will be making money/ a margin on other activities connected with joint venture/collaboration. Determining margins on side arrangements is as important as working out the respective parties’ entitlements to the profits of the joint venture/collaboration itself.

It is important to take legal advice as early as possible to identify the most appropriate vehicle for your collaboration and ensure that the commercial interests of all parties are properly protected.

Will McIntosh is a partner in Brodies LLP’s corporate and commercial team.

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