Setting Transfer Prices in Manufacturing Joint Ventures


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Choosing the right approach for your venture.

GettyImages-200361840-001_opt.jpgIN SCALE AND PROCESS INTENSIVE industries such as automotive, semiconductors, chemicals, and metals, it is common for industry peers to enter into joint ventures to manufacture intermediate or end products, and for the owners to be the venture’s sole customers (Exhibits 1A and 1B). General Motors and Toyota established their NUMMI joint venture to design and manufacture sub-compact cars, which the owners branded and sold separately under the Chevrolet Nova and Toyota Corolla monikers. Similarly, Intel and Micron entered into a semiconductor JV, IM Flash Technologies, to manufacture memory devices. In that venture, the owners perform the process technology development work separately outside the venture, and each takes ownership of its share of the memory devices that the venture manufacturers, which each in turn sells into the market under its own brand.

The concept is simple. But setting the transfer price is often not.

Exhibit 1A: Manufacturing Joint Ventures - Basic Construct

Exhibit 1A Manufacturing JVs - Basic Construct v2.png

Exhibit 1B: Examples of Manufacturing Joint Ventures

Exhibit 1 B Examples of Manufacturing Joint Ventures.png

Establishing the transfer price at which the venture sells its output to the owners can be tricky, especially when the venture does not manufacture exactly the same product in the same quantities for its owners. Because the owners receive all the output – typically in proportion to their in the JV – there are no third-party sales that can be used to develop a comparable controlled pricing benchmark. Because the output is often customized for each owner, the internal price marker is often different. Add to that the owners’ desire to fairly allocate costs between the multiple products such ventures typically produce – often in unequal portions for the owners – and things get even trickier. Layer on the requirement for the price to be defensible from a tax and regulatory viewpoint, and competitive enough to enable the owners make a profit on end customer sales, and the pricing methodology starts to sound like multivariate calculus.


We looked at several ventures manufacturing custom products solely for their owners, and identified eight principal transfer-pricing approaches (Exhibit 2). These approaches, categorized into cost, market price, and return-based approaches on the basis of the variables used to set the price, are as follows:

Exhibit 2: Examples of Manufacturing Joint Ventures

Exhibit 2 Transfer Pricing Apparoaches.png

To understand how some of these approaches work, consider the Recommended sales price pricing methodology and how it has been applied in the venture example below:

2C. Recommended Sales Price: AMD and Fujitsu, both manufacturers of semiconductor devices, established a venture, Fujitsu AMD Semiconductor Limited (FASL), to produce wafers of certain types of non-volatile memory (NVM). The venture, established in 1993 and based in Japan, evolved over the ensuing two decades – including changing its name to Spansion, being spun-off through an IPO in 2005, and in 2015, being acquired by Cypress Semiconductors.

Through its existence as a joint venture, the owners experimented with a variety of transfer pricing approaches. As initially scoped, the JV produced a new generation of wafers that the owners had equal rights to purchase, incorporate into sophisticated NVM devices (including flash memory devices), and sell into the OEM market. Since the wafers accounted for more than half of the final product price, the unit-selling price to the owners was based on a percentage of their ultimate average selling price at a predetermined, non-negotiable exchange rate. The transfer pricing approach was amended in 2001 to calculate the unit-selling price using approximately 106% of the venture’s cost of sales (possibly to maintain compliance with Japan’s Commercial Code, and / or because the venture’s cost structure had since stabilized).

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In 2003, the owners expanded the scope of the venture to include the manufacturing of flash memory devices. The restructuring, undertaken in response to a downturn in the semiconductor industry, and as a prelude to the venture’s IPO, gave the venture authority over the sales, marketing, and distribution of the devices. AMD and Fujitsu were designated sole distributors of the products manufactured by the venture.

To effect this shift, the transfer pricing was reset to a market-based approach. Under this approach the venture categorized its finished products into “Spansion content only products” and “Combined products”. “Spansion content only products” were defined as products that only contained components manufactured by, or on behalf of, Spansion, and either based on IP owned by Spansion or IP licensed to Spansion, or designs provided by Spansion. “Combined products” were defined as products that included non-Spansion content alongside Spansion content.

Spansion maintained a quarterly price list with its Recommended Sales Price (RSP) for each finished product. For “Spansion content only products” the transfer price to the owners was derived as a percentage of the RSP at the time the order was booked by the owner. For “Combined products”, the transfer price to the owners was also set as a percentage of the RSP at the time the order was booked by the owner. But the percentage figure varied as the proportion of Spansion content to non-Spansion content decreased . For “Combined products” with limited non-Spansion content, the transfer price was simply a percentage of the RSP at the time the order was booked. But for Combined products with limited Spansion content, the transfer price was a percentage of the RSP for Spansion content plus a percentage of the price the JV paid for non-Spansion content.

The difference between the transfer price and the RSP was effectively a distribution fee to the owners. The owners were free to establish the actual price for the re-sale of products transferred from the venture. If the owners sold the product to a customer or channel partner for an amount higher than the RSP, the transfer price automatically increased and was defined as a percentage of the actual sales price. If the owners sold the product for an amount lower than the RSP, the owners could request the venture for a purchase price reduction, but the venture was under no obligation to concede to the request. If an owner were purchasing the product for further integration into a downstream product and sale to an end-customer, rather than in its capacity as a distributor, the owner simply paid 100% of the RSP. The venture had the right to increase or reduce the RSP for any product, at any time, and at its sole discretion (though there were some guidelines in place to honor long-term pricing commitments of the owners).


When negotiating and structuring the legal agreements for a manufacturing JV, dealmakers and attorneys will also often benefit from considering other terms related to transfer pricing. These include:

  • Establishing “take or pay” obligations enabling the venture, at a minimum, to recover fixed costs, if the owners default on off
    take commitments
  • Designing the physical configuration of the facility so that it is easier to track capacity utilization and materials consumption by each owner (e.g., through different assembly lines or through the machinery and equipment layout)
    Clarifying whether costs for custom upgrades, capacity additions, and special installations will be fully borne by the requesting owner
  • Clarifying whether costs of ‘scrapped products’ (which do not meet quality criteria of owners) will be fully borne by the venture
  • Clarifying whether product modifications and specification changes requested by one owner will be allowed and, if so how (e.g., only if the other owner is compensated for the impact on the JV’s cost structure and pricing)
  • Creating mandatory processes to exercise oversight of production efficiency and cost management (e.g., annual executive-level meetings to share financial objectives; open book costing and pricing; periodic adjustments to manufacturing processes, capacity allocation, and other procedures impacting costs)


Pricing owner off take in manufacturing joint ventures might not be simple, but there is a range of approaches that you can compare and choose from. What is the best approach for your JV? 

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