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Joint ventures disintegrate, unsettle corporate India

Usha Iyer in Bombay

Sample a few headlines during the last fortnight: ''A Marriage That Was Bound To Break'', ''Divorce By Mutual Consent'', "Driven By Discontent". These are not from tabloids but well respected financial newspapers.

The termination of the joint ventures between global infotech leader IBM and the Tatas, Ford and Mahindra & Mahindra, Kinetic and Honda, LML and Piaggio, has sparked a debate as to whether Indian companies find it difficult to do business together with foreign corporates and vice-versa.

"Historically, joint ventures have had their share of successes and failures in India. While each case is grounded in its own specificity, there certainly are some lessons to be culled on what makes a joint venture between a multinational company and an Indian company tick," says a functionary at a leading management consulting firm.

Joint ventures in the form of financial / technical collaborations have been the most common mode of foreign investment in India, guaranteeing maximum visibility and presence in the market. The early Nineties saw a number of multinational companies seek partnership with Indian companies, swept along by the new winds of liberalisation that blessed such liaisons.

Although this was essentially necessitated by the fact that MNCs were not allowed to hold a majority stake at the time, most of them actually preferred to tie up with a local partner to gain a foothold and establish a strong distribution presence in the country.

Rukhshad Shroff, strategist at Jardine Fleming, says, ``The Indian promoters had their distribution network in place, while the foreign partners brought their technical expertise to the venture. A proverbial win-win situation it was for both." A situation that spurred tie-ups across diverse industries, as between Procter & Gamble and Godrej, Peugeot and Premier Automobiles Limited, and Hewlett Packard and Hindustan Computers Limited, to name a famous few.

The local partner got access to multinational marketing prowess and high-end technology, while the foreign partner got plugged into a strong, mainline distribution system.

However, as it turned out, a number of these partnerships floundered and gave way over time. Although each joint venture may have come apart for reasons unique to the two partners, or that particular industry, or economic factors peculiar to the time, analysts point out certain common trends.

The obvious, though often overlooked, factor in forming a joint venture is the compatibility of long-term objectives of both partners, and their respective capacities to meet those objectives. Amitabha Guharoy, executive director, PriceWaterhouseCoopers, says, "Any joint venture has to be between equals. Most in the Indian context though are not. And, therefore, after the initial period, if there is a requirement to increase capacity or funding, the Indian partner is at a disadvantage."

Parity of size, ownership, control and contribution to the joint venture hold the key to keeping a partnership alive, says Rajshekhar Iyer, head of institutional broking, Kotak Securities. "Unless the local partner constantly adds value to the joint venture, and keeps the initial need of the foreign partner alive through the period of the joint venture, the partnership will not be successful."

Since joint ventures are inevitably entered into in businesses where the market is domestic, and technology global, the strength of the local partner lies in the knowledge of local markets. However, it is only a matter of time before the MNC, with its vast experience in other markets covers this learning curve. Consequently, the need for the local partner reduces, and the MNC offers to buy out its stake, say the experts.

Another reason for the failure of joint ventures comprising MNCs in India is the inability of the Indian partner to match the financial muscle of the foreign partner. Shroff says, "In high gestation industries where you may not see profits for a few years, the Indian partner is unable to commit more finances and is therefore forced to sell out." Iyer agrees, "The most important factor in a joint venture is the investment time horizon. The foreign partner's time horizon in terms of strategy for growth is much longer, since their ability to take risk is obviously higher. You really cannot expect an equitable relationship in that case between a multi-billion dollar MNC and a 1 billion Indian company."

And in an increasingly competitive and discerning market, where money is becoming scarce, Indian companies are left with little choice but to recapitalise their businesses and sell out to their deep-pocketed MNC partners. However, it would be a skewed view to regard this as a case of Cowboys vs Indians. There is much to be learned and valued by both partners, and most Indian strategists see these joint ventures as an opportunity for the local partner not so much to absorb capital as to absorb learning from their international counterparts, to see the joint venture as a process rather than as an event.

Will familiarisation with the Indian markets and rapid deregulation, then, set the stage for MNCs to increasingly operate as wholly owned subsidiaries? Yes, says Guharoy. "The MNCs have been here awhile now and have a feel of the market. Therefore, the trend is towards having 100 per cent subsidiaries, particularly in technology intensive sectors."

Other sectors may not be that easy to penetrate, says SSKI analyst Prabhat Awasthi. "The barriers of entry for, say, the two-wheeler market are very high, and therefore it would not be easy for a company like Piaggio to set up a 100 per cent subsidiary in India. To build a brand, you have to have a dedicated dealer network, and therefore the foreign company may have to look for another local partner.''

As for the larger question of the attractiveness of the Indian market as an investment destination, Iyer sums it up: "Most MNCs overestimate the potential of the Indian market in the short term, but underestimate it in the long term."

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