The trick in an Indian joint venture is to do what
B-school boys are first taught to do -- a SWOT analysis
I have a friend in New Delhi who advises companies,
especially foreign ones, on entry strategies. Among his
regular clients are Japanese investors. For the past few months
they have become extremely wary of entering into tie-ups with any Indian
company. They are suffering from what can now be called in joint-venture
parlance the Chiku Effect.
Chiku is the pet name of Siddharth Shiram, managing
director of Shriram Industries and Engineering Ltd. Months
after his cousins Vinay and Arun Bharat Ram of DCM Ltd hit
the jackpot by bringing in Daewoo Motors, Chiku decided to rope
in a bigger fish: Honda Motors. Together, they decided to form Honda-
SIEL, whose model -- the City -- is expected to hit the India roads
in September.
The $245 million Honda-SIEL project was to have
a 60:40 equity participation which meant that Chiku was to put
in $98 million. After getting all the necessary clearances, just before the shares
were to be formally distributed, Chiku told his Honda counterpart
that he didn't have the money for the 40 per cent.
The Japanese reminded him that three months ago he
had confirmed he had the money. Chiku said he had it
then. But he didn't have it now. So what do to do?
Since Honda had committed going ahead with project
(the Indian market is irresistible), Chiku made an offer they
couldn't refuse. He would put in 10 per cent of the equity now
($24.5 million), and two years hence he would buy the remaining 30 per cent from Honda at the current
price. In other words, could Honda raise their equity to 90 per cent and let him have his share later at today's prices?
If they could not, then Chiku was sorry. He would
withdraw from the joint venture. And Honda would have to start
from scratch.
Honda was reluctant, but finally decided the venture was worth
it.
The venerable Tarun Das,
chief of the Confederation of Indian Industry, the country's most powerful
corporate lobby, has been saying that MNCs act like cowboys when
they enter a JV with an Indian firm. Wonder what he has to say
for Chiku Shriram!
Of course, technically speaking, the Honda-SIEL joint
venture is still on. It is one of the 255 odd Indian joint ventures
with overseas companies that the government approved
in 1996. But is it successful?
A McKinsey worldwide study of more than 2,000 alliance
(principally joint ventures) over the past few years shows
the average span of a JV is only seven years. In more than 80
per cent of the cases it ends in one partner selling out to the
other.
We have seen this happening often in India Inc, especially
in the automobile and telecom industries where large capital is
needed. DCM sold off a sizeable portion of its equity to Daewoo
Motors. Peugeot has put on pressure on its partner Premier
Automobiles Ltd. General Motors and Ford say things are hunky-dory --
but, take a bet, when they launch their new models, their India
partners, Hindustan Motors and Mahindra respectively, will find
it easier to dilute equity than to raise resources.
Indian corporate houses are tackling this trend
in two ways. Some throw up their hands and say they have been cheated; that they are being bulldozed
by the muscle power of their JV partner.
Recently, Ratan Tata,
aired this view. Then came the news that TELCO is set to reduce
its stake in its venture with Daimler Benz AG from 49 per
cent to 24 per cent. If you think Ratan Tata does not have $30 million to enlarge the equity base,
you are wrong. The reason why Tata wants time out from the Mercedes
Benz venture is because their product, the E-Class car, has failed
miserably. And Tata would rather save the money for his
pet small car project which is expected to be launched next year.
The second lot of companies are tackling the JV problem
in the manner of Modi Corporation chairman B K Modi. When
I met him recently he said he had about 14 joint ventures going on,
the most successful of them being Modi-Xerox. His attitude towards
JV is simple. The Indian market is booming, say, in telecom. You
know the regulation, regulators, and the market conditions. The
MNC has the technology and the capital. Both want to make money.
So enter into a live-in relationship. Two years later the MNC
may become market savvy himself and want to raise his stake. No
problem. You have made your moolah. Get out. And start a new business
with another MNC.
The trick in an Indian joint venture is to do what
B-school boys are first taught to do -- a SWOT analysis. If you
know your strength, weakness, opportunities and threats -- as well
as that of your partner -- you can have a successful joint venture.
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