Tuesday, December 12, 2006

Joint Ventures is a preferred way to Enter India

India has emerged on the global business map and global giants are eager to enter India. In their rush to enter India, global companies are entering into a slew of joint ventures and strategic alliances. While some of these ventures are driven by government regulations, most are driven by their need to lower risks. In my previous article, I had mentioned that JV offers a lower risk option to enter newer markets for Indian companies venturing abroad. The same hold true for foreign firms entering Indian markets.

Notable JV of Recent Times

  • Tata Motors & Fiat: The JV will manufacture cars from Tata & Fiat stables. Tata Motors will also buy diesel engines for it cars from Fiat, while Fiat will distribute Tata cars in Europe.
  • Mahindra & Renault: This JV is the market entry strategy for Renault. The JV will manufacture Renault’s Logan cars in India. Renault will gain market knowledge - while Mahindra’s will learn how to make good cars, and leverage its dealership network to additional profits.
  • Tata-AIG: This JV was created to take advantage of the new government regulations on private insurance companies. Private insurance companies need foreign collaboration for technical know how. While the current regulations prevent foreign insurance companies setting up a green field venture in India. Similarly other JV in this field are: ICICI Lombard, ICICI Prudential, Bajaj- Allianze etc.
  • Bharthi-Walmart: JV was primarily created by Wal-Mart’s desire to enter India and the government regulations regarding large foreign retail firms operating in India. This 50:50 venture with Bharti will give Wal-Mart an entry into India ( a long awaited one at that)

Why form JV?

The main reasons for a JV has always been an entry strategy. JV provides a lower risk option of entering into a new country. For Fiat, Pepsi, Ford, Xerox, Suzuki, etc., the JV is an ideal way to enter Indian markets and establish itself as a leader ahead of other competition. The JV also provides an opportunity for both the partners to leverage their core strengths and increase the profits.

For example, Modi-Xerox venture gave Xerox an early lead in the photocopier market and help secure a strong brand recognition. For the Modi group, this turned out to be a very profitable venture. JV also provides a learning opportunity for both the partners. A smart partner will learn a lot about other partner’s capability. For example, Xerox learnt about distribution channels and copier usage model from the JV. TVS learnt a lot about making motorbikes from Suzuki.

Other reasons to form a JV in an Indian context are:

Technology: When partners have mutually rights over exclusive technology, then JV forms an option to exploit the opportunity by combining these technologies. Alternatively, when a partner has identified a profitable market opportunity - but does not have the necessary technology, then a JV is an option to go. However both parties need to have a good understanding to protect each others IP.

Lower Risk of Geographic Expansion: A JV with a local partner is an ideal way to minimize risks of cross-border expansions. For foreign firms a JV with a local partner lowers risks via: ability to hire the best talent, knowledge of local markets, connections with local government, pre-existing distribution networks etc.

Government Regulations: In most emerging markets government rules and regulations prevent foreign players from establishing a wholly owned subsidiaries. For example, Indian government laws prevent foreign retailers, insurance companies from entering India directly. The current regulations force these companies to form JV with local partners

Access to Capital: Often times companies in emerging economies lack capital to expand. A JV or an strategic investment will infuse capital to the local operations and make it more profitable. In an emerging economy - the local partner provides the distribution network, human capital and government links as its investment in the JV, while the foreign partner provides the capital and technology.

JV has a definite Life span

All JV’s have a definite life span. Oftentimes the end objectives and exit strategy will be negotiated during the formation of the JV itself. Despite the fact that everyone knows that a JV has a definite life span, most JV falls apart earlier than expected.

The main reason why a JV falls apart is changes in partner’s strategy. Often either one of the partner changes their strategy which makes this JV redundant. For example Ford-Mahindra JV. Ford wanted to expand the operations but Mahindra wanted to focus more on SUV segment and did not want to invest for the expansion. Thus forcing Ford to go alone.

Often times the conditions which made a JV necessary change - like government regulations, access to technology or capital or the partner has gained sufficient confidence to go alone: All this causes the JV to fall apart. For example TVS-Suzuki JV fell apart when TVs learnt how to design motorbikes on its own. TVS designed "Victor" on its own and it was a success. This gave TVS the confidence to go alone.

Another popular reason why a JV falls apart is when the JV is successful. The JV becomes a cash cow and both the parties now want greater control over it. This often results in a nasty fight for control - and in the process the JV falls apart. Alternatively, when a JV is not doing well, the partners start blaming each other and want to take over the control to prevent further deterioration.

Closing Thoughts

Joint Ventures are becoming a popular means to enter Indian markets for global giants. However, the risks of cross-border expansion are slightly lowered, but they still remain. To have a successful JV, both partners should have a good understanding of each other’s cultures, establish a good work collaboration and work towards a common objective. The risks of cultural integration still exist - often times management from both the sides often ignore the cultural integration issue assuming that they can take care of it - but cultural integration often falls between the cracks - and the JV ultimately fails.

Also See:

Successful Joint Ventures


kingofkings said...

I, Paul Ponniah, wish to partner as joint venture in education or technology at my place. I have 2 plots of land in the rural setting Ideal for international school or some techncal project. Yhe place is about 90 KM from Bangalore or 4 KM from Kolar Gold Fields situated in rural area. Please consider if interested.
Paul Ponniah.

WebGlobex said...

I want to start web/IT related service in india just 5 to 8 sheat(worker)
can u help me?

Gopi Karunakaran said...

Really its a great information that you have shared and i learned a new things from it.
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