JOINT VENTURES IN INDIA

INTRODUCTION

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A joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and then they share in the revenues, expenses, and control of the enterprise

REASON FOR JV’s JV provides a lower risk option of entering into a new country. .example- Motorola

entered India in JV with blue star company, a brand with repute and vast distribution network.

It also provides an opportunity for both the partners to leverage their core strengths and increase the profits. It also provides a learning opportunity for both the partners.

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Others Reasons…•Technology: General Motors joint

venture with Toyota provided an opportunity for GM to obtain the low-cost strategy used by Toyota.

•Lower Risk of Geographical Location.

•Government Regulations.•Access to Capital.

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Types Of JV’s1. Jointly controlled operations.

2. Jointly controlled assets.

3. Jointly controlled entities.

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Pre-Liberalization Scenario•Indian industry was unaware and

unconscious about the danger of International Business.

•Most businesses did not have economies of scale by global standards.

•Control on collaborations restricted the choice of technology and manufacturing methods.

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Post-Liberalization ScenarioInternational players become major

threats because of their limitless resources.

Indian players has an option either to increase production or entering into JV with Global players.

Foreign players saw India as a land of opportunity to take advantage of low cost of production.

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Need for setting up a Joint Venture

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INTERNAL REASONS COMPETITIVE GOALS

STRATEGIC GOALS

INTERNAL REASONS1) Building on company's strength.

2) Spreading costs and risks.

3) Improving access to financial resources.

4) Economies of scale and advantages of size.

5) Access to new technologies and customers.

6) Access to innovative managerial practices.

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COMPETITIVE GOALS1) Influencing structural evolution of the industry.

2) Pre-empting competition. 3) Defensive response to blurring industry

boundaries. 4) Creation of stronger competitive units. 5) Speed to market. 6) Improved agility.

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STRATEGIC GOALS

1) Synergies.

2) Transfer of technology/skills.

3) Diversification.

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SECTORS PERCENTAGESMining (commercial) 51%Banking (Pvt), Airport (Existing)

74%

Insurance 26%Telecommunication 49%Alcohol distillation and brewing, Floriculture, Horticulture , Animal Husbandry, Petroleum and Natural gas, Construction and Development, SEZ’s and Free Trade Warehousing Zones, Trading etc..

100%

Regulations governing JV in india

Regulations governing JV in india-Press Note 18

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Regulations governing JV in indiaPress note-1Whereas Press Note 18 required government

approval for investment in “same or allied” field, Press Note 1 requires government approval only if the foreign investor invests in the “same” field

While Press Note 18 completely denied the use of automatic route, Press Note 1 permits the automatic route where investments are made by venture capital funds registeredSEBI as Foreign Venture Capital Investors or where either of the parties have less than 3% investment in the existing joint venture or where the existing joint venture is defunct.

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Regulations governing JV in india

Press note 1 cont..

Earlier the onus to justify and prove to the satisfaction of the government that the new proposal would not jeopardize the interests of the existing Indian joint venture partner or technology/trademark partner was only on the foreign investors or technology suppliers. Now, The onus to provide requisite justification to the govt. that the new proposal would or would not in any way jeopardize the interests of the existing partner or other stakeholders would lie equally on both.

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Regulations governing JV in india•Press note 1 contd..

• Press Note 1 provides that all joint ventures entered into after January 12, 2005 may contain a “conflict of interest” clause in the joint venture agreement. Such a clause is critical because, if drafted well, it essentially provides the foreign investor with a type of no objection from the Indian partner regarding foreign investments in the “same” field.

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Regulations governing JV in indiaThere are cases where Indian partners of failed jv’s

alleged to have made efforts to block foreign partners from ventures referring to PN1, without any sound reasons.

In 2001 Walt Disney’s local partner, the KK group objected to Disney’s attempt to establish a wholly owned subsidiary in India.

TVS group , for about three years, kept denying the much needed no objection certificate to suzuki to start a new investment venture in india after the TVS- Suzuki joint venture was called off in 2001.

Wadia group is objecting to Danone’s invstments in Bio- nutrition firm Avesthagen.

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Problems of JV’s1. Valuation Problems.2. Transparency.3. Conflict Resolution.4. Division of management responsibility

and degree of management independence

5. Changes in ownership shares.

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6. Dividend Policy.

7. Marketing and Staffing Issue.

8. Cultural Problems.

9. Multinationality problems.

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Before entering a Joint Venture..

• Both partners should appreciate the need for the joint venture.

•The partners should clearly agree on the way the joint venture will be managed. 

•Take measures to be sure that the partner has a compatible work culture.

•Be sure about the organisational behaviour of the partner to ensure synergies.

It is important that both partners work towards a system based on trust and transparency.

To make for the long term success of the joint venture, it is also important that both partners are equally able to service its growing need for capital as the business expands.

Need to have a clear long term goal and set the terms and conditions of the JV.

Clarly define the role and responsibility of each partner.

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Before entering a Joint Venture..

Successful joint venture require:Each participant has something of value to bring to

the venture. The participants should engage in careful

preplanning. The agreement or contract should provide for

flexibility in the future. There should be provision in the agreement for

termination including buyout by one of the participants.

Key executives must be assigned to implement the joint ventures.

A distinct unit be created in the organizational structure which has the authority for negotiating and making decisions

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Example :-

• Virgin Group and Tata Tele Services• http://business.mapsofindia.com/

communications-industry/tata-teleservices-tie-up.html

• Maruti Suzuki• Tyson Foods and Godrej Agro vet• http://www.godrej.com/godrej/GodrejAgrovet/

index.aspx?id=2• Marks & Spencer and Reliance Retail of India• http://www.financialexpress.com/news/marks-

and-spencer-forms-retail-jv-with-reliance-retail/298662/

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Concerns of doing a JVChange of strategy of either of the

partners creats rift in certain JV’sThe JV between Hotline group(india) and Haier(china)

missed at that point.Haier planned to increase its share to 49% to introduce

wide ranges of products including washing machines, multi-split AC’s etc.

Haier wanted to focus in imports.Hotline disagreed to theses, the JV broke off before the

operations startedHaier re-entered indian market with a 100% susidiary in

2003.

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Concerns of doing a JV•In some cases accecss to technology or

capital provides sufficient confidence in the partners to go alone, making the JV redundant

•For example- JV between TVS group (INDIA) and Suzuki(japan) formed in 1983 was called off in 2001.

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Concerns of doing a JV•AT times either of the partners are accused

of breaching the terms of the JV creating tensions in it.

•For example- Wadia accused DANONE of using the popular Britannia brand Tiger products outside India, not permitted as per the existing agreement between the two.

• http://www.just-food.com/news/danone-tight-lipped-as-wadia-jv-probed_id98682.aspx

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Concerns of doing a JV There are cases of JV falling apart due to

lack of synergy.• For example- the 40:60 JV between Godrej and GE

formed in 1993 , was called off in 2001because-• The JV failed to meet the projected turnover of Rs

35 billion and managed only 1.83 billion in 1998-99.

• There was poor cultural integration between the two partners. GE alleged lack of professionalism in the Indian partner.

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Reasons for failure of a joint venture Inadequate preplanning for the joint venture. The hoped-for technology never developed. Agreements could not be reached on

alternative approaches to solving the basic objectives of the joint venture.

People with expertise in one company refused to share knowledge with their counterparts in the joint venture.

Parent companies are unable to share control or compromise on difficult issues

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Example :-•Lufthansa and Modi Group•Daewoo and Proctor & Gamble•Kinetic Honda•Tata IBM•LML Piaggio

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