The in­her­ent chal­lenges of joint ven­tures in In­dia

Mint ST - - MANAGEMENT - BY SUMEET ANAND feed­back@livemint.com

The news of Mcdon­ald’s Corp. ter­mi­nat­ing its fran­chise ar­range­ment with its joint ven­ture (JV) in In­dia is of little sur­prise. It’s the lat­est de­vel­op­ment in the con­flict be­tween the two JV part­ners, the Amer­i­can com­pany Mcdon­ald’s and the In­dian part­ner, Vikram Bak­shi of Con­naught Plaza Restau­rants Ltd.

When Mcdon­ald’s en­tered In­dia in 1996, there were many for­eign and In­dian com­pa­nies join­ing hands in part­ner­ship to take on the promis­ing and com­plex In­dian mar­ket. The JV struc­ture seemed to be just what the doc­tor had or­dered. On the one hand you had a for­eign firm, often a global leader in its field, bring­ing brand and tech­nol­ogy or savoir faire, and on the other an In­dian com­pany that had knowl­edge of the In­dian con­sumer, pos­si­bly some rel­e­vant in­fra­struc­ture and a route to mar­ket. The per­fect com­bi­na­tion to share in­vest­ments, re­duce risks and achieve suc­cess.

Things did not play out like that for most of the JVS. Ind­sight Growth Part­ners Ad­vi­sors’ anal­y­sis of In­dia en­try strat­egy of 38 for­eign con­sumer good com­pa­nies over the last 25 years shows that of the 21 JVS started, only six have sur­vived. Of the 15 that were ter­mi­nated, a third of them ended in a pub­lic con­flict.

Mcdon­ald’s JV was one of the few re­main­ing suc­cess sto­ries. Let’s rewind to 2013 be­fore the con­flict. Mcdon­ald’s had two JVS in In­dia— for the north and east with Bak­shi and for the west and south with Amit Ja­tia of Westlife De­vel­op­ment Ltd whose sub­sidiary Hard­cas­tle Restau­rants Pvt. Ltd runs the fast­food chain.

One of them (Hard­cas­tle) was given charge to de­velop the In­dian ven­dors but they both in­no­vated for In­dian con­sumers. They were both touted as suc­cess sto­ries. Build­ing a burger busi­ness with­out a beef of­fer­ing—never done any­where else in the world—then in­no­vat­ing with items like aloo tikki and fi­nally de­vel­op­ing af­ford­able price of­fer­ings such as the soft serve cone at Rs14.

The JV with Bak­shi seemed to be work­ing well. But clearly the events of the last four years show that this was not the case.

What are the rea­sons be­hind many of the JVS fail­ing in In­dia, es­pe­cially those be­tween West­ern com­pa­nies and In­dian com­pa­nies? Surely, there are busi­ness rea­sons for the fail­ures—strat­egy, team, re­sources—and in some cases val­ues that don’t match—dis­hon­esty, fraud and im­pro­pri­ety. There are, of course, so­lu­tions and frame­works to ad­dress those the busi­ness and value issues. How­ever, in our anal­y­sis, most JVS fail be­cause they do not ac­knowl­edge and man­age the in­her­ent chal­lenges within the struc­ture of a JV in In­dia.

WHAT ARE THESE IN­HER­ENT CHAL­LENGES? Cross-cul­tural

na­ture: These were JVS be­tween com­pa­nies of a for­eign cul­ture (Amer­i­can, French, Bri­tish, Ger­man, ...) and In­dian com­pa­nies.

There is an in­her­ent cross­cul­tural con­text, which is down­played since there is no lan­guage bar­rier in dis­cus­sions with the In­dian part­ner, due to the pre-em­i­nence of English as the lan­guage of busi­ness in In­dia.

Fur­ther, In­dian part­ners are well trav­elled, good com­mu­ni­ca­tors in gen­eral and have high so­cial skills, all of which pro­vide a false sense of cul­tural com­fort.

The re­al­ity is that speak­ing the lan­guage is dif­fer­ent from un­der­stand­ing each other. The two part­ners can fin­ish a meet­ing with each other draw­ing op­po­site con­clu­sions and in­ter­pre­ta­tions of the same dis­cus­sion.

It’s not just lan­guage and com­mu­ni­ca­tion— work ethic, value sys­tems, cor­po­rate cul­ture within teams and other cul­tural as­pects are dif­fer­ent too.

Dif­fer­ent

own­er­ship con­text: For­eign com­pa­nies are often large cor­po­rate en­ti­ties with in­sti­tu­tional own­er­ship and pro­fes­sional man­agers while most In­dian com­pa­nies are fam­ily owned and fam­ily mem­ber-led.

Typ­i­cally, most man­agers fo­cus on short- to mid-term goals to earn their bonuses and be rec­og­nized for pro­mo­tions while a fam­ily has a longert­erm view linked to share­holder re­turns.

Fur­ther, for­eign com­pany man­agers change reg­u­larly, which cre­ates un­cer­tainty about the In­dia strat­egy while the In­dian fam­ily is more sta­ble.

Mis­matched fi­nan­cial ac­cess: Most for­eign com­pa­nies can ac­cess wider sources of cap­i­tal and at a lower cost. They draw on mar­ket-driven banking part­ners, gov­ern­ment fund­ing agen­cies, tax in­cen­tives and other in­no­va­tive sources of cap­i­tal, which are not as ac­ces­si­ble to many In­dian com­pa­nies.

Most im­por­tantly, they ac­cess bank debt at in­ter­est rates that are 5-7% cheaper, al­though they may have to ac­count for for­eign exchange de­pre­ci­a­tion in the fu­ture. How­ever, the In­dian part­ner needs to fund the JV at a higher cost right from the start. Con­se­quently, the In­dian part­ner has a need for a shorter break-even pe­riod and a higher re­turn on cap­i­tal em­ployed.

Poor start-up cul­ture: Many JVS are start-ups, like the Mcdon­ald’s one. Even in ac­qui­si­tion-driven JVS, the chal­lenge is to de­velop new lines of busi­ness.

This calls for the abil­ity to in­vent or rein­vent. Many large for­eign com­pa­nies are no longer en­tre­pre­neur­ial and are run by man­agers who didn’t build these busi­nesses. They tend to over-re­search and over-plan for all sce­nar­ios. While the In­dian com­pany has a strong en­tre­pre­neur­ial cul­ture, for­eign part­ners come with the ar­ro­gance of re­cent suc­cess in their core busi­ness and have a “know-it-all” at­ti­tude. They are un­will­ing to in­vest in a step-by-step ap­proach to es­tab­lish a new busi­ness.

Con­trol ex­pec­ta­tions: Both part­ners want con­trol. It’s nat­u­ral since each feels that it is in­vest­ing time and money. The for­eign com­pany is inse­cure about giv­ing its brand and tech­nol­ogy, and the In­dian com­pany wor­ries about its fi­nan­cial in­vest­ments. Yet, busi­nesses need clear de­fined lead­er­ship struc­tures to suc­ceed. So­lu­tions like equal 50:50 JVS, like in the Mcdon­ald’s case, don’t re­ally work.

Fur­ther, most part­ners don’t have prior ex­pe­ri­ence of work­ing jointly with peo­ple from another com­pany to build a busi­ness. They have al­ways worked in­ter­nally with oth­ers like them­selves. A JV is an “ar­ranged” mar­riage set up by the “el­ders” and re­quires every­one to align their be­hav­iour and ex­pec­ta­tions.

‘Win-lose’ ap­proach: Most peo­ple have a “Win­lose” ap­proach to do­ing busi­ness with out­siders and they en­cour­age the same cul­ture within their teams.

The re­spec­tive “Win-lose” be­hav­iour of each of the part­ners af­fects im­por­tant de­ci­sions where what’s best for the JV may not be best for one’s com­pany.

Some ex­am­ples are prod­uct strat­egy, in­dus­trial strat­egy, fi­nan­cial strat­egy and many oth­ers. This cre­ates an en­vi­ron­ment where trust and trans­parency are lack­ing. Fur­ther, ne­go­ti­at­ing strat­egy of the two part­ners is dif­fer­ent and based nearly al­ways on a “Win-lose” ap­proach.

These are some of the in­her­ent chal­lenges for JVS in In­dia.

In the Mcdon­ald’s case, it ap­pears that these were not ad­dressed in a timely and rea­son­able man­ner. Part­ners that ac­knowl­edge these chal­lenges and work to­gether to man­age them ef­fec­tively through­out the life of the JV are more likely to build­ing a suc­cess­ful busi­ness in In­dia.

Sumeet Anand is founder and CEO of Ind­sight Growth Ad­vi­sors Pvt. Ltd, a strat­egy con­sult­ing and ven­tures firm ad­vis­ing global clients on In­dia strat­egy. He has been part of JVS and ad­vises clients on strate­gic part­ner­ships.

HEMANT MISHRA/MINT

Busi­nesses need clear de­fined lead­er­ship struc­tures to suc­ceed. So­lu­tions like equal 50:50 JVS, like in the Mcdon­ald’s case, don’t re­ally work.

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