The recent news about the breakup of Hero Honda, the joint venture (JV) between the Munjal family and Japanese firm Honda, raises important questions about the viability and future of JV partnerships between Indian firms and their foreign collaborators. Specifically, what factors, in general, lead to the breakup of such JVs? Who benefits more from such partnerships?the foreign company or the Indian one? From the perspective of the Indian domestic partner, what is the way forward after the breakup? Finally, what does the future hold for such JVs in India?
Before 1991, JVs were mandatory for foreign companies seeking to enter India. Even today, after liberalisation, in many of the large and fast-growing sectors of the economy, such as retail, consumer banking, telecommunications and media, foreign firms entering these industries require an Indian partner. Thus the foreign partners enter into these JVs without really desiring an Indian partner but are forced to have one for market access. In many cases, the Indian partner does not have the technological competence and brings only local knowledge. The Indian partners, however, believe they add substantive value to the JVs. As a consequence, they have high expectations that the foreign partner will contribute by transferring technology, training its employees, etc. However, since the foreign partner often intends to expand into an independent business in India, it does not want to make the technological transfers desired by the Indian partner. The result is a significant mismatch in expectations between the two partners. As would be anticipated, such a mismatch in expectations eventually leads to a subsequent falling out between the partners.
Such tensions reach flash point when both partners expect industry growth to speed up and want to corner a larger share of the growing market. With the Indian government gradually allowing foreign companies to operate alone or increase their stake in many industries, the foreign firm often plans to do business on its own in India. As a result, a large number of the Indian JVs have lost their raison d?etre from the foreign partners? perspective. The foreign firm either buys out the Indian partner or sets up an independent unit separate from the existing JV.
In fact, in the Munjal-Honda JV, the rising differences between the two partners stemming from Honda?s ambitious plans to enter the two-wheeler industry on its own have been cited as a key reason for the split. Other examples abound. When the Indian government eased restrictions for foreign companies in investment banking, both Goldman Sachs and Merrill Lynch looked to exit their existing JVs with Indian partners. Goldman Sachs sold its stake in its successful JV with Kotak Mahindra Bank for about $75 million, while Merrill Lynch bought most of its stake in DSP Merrill Lynch for about $500 million. American giant Morgan Stanley ended its decade-old partnership with Nimesh Kampani?s JM Financial to strike out on its own in the rapidly growing Indian financial services industry. Bayer, Gillette, Goodyear, Datacraft, EMI, Sprint, Suzuki, Xerox, Vodafone, and many more foreign firms have exited their Indian JVs with the sole purpose of reappearing with 100%-owned companies.
India can safely be regarded as the JV graveyard of the world, based on evidence from the past two decades. A McKinsey study found that of the 25 major JVs between foreign and Indian companies established from 1993 to 2003, only three still survived in 2005. For example, consider ModiCorp, which, during the 1990s, had lined up alliances with Motorola, Walt Disney and Xerox (ModiCorp?s chairman, BK Modi, was popularly referred to as ?Mr JV?). Since then about a dozen of his JVs, including those with the three American companies, have dissolved. Most of these JVs last no more than a decade, on average, and may extend to a couple of decades at the most.
In the automobile industry, Kinetic Honda, which was a JV between Kinetic Motors and Honda, was formed in 1985 and dissolved in 1997. TVS Suzuki, a JV between TVS Motors and the Japanese firm Suzuki, was instituted in 1982 and disbanded in 2001. After the breakup, the local partner needs to build its own R&D capability since the umbilical cord, where the local partner was being supported technologically by the foreign firm, is broken. Kinetic Honda failed after Honda exited, since Kinetic Motors was not able to ramp up on the innovation front. However, Honda Motor Scooter India is expected to sell close to 1.5 million units in this fiscal year. In contrast to Kinetic Motors, TVS ramped up on the innovation front after its split with Suzuki. The company started focusing on R&D as its key to survive in the business. As a testimony to its ability to innovate on its own, TVS Motor won the Deming Application Prize in 2002. It became the first and only Indian two-wheeler company to win it. This award, given to companies that do outstanding work in the field of Quality Management, is considered to be one of the world?s most prestigious. On the product front, today TVS is able to produce trendy products?bikes like the Apache and scooters like the Wego.
If the foreign firm has to do well post its breakup, it has to invest in developing its own sales and distribution network, apart from its own independent understanding of local customer preferences. These are crucial since the foreign firm had been piggybacking on the domestic partner?s sales and distribution network as well as its understanding of local customer preferences. Looking forward, with the government looking to relax the conditions for FDI in India, the days of JVs between foreign firms and Indian counterparts in India may be mostly over since such piggybacking may not be necessary any more.
The author is assistant professor of finance at ISB, Hyderabad