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The risks and rewards of joint ventures in India

According to my next guest, the mere mention of joint ventures in India among company executives is likely to make them, and I quote, "shudder". But why is this the case exactly, and how should companies tackle the challenges of joint ventures in India?

My next guest is Ravi Venkatesan, author of Conquering the Chaos: Win in India, Win Everywhere. He was also chairman of Microsoft India and Cummins India, a manufacturer of diesel and natural gas engines. He's on the phone with me from his office in Mumbai.

Ravi, thanks for speaking with me today.

RAVI VENKATESAN (Author, Conquering the Chaos: Win in India, Win Everywhere, former chairman, Microsoft India and Cummins India): A pleasure, Michael.

MICHAEL MANCINI: So tell me why do joint ventures in India make executives shudder?

RAVI VENKATESAN: I think joint ventures make people shudder regardless of where they're based. You know, on a global basis, about half of all joint ventures fail, and joint ventures are inherently transitional structures. They're not meant for life. But some fail rather quickly.

And the failure rate, when you look at the emerging markets, whether it's India or any other emergent market, is a little bit higher because I think the two partners have unrealistic expectations or differences of values, and a whole host of other things. So just the track record is enough to get people really concerned.

I think North American executives, particularly American executives, also enjoy control; they enjoy situations where they have complete control over the business, the ability to make decisions without having to consult, negotiate, etc.

I think European executives tend to be a little bit less control-oriented, but I think that's another reason why people don’t really appreciate joint ventures except when they're absolutely essential.

MICHAEL MANCINI: Uh-huh. Well the risk… without that control there is a perceived increase in risk. And risk and business often don’t mix.

RAVI VENKATESAN: That's right. So there is a perception that the risks are higher, there is a perception and a reality that your partner will actually slow you down, and there is a concern that if the business succeeds when you're sharing 50 percent of the upside, and why would you want to do that?

So yeah, there are many reasonable reasons why you wouldn't want to necessarily share control unless you have do it if you had to.
But let me tell you, I ran 11 joint ventures, and I would say nine of them were really successful, and several still exist. I'm a reasonable fan of joint ventures. The key thing is, can you find the right partner? We can get into what the right partner looks like, but if you can find the right partner, and you can learn how to manage these kinds of partnerships, joint ventures have huge upsides.

MICHAEL MANCINI: Okay so tell me what the upside is: what is so great about a joint venture?

RAVI VENKATESAN: There are probably three good reasons when you come to an emerging market like India to consider a joint venture, at least to be open to the idea.

One is of course the regulatory barriers. There are some businesses or industries where, for example, a phone company cannot own 100 percent, also in insurance, defence, a number of these kinds of things. And so you need an Indian partner, and so regulations force you there.

The second one is if you find the right partner, they bring very different and complementary capabilities. So if you're manufacturing diesel engines or trucks or whatever, you bring the product, maybe the brand, you bring technology and know-how on a global scale, and the Indian partner or the local partner brings an understanding of the local conditions, like how to navigate government, they bring distribution know-how, the ability to hire the right kind of talent, all those kinds of things. And so if you can marry these two capabilities, you're better off.

Obviously, you’re sharing risk in return for sharing the upside and that can… if you're very worried about the risk, having a local partner who is sharing that can be important.

But most importantly, what a joint venture forces you to do is adapt and localize much faster than you would if you had 100 percent control over your business here.

But the great temptation when you own 100 percent of your India business or China business is to simply mindlessly replicate your global model — your HR policies, your budgeting policies, all of that — whether they make any sense locally or not. And when you have a partner who owns whatever, 49, 50, 51 percent of the business, they're going to say: “Hey! Stop, this makes no sense, slow down.” And while you may feel a little irritated and frustrated by that, in the medium term that saves you a whole bunch of problems.
So for all these reasons, I am very, very, very open-minded to joint ventures and I would encourage your listeners to also be.

MICHAEL MANCINI: Right. So joint ventures essentially help you to adapt to the chaos that you outlined in the book, it's a coping mechanism.

RAVI VENKATESAN: Indeed. Absolutely right.

MICHAEL MANCINI: Okay. Now you say in your book that 60 percent of JVs fail in India, why is that the case?

RAVI VENKATESAN: Well I think there is a set of pathologies that are at work, and therefore, a set of key success factors correspondingly.

I think the most important thing is actually congruence of values. So it's really important that your values and the values of your joint venture partner are reasonably congruent when it comes to ethics and integrity, how you do business, how you treat people, etc. And if these are in violent disagreement, this is going to break down sooner rather than later.

There are many examples of this. There is this Norwegian telecom company that decided to get into India. And they got into bed with an Indian real estate company which happened to have, mysteriously, telecom licences. Well, within a year or so they found that their views on ethics and so forth were completely divergent and this didn't last, and they ended up in court.

So congruence of values of all sorts is really important.

The second one is clarity. You know, you need to do the work upfront to establish clarity on a number of things; for instance, scope of the business, what are the roles of each partner, what am I going to do, what are you going to do, what are you going to lead and drive, and whether we are going to lead and drive? How are we going to manage the joint venture? What is the governance like, is it going to be through a board, and so forth? What is the product line of the joint venture in the short-term, medium-term, long-term?What investment are we going to make, etc? So if you do the upfront detail work around these issues then things become much better.

So I'll give you an example. Volvo, a company whose board I was on for six or seven years in Sweden, comes to India, and they do a joint venture with a major truck manufacturer. It's a company called Eicher. And right off, they agreed they're going to have two brands in the market. The premium brand is going to be Volvo, the middle brand is going to be Eicher. And both brands are to be global, so they're going to help Eicher become global. But it's very clear that Eicher is not going to go into the premium end and develop trucks in competition with the Volvo brand.

So this kind of clarity around where the brands play…is Eicher restricted to India or is it going to be part of the global play? These things are decided upfront. And if you don’t decide it upfront, sooner or later you're butting heads. So clarity is important.

I'd say the third one, which is absolutely crucial, is the chemistry and the relationship between the CEOs on both sides, and the very senior leaders on both sides. Because no matter how much work you do, sooner or later you run into disagreements, potholes, differences of opinions, assumptions change, and you have to work through them. And if you don’t have chemistry at the top, then you end up getting very polarized and it becomes very antagonistic and breaks down.

Just like a marriage. So what you need is people who are willing to not just see this as a transaction, but invest in building personal relations on both sides. And so you need to break a little bread, share meals, talk about family and sports and all these other things, and get to know each other. And you then have the reservoir of goodwill that allows you to get through the differences.

So that's kind of important. And you know there are probably a couple of other factors, and if I had to call out one more, it would simply be that you have to optimize for the joint venture, rather than for yourself. If you try and do sub-optimal things like say, let me see how I can make more money on my books rather than in the joint venture, then the partner is going to get pretty pissed off and trust will be eroded, and that's not good.

And too many companies do that: they say, “Oh, let me charge more.” There is this classic case of an automotive company in a joint venture in India, and they tried to discontinue their most successful product line because they could introduce a new product with much higher licence fees. It was really bad because it was bad for the joint venture, and good for them. And so the Indian partner got really, really upset.

So you should avoid the temptation to do things which optimize your profitability at the expense of the partner and the joint venture.

MICHAEL MANCINI: Ravi, how feasible is all this for SMEs specifically? I know a lot of this applies very easily to large corporations but what about small and medium size enterprises?

RAVI VENKATESAN: One of the big learnings for me in my book is that all the examples are of large companies, and so if you're small, there is a question of how does this apply to me. I think there are differences and there are communalities.

The biggest sort of difference is that a small company has is a different appetite for risk. You simply don’t have the same strength of balance sheet and profitability to take a big blow or to invest very heavily upfront. You may have less talent that you can spare to go into one of these markets, and so on.

But on the other hand there are huge advantages. Small businesses tend to have a very strong owner who is still active in the business and therefore when they see the potential of the market, the whole organization can align. Decision making is very swift.

So small and medium-size companies have a very different set of strengths and limitations when it comes to going into these kinds of markets.

But I think the principles are not different. What are the principles? Number one is: show up. You really can't succeed by sitting in Canada and reading about stuff that's happening in India and make sense of it. You need to show up and invest reasonable time on the ground and sniff things out for yourself. Is there a market for my product? What will it take to succeed? What is my assessment of the risks? And chances are if you actually do invest that time, you're going to be quite persuaded that this is a good place to do business and the biggest reason is the energy that you will sense when you're on the ground — the vitality of the place, the quality of the people you meet. That tends to, invariably, impress people from other countries who are dropping in for the first time. And there is no way you can sense that if you're not on the ground, okay? And so if you're trying to make the decisions by sitting in Montreal or Toronto, or wherever, the risks will seem bigger than they are and the opportunities will seem smaller than they are. And therefore, you will always defer the decision.

So that's the main thing I'd say.

Number two, I'd say start small and invest in building a small local team who can sense the opportunities and start building your business, and then you can figure out, based on your learning, how to scale it up fast. Do you need a joint venture? Should you do an acquisition, or should you go at it alone? So these kinds of second order decisions can happen but at least get going with a local team of your own.

MICHAEL MANCINI: Well Ravi, thank you very much for this time, you've packed a lot of information in here for our companies, so thanks again.

RAVI VENKATESAN: You're most welcome Michael, it's been a great pleasure.

MICHAEL MANCINI: I was speaking with Ravi Venkatesan, author of Conquering the Chaos: Win in India, Win Everywhere. It's available on amazon.com if you're interested.

Another key ally on your side is of course the Canadian Trade Commissioner Service, don’t hesitate to visit tradecommissioner.gc.ca to get the most comprehensive network of international business development professionals working for you. That's tradecommissioner.gc.ca.

I'm Michael Mancini, signing off for now.

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