JOINT VENTURES IN INDIA

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INTRODUCTION
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

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REASON FOR JVs

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 JVs
1. 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 Scenario
International 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

INTERNAL REASONS COMPETITIVE GOALS

STRATEGIC GOALS

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INTERNAL REASONS
1) 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 GOALS 1) 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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Regulations governing JV in india

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SECTORS Mining (commercial) Banking (Pvt), Airport (Existing) Insurance Telecommunication

PERCENTAGES 51% 74% 26% 49%

Alcohol distillation and brewing, Floriculture, Horticulture , Animal Husbandry, Petroleum and Natural gas, Construction and Development, SEZs and Free Trade Warehousing Zones, Trading etc..

100%

Regulations governing JV in india-Press Note 18

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Denied the use of the automatic investment route and required a foreign investor who had an existing joint venture, trademark or technology transfer agreement in the same or allied field in India to seek FIPB approval for further investments in India.
The foreign investor also had to prove that the new investment would not harm the existing joint venture or its stakeholders and obtain a No Objection Certificate from the Indian partner. Foreign investors often felt that such restrictions held them hostage to their Indian partners..

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Regulations governing JV in india

Press note-1
Whereas 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

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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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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 india

There are cases where Indian partners of failed jvs alleged to have made efforts to block foreign partners from ventures referring to PN1, without any sound reasons. In 2001 Walt Disneys local partner, the KK group objected to Disneys 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 Danones invstments in Bionutrition firm Avesthagen.

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Problems of JVs
1. 2. 3. 4. Valuation Problems. Transparency. Conflict Resolution. 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.

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.

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Before entering a Joint Venture..

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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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Successful joint venture require:

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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/communicationsindustry/tata-teleservices-tie-up.html Maruti Suzuki Tyson Foods and Godrej Agro vet http://www.godrej.com/godrej/GodrejAgrovet/inde x.aspx?id=2 Marks & Spencer and Reliance Retail of India http://www.financialexpress.com/news/marks-andspencer-forms-retail-jv-with-relianceretail/298662/

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Concerns of doing a JV
Change of strategy of either of the partners creats rift in certain JVs
The 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 ACs etc. Haier wanted to focus in imports. Hotline disagreed to theses, the JV broke off before the operations started Haier 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-tightlipped-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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