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Joint Ventures with Foreign Companies - Some Do's and Dont's

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Collaborations between Indian SMEs and foreign companies are on the rise. In this article, S Venkat of WealthTree Partners examines the need for such collaborations, whether Indian companies should actively pursue tie ups with foreign companies and the points to be borne in mind for creating a successful partnership with foreign companies.

Collaborations and tie ups with foreign companies is no longer the preserve of the large Indian corporates. Indian SMEs are being actively pursued by foreign companies to enter into partnerships. In recent times, Indian mid sized corporates have made aggressive bids to acquire and take over companies operating internationally. These recent trends have opened up a new set of opportunities and challenges to Indian SMEs – how do you gain the most from a partnership with a foreign company and what are the common pitfalls to avoid? Tie ups with foreign companies can take a number of forms. At the simplest level, it may be a distribution or agency agreement for the sale of goods and services. Technology transfers/ sharing is another avenue for tie ups. The most evolved forms of tie ups are Joint Ventures, where risks and rewards are shared by the Indian and foreign partners in a pre agreed proportion. In this article, we are focusing on Joint Ventures formed by Indian and foreign partners for doing business in India.

Some decisions to make

Is your company ready for tie up with a foreign company? Indian companies need to be open minded about tie ups with foreigners. Historically, our mindset has either been too eager or extremely suspicious about foreign companies. Indian promoters have either believed that
(a) anything that is foreign is better than Indian and therefore any offer for partnerships must be pursued and concluded at all costs or
(b) have been so insecure about the foreign companies taking them over that they have never been mentally prepared for a partnership.

Things have changed in recent times and Indian promoters are beginning to view foreign tie ups more objectively. In any tie up, the promoter has a key role to play and he needs to assess if he and his company are mentally ready for the cultural and business adjustments that a foreign tie up demands.

Do you really require a foreign tie up?
Indian promoters have too often made the mistake of looking at partnerships with foreigners as a status symbol! We need to remember that the tie up needs to be considered as a business opportunity and not as an achievement to be flaunted among friends, family and well wishers, It is important for Indian SMEs to understand that any tie up will involve give and take. What are we gaining from the partnership? And more importantly, what are the financial and non financial costs of doing this partnership?

What form of tie up is right for your company?
The structure of the tie up needs to be thought through. Is it better to restrict the arrangement initially only to sourcing of goods or technology or sale of goods and services? Is it better to do a joint venture is a Greenfield expansion or should you look to sell stake in your existing business? These are important questions that need to be thought through. Needless to say, there is no right or wrong ‘formula’ that can be applied. The appropriate solution will vary depending on the specific case and circumstances and the needs of both the Indian and foreign partner.

Why do Joint Ventures fail?
The track record of Joint Ventures between Indian and foreign partners is not very positive. While there are no accurate statistics available to support this view, it is estimated that only one in five tie ups survive beyond the first five years. It is therefore important to understand why partnerships fail and what we can do to avoid these situations.

From an Indian company’s stand point the key reasons why a tie up fails are:

  • Fear of foreign company putting in additional funds to dilute the shareholding of the Indian promoter
  • Rigid focus on systems and processes and application of ‘foreign’ standards without modifying them for local conditions
  • Issues relating to management control and which partner will have control over what areas of the business

From a foreign company’s stand point, the key reasons why partnerships in India fail are:

  • Inability of the Indian promoters to keep their word or live up to their commitment
  • Involvement of family members in business decision making
  • Inability to appreciate global trends and expectations in areas of quality, timelines, and customer service
Do's while entering into a Joint Venture
  • Always prepare a documented Business Plan for the Joint Venture, which in agreed to in principle by both partners before commencing the partnership.  The plan needs to include as a minimum:
    • Strategic purpose for the JV
    • A rigorous SWOT analysis
    • What is the investment and what is the payback time?
    • Who is the target market and why should they do business with the joint venture
    • Key success factors and key risks
  • Always prepare a partnership document that covers:
    • What is each party bringing to the partnership
    • What is it that cannot be achieved by either party alone, but can be achieved through the Joint Venture?
    • What are the expectations of each party in the Joint Venture
  • Always conduct a due diligence on the partner.  Even if this is not a formal legal or commercial due diligence, at the very minimum, references and past track record need to be checked out.
  • Understand the cultural differences between yourself and the partner. 
  • Encourage regular and open communications. 
  • Establish mechanisms for resolving disputes (mediation/arbitration)
  • Think about the exit options.  In case of dispute, who buys whom?  At what price?
  • Take professional advice.  Joint Ventures are difficult to form and manage; take assistance of consultants who have formed Joint Ventures before
  • Be clear on all terms and conditions.  No matter how much the partners trust each other, put your agreement in writing. 
Some don'ts while entering into a Joint Venture
  • Don’t take a Joint Venture lightly. Partnerships are like marriages.  A successful partnership requires commitment, patience, understanding and compromises by both partners.
  • Don’t rush the planning phase.  It is better to wait for a few months in the beginning to obtain clarity on the terms and conditions rather than rushing into a Joint Venture and regretting later.  Joint Ventures are difficult to dissolve and cost a lot, in terms of time and money
  • Don’t make loose statements.  Foreign partners take the spoken word seriously and will be disappointed if you don’t live up to your commitment.  If you are not sure, say so and do not commit.
  • Don’t hide the bad news.  A common error Indian promoters make is to delay giving negative news.  This can be dangerous.  Foreign partners appreciate transparency and appreciate being told of all problem areas as and when they arise.  No one likes unpleasant surprises at a later stage!
  • Don’t make any assumptions.  All key points need to be specifically identified, listed down, and talked through between both partners. 

It is important that Indian promoters be not discouraged by high failure rates of Joint Ventures.  If they are done properly, Joint Ventures can be hugely rewarding for both partners.

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Peter John  |  August 09, 2014