Hero Honda lessons

The epochal joint venture (JV) of India, Hero Honda, has unravelled many a lesson even in its sunset days, by parting ways in the most non-acrimonious manner. The 26-year-old partnership between Japan’s Honda Motor Corporation and India’s Hero Group was the perfect marriage. With Hero smoothly managing the distribution end and Honda similarly servicing the technology back end to make Hero Honda desh ki dhadkan. Earlier sunsets of JVs showed signs of struggle, with no clear separation strategy in place. But not in this case.

Hero Honda stands testimony to a milieu when JVs was one of the few means through which a foreign company could enter the Indian market, and the 80s and 90s witnessed a slew of them. The government, at its end, provided ample cushion to the Indian JV partners, who subtly lobbied for protectionism against the backdrop of India’s technological limitations. Press Note 18/1998 spelled that the automatic route for foreign investment was not available to existing foreign investors.

Any foreign investor required the permission of the government to invest in India if it had been part of an existing Indian JV, and produce a certificate from the existing Indian JV partner that it had no objection to the foreign partner’s new investment proposal in the same or allied field. The main policy concern was to protect the interests of domestic JV partners. It was felt that an element of government oversight was necessary, so that future collaborations were subjected to the test of ‘jeopardy’ and existing domestic JV partners were not placed in a position wherein their survival was ‘threatened’.

With liberalization and subsequent dilution of FDI rules, the revised Press Note 1 of 2005 too retained some protectionist measures (even as on the whole the policy framework was relaxed) as it acknowledged that the JV partners contractually safeguard their interests. Subsequent Press Notes attempted to set out a methodology for computing the quantum of ownership and management of JV companies. As per the policy stipulated under Press Notes 2 and 3 of 2009, it was spelled that an Indian company is a company incorporated in India where majority stake is held by Indians and they have the powers to elect majority directors on board. Accordingly, foreign investments of all types—FDI, portfolio or foreign institutional investments, NRI investments, GDRs and ADRs, foreign currency convertible bonds and preference shares—are taken into account while determining ownership of an Indian company. Indian JVs normally have a 51:49 equity breakup between Indian and foreign partners, but there seems to be ambiguity with respect to a situation of equal—50:50—JV.

Today, even after considerable simplification of FDI rules, and even after the Department of Industrial Policy & Promotion (DIPP) issuing a Consolidated FDI Policy on March 31, 2010, that subsumes all prior existing Press Notes, the clause of seeking a NOC from the JV partner remains intact for JVs entered before 2005. Accordingly, a foreign investor who entered into a JVs in India before January 12, 2005, has to seek an NOC from the ‘existing’ local partner to start a new business in the same field, even if the investment is routed via Indian-owned and Indian-controlled company.

The Foreign Investment Promotion Board has been alerted many times by Indian JV partners in this regard. Fresh in memory are instances when Telcon (itself a JV between Tata Motors and Hitachi Construction) highlighted the issue of its JV partner John Deere wanting to enter into an alliance with Ashok Leyland, L&T raising concerns about its German JV partner Ralf Schneider wanting to set up a wholly-owned subsidiary in India, and Modi Entertainment Network refusing to give the NOC to its JV partner Disney that wanted to launch the Disney channel in India through a wholly-owned subsidiary. More recently, Ramphal Trust opposed the plan of Mercer Inc for entering into the insurance broking sector by citing the conflict of interest clause of Press Note 1, on the grounds that Ramphal Trust is also an insurance broking firm.

DIPP has recently issued a discussion paper stating that, “Industry has to increasingly become more competitive. This is particularly relevant in an era of globalisation, where a number of FTAs and CEPAs are in place. In such a scenario, if an industry is discouraged from being set up in India, it could be set up in a neighbouring country, with whom a trade agreement exists or is being negotiated.” Despite the existing policy framework, JVs in India would remain a preferred route for international companies to find their way into the Indian market and whoever thought that JVs were a thing of the past may well have to take a reality check! Take the instance of defence, which has a 26% FDI cap. The sector is inviting considerable interest and investment. Recent developments include Mahindra Defence Systems and BAE Systems collaborating to manufacture land combat vehicles, and the tie-up of Tata Advanced System with the makers of the F-16 fighter jet, Lockheed Martin Corporation. Also notable is the fact that these JVs enable considerable technological learning, given that defence production requires advanced state-of-the-art technology.

Even for the sectors that allow FDI up to 100%, foreign companies may prefer a JV for testing the waters for their product and market even if they seek a more equal partnership in JV. An established Indian JV partner will enable quick access to the Indian market, an immediate platform to launch a product backed by a distribution network. Managing the Indian reality may be tough for the global guy, so it will always make sense for a global player to go with an Indian partner. For instance, tie-ups between Honda Motor Company and the Shriram Group and between Toyota Motor Corp and the Kirloskar Group have had a smooth run.

Other sectors that will continue to get JV traction in India will be industrial products, power, oil & gas, heavy equipment, automotive equipment, pharmaceuticals, infrastructure and high-end technology. For JVs in these sectors, technological expertise, best practices, risk-sharing and capital will play a key role and, in turn, provide opportunity for both partners to leverage their core strengths and increase their profits and offer something unique to the partner. This fact is well comprehended globally, where risk-sharing and technological partnerships are assuming new highs with Suzuki’s tie-up with Volkswagen and the GM deal with SAIC surely standing to be counted. The GM-SAIC partnership remains one of the most successful tie-ups between a foreign and a Chinese automaker, enabling the foreigner to make its presence felt in a fiercely competitive landscape. Taking their successful partnership to the next level, GM and SAIC are teaming up to make commercial vehicles in India.

The pharmaceuticals space is also abuzz with companies tying up for joint R&D as the risks in technology are very high and the amounts invested equally steep. In sync with this realisation, members from the China Chamber of Commerce for Import and Export of Medicines and Health Products that recently accompanied the Chinese Premier Wen Jiabao too stressed how JVs could prove to be a win-win situation for Indian and Chinese pharma companies, as few Chinese companies were qualified to bid for global tenders by the WHO compared to 1,000 Indian companies.

Even as JVs will hold traction in emerging markets, going ahead, it remains to be seen if the emerging market JVs can transcend to the next stage and move beyond just providing a market access to the global player. As of now, JVs in India leverage domestic players’ knowledge of the lay of the land, whereas developed markets JVs are more strategic and competent, almost akin to mergers. How emerging markets, and especially India, traverse this path to become an ‘equal’ partner rather than a mere market enabler holds the key to JVs’ future here.