JOINT VENTURES - Break Point

Who needs joint ventures now? Capital is freer, technology more easily available. Other than in sectors with ownership restrictions, JVs are losing relevance, as evidenced in the increasing number of splits, report Bhanu Pande & Arun Kumar

Last year, it was Mahindra & Mahindra and Renault in cars. Earlier this year, it was the Hero Group and Honda in motorcycles. And now, Godrej and Hershey might reportedly go their separate ways, after just four years, in their foods venture. India Inc is seeing an increasing incidence of joint ventures come apart. No formal numbers are available, but five investment bankers that ET spoke to say the last six years have seen the demise of about 50 prominent JVs, most of them with a lifespan of less than 10 years. The discordant notes stem as much from the intrinsic nature of this business arrangement as from its changing place in the Indian business milieu. “A joint venture is a marriage of convenience, with an exit clause,” says Ravi Sardana, executive vice-president, ICICI Securities. “The partnership begins on a happy note, with either partner gaining access to technology, funds, markets or brands. But soon, the honeymoon is over.” Increasingly, in an open and decontrolled business environment, companies are finding they don’t need a partner to access all that. In the late-90s, BK Modi had 12 JVs: with Xerox, GBC, Continental and Olivetti, among others. Today, he has none. “JVs were necessary for both Indian and foreign companies in a controlled environment, and when technology and funds were scarce,” says Modi, chairman, M Corp Global. “Today, they have no relevance in most cases, except where those three factors still hold.” Take equity holding, the biggest imperative for shared ownership. In 1991, no sector allowed 100% foreign direct investment (FDI).

Today, there are at least 22, including big ones like auto, pharma, FMCG and financial services. “Foreign companies form JVs to test waters,” says Uday Kotak, executive vice-chairman, Kotak Mahindra Bank. “If they like the market, they either buy out the local partner, even if it means paying an exorbitant premium, or sell out at a throwaway price to start afresh under full control.” Kotak had two JVs in financial services, with Goldman Sachs, which lasted 10 years till 2006, when the US investment bank decided to go solo. According to Ramdeo Agarwal, managing director of Motilal Oswal Securities, such tendencies increased in the last decade, with the regulatory framework turning favourable and globalisation seeping into the Indian system.

NEW BUSINESS ENVIRONMENT

As they spend more time in India, foreign companies feel a lesser need to have partners, and share profits and control. This is especially the case when they want to expand faster than their Indian partners. For example, American automation giant Honeywell split from the Tatas in 2004 and went solo in India, as it felt the market had greater potential than the JV was tapping; and going solo would give it greater focus and comfort while investing. “Most JVs are meant to fall apart at some point in time, and the reasons for this are not blinding insights,” says Ashish Singh, chairman, Bain & Company India. “The life of JVs is what they normally call the ‘seven-year itch’, beyond which there are many reasons for conflicts between partners,” says Hemendra Kothari, chairman, DSP Blackrock. Kothari, who was a partner in DSP Merrill Lynch, a JV with Merrill Lynch, exited the venture in 2009, after 14 years. Even Hero Honda, which endured for 27 years, could not escape that inevitability. Company insiders say Honda, the Japanese partner, wanted a greater say in decision-making, particularly in sourcing parts from original equipment manufacturers (OEMs), which the Munjal family wasn’t willing to concede. “Friends and associates of the Munjals control substantial part of Hero Honda’s OEM business,” says an institutional investor who has tracked the company for about two decades. Another point of disagreement was over expansion: the Munjals wanted to expand abroad, but Honda wanted to keep it to India only. “There can’t be two leaders in a company,” says Modi of JVs in general. Both partners felt confident going solo, which they might not have in the past. Honda has had a 100% subsidiary in India since 2000, and agreed to exit Hero Honda at a 50% discount to market price. The Munjals understand the Indian market, and feel they can source technology and build their research team. “Mathematics has not found a way where two people can own 51% each in the same company,” says Kotak.

DIFFERENCE OF OPINION

Most JVs come unhinged due to differences in aspirations and approaches. A case in point is HDFC-Chubb General Insurance. In 2007, the Indian company called off its JV with The Chubb Corporation, the world’s largest non-life insurance company, after five years due to differences on pace of growth. “Chubb had a low appetite for risk in India,” says a person who advised HDFC on the split. “This became a bone of contention between the partners. It became a barrier for the JV’s rapid roll out, especially in the commercial segment.” Singh of Bain says the 2008-09 financial crisis saw a number of foreign companies temporarily reduce their focus on emerging markets. “In some cases, this strained relationships with local partners,” he says. “Sometimes, too little success leads to frustration, impacting the JV’s durability.” Investment banking officials say the Godrej Group is getting impatient with the slow progress of its Rs 450 crore JV with Hershey, at a time when the chocolates category is registering good growth. In its fourth year, the US company has only launched its popular chocolate syrup, while Godrej has contributed a number of brands to the JV under its Nutrine portfolio, they point out. Godrej has a history of broken JVs. In the nineties, Godrej Soaps broke its JV with Procter & Gamble after four years as it felt its brands like Cinthol were getting the short shrift. In the early-2000s, white goods major Godrej & Boyce and GE Appliances parted ways; and a tie up with Pillsbury to market wheat flour was called off. And, more recently, its consumer goods flagship, Godrej Consumer Products, bought Sara Lee’s 51% in Godrej Sara Lee, ending a 15-year JV.

JV TEMPLATE

Joint ventures are good for a finite period of time, says Adi Godrej, chairman, Godrej Group. “They are not forever and they should not even be,” he says, adding that JVs are forged with a specific objective. “Over a period of time, each partner learns what it set out to do and it’s time to move on.” Godrej, however, still believes that JVs are useful for resources and growth. There will always be reasons to start JVs, but, in the coming years, their need could reduce across many sectors. And so will their numbers. “In sectors where regulation is still extensive, and knowledge of the political and administrative landscape is critical, the need for JVs will remain,” says Singh of Bain. “Also, where special skills/technology is a big issue.” He cites the example of the boiler, turbine and generator segment in the power sector, where almost all players have JVs. Similarly, sectors requiring elaborate sales and distribution networks will continue to see JVs being signed. A template for a successful JV entails three things: the partners are clear about their strategic objectives, they know their respective responsibilities, and they trust each other. “It is obvious that a JV must have a thoughtthrough pre-nuptial plan,” says Singh of Bain. “But what is needed — and sometimes, it is not so obvious — is a certain degree of flexibility, which will be called on at some point to keep the JV intact and successful.”