JOINT VENTURES IN INDIA

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PGP/FW/07-09 1 May 2012

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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1 May 2012

REASON FOR JV’s

 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.

• Government Regulations. • Lower Risk of Geographical Location.4 PGP/FW/07-09 1 May 2012 Others Reasons… • Technology: General Motors joint venture with Toyota provided an opportunity for GM to obtain the low-cost strategy used by Toyota. • Access to Capital. .

Jointly controlled assets. Jointly controlled entities. 2. 3. . Jointly controlled operations.5 PGP/FW/07-09 1 May 2012 Types Of JV’s 1.

.6 PGP/FW/07-09 1 May 2012 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.

7 PGP/FW/07-09 1 May 2012 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.

8 PGP/FW/07-09 1 May 2012 Need for setting up a Joint Venture INTERNAL REASONS COMPETITIVE GOALS STRATEGIC GOALS .

3) Improving access to financial resources. 4) Economies of scale and advantages of size. .9 PGP/FW/07-09 1 May 2012 INTERNAL REASONS 1) Building on company's strength. 6) Access to innovative managerial practices. 2) Spreading costs and risks. 5) Access to new technologies and customers.

. 5) Speed to market. 2) Pre-empting competition. 6) Improved agility.10 PGP/FW/07-09 1 May 2012 COMPETITIVE GOALS 1) Influencing structural evolution of the industry. 3) Defensive response to blurring industry boundaries. 4) Creation of stronger competitive units.

.11 PGP/FW/07-09 1 May 2012 STRATEGIC GOALS 1) Synergies. 2) Transfer of technology/skills. 3) Diversification.

12 Regulations governing JV in india PGP/FW/07-09 1 May 2012 SECTORS Mining (commercial) Banking (Pvt). Trading etc. Airport (Existing) Insurance Telecommunication PERCENTAGES 51% 74% 26% 49% Alcohol distillation and brewing. SEZ’s and Free Trade Warehousing Zones. Petroleum and Natural gas. Animal Husbandry.. Floriculture. 100% . Construction and Development. Horticulture .

Regulations governing JV in india-Press Note 18 PGP/FW/07-09 1 May 2012 13 Denied the use of the automatic investment route and required a foreign investor who had an existing joint venture. 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.. . trademark or technology transfer agreement in the “same or allied” field in India to seek FIPB approval for further investments in India.

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.14 PGP/FW/07-09 1 May 2012 Regulations governing JV in india  Press note-1  Whereas Press Note 18 required government approval for investment in “same or allied” field.

15 Regulations governing JV in india PGP/FW/07-09 1 May 2012  Press note 1 cont.. . Now. 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. The onus to provide requisite justification to the govt.  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.

.. 2005 may contain a “conflict of interest” clause in the joint venture agreement. it essentially provides the foreign investor with a type of no objection from the Indian partner regarding foreign investments in the “same” field. Such a clause is critical because. • Press Note 1 provides that all joint ventures entered into after January 12.16 Regulations governing JV in india PGP/FW/07-09 1 May 2012 • Press note 1 contd. if drafted well.

 Wadia group is objecting to Danone’s invstments in Bionutrition firm Avesthagen.  TVS group . .17 Regulations governing JV in india  There are cases where Indian partners of failed jv’s alleged to have made efforts to block foreign partners from ventures referring to PN1. without any sound reasons.  In 2001 Walt Disney’s local partner. the KK group objected to Disney’s attempt to establish a wholly owned subsidiary in India. kept denying the much needed no objection certificate to suzuki to start a new investment venture in india after the TVS. for about three years.Suzuki joint venture was called off in 2001.

18 PGP/FW/07-09 1 May 2012 Problems of JV’s 1. Valuation Problems. . Conflict Resolution. Changes in ownership shares. 4. 3. Transparency. 2. Division of management responsibility and degree of management independence 5.

Marketing and Staffing Issue. 9. 8. Dividend Policy. 7. . Multinationality problems.19 PGP/FW/07-09 1 May 2012 6. Cultural Problems.

Before entering a Joint Venture. •Be sure about the organisational behaviour of the partner to ensure synergies. . • Both partners should appreciate the need for the joint venture. •Take measures to be sure that the partner has a compatible work culture.. •The partners should clearly agree on the way the joint venture will be managed.

it is also important that both partners are equally able to service its growing need for capital as the business expands.  To make for the long term success of the joint venture..  Need to have a clear long term goal and set the terms and conditions of the JV.21 Before entering a Joint Venture. PGP/FW/07-09 1 May 2012  It is important that both partners work towards a system based on trust and transparency.  Clarly define the role and responsibility of each partner. .

 The agreement or contract should provide for flexibility in the future.22 Successful joint venture require: PGP/FW/07-09 1 May 2012  Each participant has something of value to bring to the venture.  There should be provision in the agreement for termination including buyout by one of the participants.  The participants should engage in careful preplanning.  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 .

godrej.mapsofindia.23 PGP/FW/07-09 1 May 2012 Example :• Virgin Group and Tata Tele Services • http://business.com/communicationsindustry/tata-teleservices-tie-up.com/godrej/GodrejAgrovet/inde x.html • Maruti Suzuki • Tyson Foods and Godrej Agro vet • http://www.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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 Hotline disagreed to theses.25 PGP/FW/07-09 1 May 2012 Concerns of doing a JV  Change of strategy of either of the partners creats rift in certain JV’s  The JV between Hotline group(india) and Haier(china) missed at that point.  Haier wanted to focus in imports. the JV broke off before the operations started  Haier re-entered indian market with a 100% susidiary in 2003. . multi-split AC’s etc.  Haier planned to increase its share to 49% to introduce wide ranges of products including washing machines.

.26 PGP/FW/07-09 1 May 2012 Concerns of doing a JV • In some cases accecss to technology or capital provides sufficient confidence in the partners to go alone.JV between TVS group (INDIA) and Suzuki(japan) formed in 1983 was called off in 2001. making the JV redundant • For example.

Wadia accused DANONE of using the popular Britannia brand Tiger products outside India.aspx .just-food. • For example.com/news/danone-tightlipped-as-wadia-jv-probed_id98682.27 PGP/FW/07-09 1 May 2012 Concerns of doing a JV • AT times either of the partners are accused of breaching the terms of the JV creating tensions in it. not permitted as per the existing agreement between the two. • http://www.

28 PGP/FW/07-09 1 May 2012 Concerns of doing a JV There are cases of JV falling apart due to lack of synergy. . • There was poor cultural integration between the two partners. GE alleged lack of professionalism in the Indian partner. • For example. 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.the 40:60 JV between Godrej and GE formed in 1993 .

 People with expertise in one company refused to share knowledge with their counterparts in 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.  Parent companies are unable to share control or compromise on difficult issues .29 PGP/FW/07-09 1 May 2012 Reasons for failure of a joint venture  Inadequate preplanning for the joint venture.

30 PGP/FW/07-09 1 May 2012 Example :• • • • • Lufthansa and Modi Group Daewoo and Proctor & Gamble Kinetic Honda Tata IBM LML Piaggio .

31 PGP/FW/07-09 1 May 2012 .

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