Why venture jointly?
Up to 70% of the joint ventures fail. And yet, why do we continue to go for forming a joint venture?
German Mittelstand companies (Medium-sized enterprises, primarily industrial, manufacturing) had been dominant in their local market. Though they have been the export-masters, traditionally they had little presence abroad through international entities. Slowly those SMEs started widening their reach – first in the familiar territories – West European countries, the UK-USA, then nearby East Block countries and Russia. And now they are testing the waters in altogether foreign cultures like China and India.
When such companies enter, for example, India, they find everything unfamiliar – laws, customs, languages, customer preferences, business practices, ethical standards, climatic conditions, manufacturing processes, work culture – you name it. A trusted local partner comes handy in interpreting these, making sense of the ecosystem and finding the way through it.
The ideal joint venture partner is the one that has resources, skills, and assets that complement your own. And there are Chambers and government initiatives like BVMW (German Federal Association of SMEs), IGCC (Indo-German Chamber of Commerce), MIIM (Make-in-India Mittelstand) and hundreds of consultants who will willingly support you in finding the right partner. Simple, isn’t it? And yet, the majority of the joint ventures fail and become a drag on both the partners for years to come.
Marriages could be made in heaven, but joint ventures are formed on the earth. Selection of the right partner is THE most important aspect deciding the fate of the venture. During my many years of experience in this field, I worked with some successful and some failed joint ventures. The failed ones keep on repeating the same mistake. Let’s discuss some of them.
Difference in the mindset
To start with, we have to be aware of the cultural differences that guide our search, discussions, and negotiations. One has to understand the mindset differences while dealing with the partners. German Mittelstand – stays focused, is slow in decision-making, prefers consensus. Indian partner – deals in varied business activities simultaneously, is aggressive, and anticipates a quick closure and rapid progress. Germans prefer a structured, planned approach. Indians adore flexibility and improvisation. Germans are more project-oriented, Indians – people-oriented.
In a joint venture, typically, the German partners bring to the table – vast experience in a niche area, technology, know-how, processes. The Indian partner – local presence, knowledge of the local business environment, network, an established market position in the specific industry, readily available real estate options. All these must be valued properly at the time of entering into a joint venture. There is no point in complaining about it later on.
Lately, many German Mittelstand companies have started providing intercultural training for their “India project team”. A similar training is also essential for Indian partner’s Germany project team for a better understanding.
Standard process used in the selection of the partner
Increasingly, German Mittelstand wants to explore India as a market and eventually as a production base. If the Mittelstand companies want to sell their B2B products (industrial goods) in India – like capital equipment and machine tools, it is imperative to maintain inventories and having a service set-up in India. A German Mittelstand company often looks to partner with its long term customer or supplier from India.
An Indian company often wants new technology in their domain, scale up, access to the European market. Again, a known German customer or supplier becomes a natural choice to partner with.
One often meets potential partner at the trade fairs. If these options are not easily available – search for an unnamed partner takes place through India-Entry consultants.
Typical errors in Indo-German joint ventures
1. Not examining what the partner really wants from the joint venture
A German aluminium foil mill wanted to supply locally to the Indian subsidiary of its global, largest and most valuable customer. They partnered with an Indian company engaged in aluminium strip business locally. Even though foil and strip, both are termed as “rolled products”, aluminium foil is a high tech, high margin, skill and technology-driven business.
The customers tend to be global food, pharmaceutical packing giants. Aluminium strip, on the other hand, is a low-tech, low-margin business with commoditized product and a customer base in the highly competitive construction industry. The Indian partner wanted to use the spare capacity from its furnaces to supply aluminium as raw material to the joint venture. Neither intentions nor approaches matched. Millions of Euros went down the drain until it was realized that they both cannot work together.
Inconsistent goals lead to irreconcilable differences; which ultimately leads to the failure of the JV.
There is no harm in using Indian partner’s office space, factory location, or any other readily available resources. However leasing out those assets to the JV cannot be the objective. Besides, renting out should be done at market rates or a pre-decided price. Even the escalation mechanism should be decided in advance. Lock-in period or terms of vacating the real estate or service agreement must be agreed upon – just like with a third party.
2. Not having the transparency about “relationship management”
Since Indians are relationship-oriented, it must be ensured that a professional management leads the company. Again, no harm in hiring the partner’s brother or daughter in important positions in the company – but only if they qualify for the position.
For the German partners, it would make sense to inquire into the relations of the local partner – if there are any close relatives in a competing business, or potential vendors or customers etc.
3. Saving on due diligence
As a German saying goes – trust is good but control is better. It is extremely important to invest enough efforts, time and money in due diligence.
A German hydraulic products manufacturer entered into a joint venture with its long-term Indian supplier of castings. In a rush to start operations, the due diligence was not done properly. “We already know the partner, don’t’ we?” A state-of-the-art factory was built with excellent plant layout, newest machinery and so on. As it turned out, the long-term Indian supplier was simply an excellent trader. He was not technically sound enough to run a high-tech company. He wasn’t even financially stable. All this could have easily been found if due diligence was done by the German partner with professional support.
Apart from a formal due diligence, inquiries must be made with the ROC – Registrar of Companies, Financial Information companies, with the customers of the potential partner. A reference check is a must before a partner is finalized.
4. Not making a reliable business plan and having buy-in from both the partners
Indians, by nature, tend to be over-optimistic. Indian market is to stay for the long run. But in short to medium term one may confront challenges. In spite of favourable demographics, the market is highly fragmented. In Germany the quality is given, in India quality is negotiable. In Germany consulting and service has a price; in India, it comes for free with the product. India is amongst the most price-sensitive markets in the world. Making an overly optimistic business plan jointly with your partner could lead to disillusionment in the future. The business plan –especially sales projections and cost estimates need to be challenged and thoroughly scrutinized.
5. Not having clarity on sales approach
Indians tend to be market-share oriented. German companies are highly focused on margins, on profitable growth. Reaching an agreement with the partner on top-line or bottom-line is essential.
Low credit morale and associated financial risks is an important issue in Indian business. To what extent the JV should accept higher credit risks or longer payment terms for the incremental business also can be agreed in advance.
Another issue which could lead to conflict is – whether to Indianise the products or to produce them as per global standards. Multinationals are often unwilling to water down the specifications in order to maintain the uniformity of their global portfolio. The Indian partner may consider those products to be over-engineered, over-specified and unsalable due to the associated higher costs. A partner sharing your view should be preferred.
6. Not making detailed growth plans with timeline and milestones
A German company typically starts a foreign venture with a sales office or a service centre. Once reaching a comfort level – say after 2-3 years – it plans for an assembly shop. Again after 2-3 years, it may think of a full-fledged production facility. As against this, your Indian partner might be working on many diverse activities simultaneously and is willing to start with the manufacturing facility within a year or two of forming a joint venture.
The Indian partner may have ideas to use the Indian low-cost base for exporting components and services back to Germany or to the parent’s other foreign entities. As against this, the German partner might insist of developing processes, skills, and capabilities, and reaching of international quality standards before starting with exports. In order to avoid disappointment later, it is essential to have clarity on this amongst the partners.
It is also important to plan capital contribution along with growth plans. It should be clear that without agreed contribution, a partner’s share in the JV gets diluted.
7. Not checking if the wavelength matches
Ethical standards, compatibility regarding governance, risk appetite, trustworthiness and a passion for technology need to match before signing off with the partner. Trust is the basis for any long-term relationship. Does the partner understand that the intangibles like a brand, production processes, technology have a monetary value and are not available for free?
With international watchdog agencies becoming strict on governance, a multinational company may be putting its reputation at stake with the wrong choice of a partner.
There was a German Mittelstand company focused only on the manufacturing of the world class automobile springs. It found an Indian partner – a large business family – engaged in a dozen businesses – including real estate, cinemas and banquet halls. One of its businesses was the manufacturing of automobile springs.
This was a small, also-ran kind of activity for the family with little focus on it. It was a cultural shock for the German partner whose passion over a century had led it to the global leadership position in this niche product to realize that the Indian partner is not at all focused on this activity. The total mismatch between the partners ultimately led to the failure of the joint venture.
8. Not checking if your potential partner is successful in his own right
In India, a lot of things could happen based on the local partner’s relationship with the bureaucrats, politicians or even within the industry. However, relationship-dependent businesses survive only so long as the people in the important positions don’t get replaced. It is important to take a long term view and ensure that the potential partner is good for a lasting relationship and sustainable business.
9. Not planning the exit
It appears counter-intuitive to talk about an exit at the time of formation of the joint venture. But it proves to be extremely important to decide as to under what circumstances the JV will be dissolved, how the valuation of shares is to be made at such a time, which arbitration to approach as a dispute resolution mechanism, what happens with the intellectual property – like a trademark, brand, designs etc. It may sound paradoxical. But having such a clear and transparent agreement in place lets both the partner focus on business rather than on “what if” situations.
For medium-sized businesses, joint venture continues to be an attractive option. A German Mittelstand company can immediately focus on its core competencies and on the business rather than on company formation, approvals, and administrative activities. Like in a marriage – if both parties work together with common understanding and mutual respect, with a shared vision and towards a joint goal, there is no reason why a joint venture can’t succeed. The key to success, however, is in finding the right partner. And that requires patience, experience, and efforts.