Read Conquering the Chaos: Win in India, Win Everywhere Online
Authors: Ravi Venkatesan
By 2012, though, this innovative project, called Vikas (or progress), had been wound
down, and the team had been absorbed into the mainstream of selling Office and Windows
licenses. The leader in selling affordable solutions through a pay-per-use model is
Tata Consulting Services (TCS), which has set up a new division called iON. TCS competes
with Microsoft’s cloud-based offerings, claiming 150 channel partners, 200 customers,
and a goal of earning a billion dollars in five years. Despite a three-year head start,
leadership for the future in Tirupur seems to have moved from Microsoft to TCS.
How did this happen? Microsoft is a rare company that is willing to take a long-term
view when it comes to product innovation. It had sustained billions of dollars of
losses for a decade or more until the Xbox or the Bing search engine succeeded. Trouble
is, in Microsoft’s model, all innovation has to happen in Redmond, Washington; countries
like India are not mandated, funded, or equipped to drive business model innovation.
Vikas was a skunk-works project funded out of the local India budget. A successful
proof of concept was demonstrated, but when the global economy went into recession
in 2008, Microsoft India was not able to support Project Vikas’s scale-up or the project.
We can learn two lessons from Microsoft’s experiences. One is the need for top management
commitment, a no-exit policy that will allow innovation projects time to mature and
scale. The other is that multinational companies need to treat geographic markets
as a source of innovation. Not all innovations need to come from the centrally planned,
disciplined, and expensive process that global companies follow. There should be room
for bottom-up experimentation in emerging markets like India. Many creative business
models develop in places like India and Kenya, so key geographies should have some
freedom to innovate and modest innovation budgets to play with. That’s how Cummins’s
small generator sets business started. That’s how Pureit was born.
One key reason why Cummins has succeeded in India and China is because we learned
how to make joint ventures work.
—TOM LINEBARGER, CHAIRMAN AND CEO, CUMMINS INC.
Mention the term
joint venture
and most executives in multinational companies as well as Indian corporations will
shudder delicately and change the subject. That isn’t surprising; over the past twenty
years, most joint ventures (JVs, for short) have failed, especially in emerging markets
where experts estimate the failure rate at 60 percent. While several partnerships
in India have ended acrimoniously—Telenor-Unitech, Britannia-Danone, and DB Realty–Etisalat,
for example—in other instances, objectives diverged, the two sides were unable to
work through their problems, and one eventually bought out the other. That’s what
happened at TVS-Suzuki, Godrej-P&G, Modi-Xerox, Tata-IBM, Mahindra-Renault, and L&T–John
Deere, among others.
However, some JVs in India have been spectacularly successful. The ties between family-owned
companies and MNCs such as the Kirloskars and Cummins (Kirloskar Cummins), the Munjals
and Honda (Hero Honda), and the Nandas and JCB (Escorts JCB) created enormous value
for both sides over a long period, and those such as Tata-Cummins, Volvo-Eicher, and
Wipro–GE Healthcare endure to this day. My research and experience suggests that joint
ventures either create significant value or destroy large amounts of value, and the
outcome usually depends on whether companies have nurtured alliance management capabilities.
Some executives extrapolate from one bad experience, and using every horror story
as further confirmation, they become permanently averse to JVs. That, I believe, is
a mistake. Joint ventures, strategic partnerships, and acquisitions are all essential
to succeed in emerging markets like India and China. CEOs should rely less on instinct
and knee-jerk reactions, and examine these options with an open mind.
When they work, JVs offer three major benefits. One, joint ventures help multinational
companies overcome the regulatory hurdles related to foreign ownership in emerging
markets so they can enter markets early. For instance, retailers like Walmart and
Tesco as well as insurance giants like Allianz and New York Life have used joint ventures
to enter India because the government doesn’t permit 100 percent ownership by foreign
companies in those sectors. Similarly, in highly regulated industries such as telecommunications,
mining, and defense production, foreign companies need Indian partners to help obtain
licenses and permits. That’s why telecom giants Telenor and Etisalat entered into
alliances with real estate groups Unitech and DB Realty, for instance.
Two, a JV can help turn into reality the belief of two companies that they can reshape
an industry because of their complementary capabilities. For instance, after failing
to make a dent in the Indian commercial vehicles market on its own, Sweden’s AB Volvo
and India’s Eicher Motors joined in 2008 to take on the two market leaders, Tata Motors
and Ashok Leyland. Volvo brought modern technology, a global brand, and economies
of scale to the table, while Eicher contributed a strong local brand, market knowledge,
distribution, frugal engineering, and manufacturing capability. By 2012, Volvo-Eicher
had doubled sales and operating margins in India, while growing its market share from
8 percent to 12 percent.
However, the single most important and powerful reason why a JV is often worth considering
in emerging markets is simply governance. Having run a very large and successful JV
for nearly a decade (Tata Cummins) and a number of smaller but equally successful
ones, I am convinced that if you can find the right JV partner, 1 + 1 = 11. It’s quite
simple. If you have two partners who trust each other, bring complementary assets
or capabilities, and are focused on expanding the pie as opposed to worried about
dividing it, the governance structure of a JV provides the freedom and accountability
to its management team to take what is best in both parents and create a vibrant and
valuable new business.
It isn’t easy, but we were able to do that at Tata Cummins, a fifty-fifty JV set up
in 1995 to provide truck manufacturer Tata Motors with Cummins’s modern engine technology.
Cummins provided the product platform as well as engineering and manufacturing capabilities,
while Tata Motors brought an extraordinary distribution system, frugal engineering
skills, and regulatory influence. The management team was young, entrepreneurial,
and passionate about reshaping the truck business in India. A five-year plan laid
out the products, localization level, branding strategies, pricing, and distribution
strategies that would most likely succeed in India. Tata Cummins’s board, which had
five representatives from each side, reviewed the business every quarter on just four
metrics: product cost, product quality, cash flow, and profitability. My team had
complete operational autonomy. We decided marketing strategy, picked what products
to offer, dropped features that added to costs but not customer value, and could add
head count even if there was a hiring freeze in Indiana or Mumbai. The combination
of a long-term plan, tremendous operating freedom, and accountability to the board
turned out to be critical to the venture’s success. Eight long years later, and after
surviving a make-or-break moment, Tata Cummins delivered results.
Both Cummins of the United States and Tata Motors were seasoned and opinionated partners,
but they had an equal say in managing the JV, which created a constructive tension.
Neither partner was able to impose its views, so we could figure out what made sense
for our venture. This governance model allowed the JV to take what was the best from
each parent, yet not be bogged down by their internal bureaucracies. Thus, the structure
prevented Cummins from being mindlessly global and Tata from being helplessly local.
Olof Persson, CEO of AB Volvo, who oversees successful JVs with Lingong in China and
Eicher in India, agrees: “JVs provide a good braking force against our instinct to
want to do everything the Swedish way.”
The most common reason joint ventures fail is poor due diligence. Companies would
do well to ask themselves: Does the partner share our values? Do we respect their
leaders? Do our ambitions and goals align, or will they come into conflict soon? Can
we trust them to do the right thing whenever we run into a roadblock? Will they stick
to the letter of the deal or understand its spirit?
Some JVs fail because foreign companies are unwilling to do things differently for
the India market—change pricing or customize products, for instance. That’s why the
Renault-Mahindra JV stumbled; Renault’s CEO Carlos Ghosn admits: “The Logan [a low-cost
car that had been successful in Europe and Russia] was too expensive; it was not sufficiently
localized.”
1
Then, in 2007, some of Mahindra-Renault’s rivals lobbied successfully to get the
excise duty on cars longer than 4 meters increased from 8 percent to 20 percent. Since
the Logan was 4.25 meters long, Mahindra & Mahindra wanted Renault to shorten it.
Renault refused to tinker with a global platform, which M&M perceived as typical Gallic
rigidity. The two companies failed to resolve their differences, as I stated earlier,
and in 2010, Renault licensed the Logan to Mahindra, and the partners ended their
joint venture. (Incidentally, Mahindra relaunched the Logan as the Verito in 2012.
Sales are reportedly strong.)
Most multinational companies have developed business models that have worked in the
developed world. If they aren’t willing to work with local partners to adapt those
models to the India market, stresses will develop in the JV. Every JV will encounter
a defining moment, and at that crucial moment, flexibility and a willingness to understand
the partner’s views and seek a win-win solution rather than simply throw in the towel
become critical. That’s how the Tata-Cummins joint venture survived (see “
A Defining Moment at Tata Cummins
”). Adds Cummins’s Tom Linebarger: “A big reason why some JVs work while others don’t
is the willingness of the partners to compromise. Big egos make for lousy JVs.”
I
n the summer of 2000, Ratan Tata, the chairman of the Tata Group and Tata Motors,
was huddled in conference in a small London hotel with Tim Solso, the chairman and
CEO of Cummins Inc., the US-headquartered engines giant. The two were discussing the
future of their five-year-old joint venture, Tata Cummins. The atmosphere was tense.
The optimism with which the companies had started their fifty-fifty venture in 1995
had evaporated. For Tata Motors, the JV was meant to be a way of acquiring modern
low-emissions engines to modernize its commercial vehicles so it could compete with
the likes of Volvo and Mercedes-Benz. It could outsource its engine operations, but
retain control because of its ownership stake. For Cummins, the JV was supposed to
help achieve economies of scale in a strategically important segment in a major market.
The partners brought distinct and complementary capabilities. Tata Motors had a 65
percent market share of commercial vehicles, a great sales network, a powerful brand,
and policy and regulatory influence. Cummins brought world-class technology, a strong
brand, and an understanding of the global vehicle business. The companies had similar
values, and the two chairpersons enjoyed good personal chemistry.
However, the JV, set up with a capacity of seventy thousand engines, ran into trouble
almost from day one. Every assumption turned out to be optimistic: the price customers
would pay, the rate at which emissions regulations would evolve, the quality and performance
of the Tata vehicles with the Cummins engines, and the capability of the service network.
As a result, losses mounted and the plant remained underutilized. For five years,
the JV worked hard to redesign the product for India, localize manufacturing, and
create distribution and service capability, but it was clear that the economics were
still broken.
At the current transfer price, Tata Motors believed that the demand for the new engines
would only be ten thousand units a year. To convert all Tata vehicles to the Cummins
engine and fully utilize capacity would require the price to be at least 25 percent
lower. Tata also believed that the JV agreement was fundamentally unfair to it. The
Cummins management felt strongly that the reason for the crisis was the lack of commitment
to phase out Tata Motors’ engines and the partner’s inability to sell the considerable
benefits of the Cummins engine-equipped trucks. It also felt that it was disingenuous
of Tata Motors to renegotiate the agreement; a deal, after all, is a deal.
Solso had three options. One, buy out Tata’s stake in the JV, sell as many engines
to Tata as it wanted, but find other customers as well. Two, stay in the JV, but rely
less on Tata to use the capacity of the plant and find other customers. Three, reduce
prices by 25 percent in return for a renewed commitment by Tata to change over its
vehicles to Cummins engines and hope that the JV could reduce costs so it could still
make money.
Overruling the advice of his senior leaders (including, I must say, me) who mostly
favored the second option, Solso took a long-term view, chose the third option, and
we cut the price by 25 percent. Solso agreed with Tata’s view that the agreement was
one-sided and would not endure. He felt that even if Cummins took a hit in the short
term, it would be immeasurably better off with a strong partnership in a fast-growing
market.
As a result, the JV had to embark on a massive cost-reduction plan to break at the
lower price. Every feature that added cost but not value was dropped, including an
electrically operated engine fan and an electric shutoff switch. The JV asked suppliers
for ideas and price reductions. Within a year, the manufacturing cost fell by 35 percent
and, eventually, by 50 percent, and volumes shot up.
Tata Cummins is one of the few JVs that currently survive in the Tata Group. While
capacity has expanded to 240,000 engines a year, revenues are approaching $1 billion,
with the return on capital exceeding 30 percent. The JV has given Cummins a 40 percent
plus share of the world’s second-largest truck engines market and makes a healthy
contribution to global profits. It took Tata Cummins eight years to make money for
its parents, and many companies would have thrown in the towel in the difficult summer
of 2000. But Solso and Tata took a long-term view, working through a tough issue to
their mutual benefit.
The downsides of a partnership gone sour can be traumatic and set a company’s strategy
back by years. For instance, Norway’s Telenor entered into a partnership (Uninor)
with India’s Unitech only to gain access to the telecom licenses that the government
of India had awarded the company in 2009. However, the sale of the licenses turned
out to be part of a moneymaking racket that politicians and bureaucrats had hatched.
After the India media exposed the scandal, the Supreme Court of India canceled 122
licenses, including those of Uninor and sent Sanjay Chandra, Unitech Wireless’s CEO,
to jail. Telenor then accused Unitech of breach of warranties, sought damages in court,
and has written off a large part of its investment in the country. It’s reboot time
for Telenor in India.
Clarity makes JVs succeed. A well-defined scope, a realistic business and investment
plan, clear roles for each partner, and alignment on governance, performance management,
and dispute resolution mechanisms in case of disagreements must all be discussed,
negotiated, and clearly captured in an agreement. When Walmart teamed up with the
Bharti Group to enter India, they agreed that the venture would focus only on the
cash-and-carry business at first. The business plan laid out a gradual scaling up
of operations, starting out in India’s smaller cities, and Walmart agreed that the
JV would use India-centric systems because of the operational challenges the country
poses.
Similarly, the success of Volvo’s commercial vehicle venture with Eicher in India
is partly due to strategic clarity. The JV agreement clearly specified the management
responsibilities of each partner. Volvo and Eicher also agreed on a dual branding
strategy, whereby they would use Eicher for the midmarket segment and Volvo for the
premium vehicles market. The business plan laid out the growth and market share objectives,
the product plan, and the investments. Volvo consciously avoided integrating the JV
into its fold or imposing its operating systems, while it staffed strategic projects
with people from both sides. The JV is a board-managed entity, with Eicher managers
in place. Since its formation, the JV has grown market share and profitability every
quarter.
Managing joint ventures is a skill or a capability, and companies must work hard to
develop it. Take Cummins, which has used joint ventures to do well in India and China.
Cummins wasn’t born with the ability to manage joint ventures successfully; partnering
is a capability that the company developed because it was central to its strategy.
It entered India in 1962 through a JV with the Kirloskar Group, which lasted until
1995. Then followed the Tata Cummins JV; later, Cummins struck six more JVs and three
strategic partnerships with manufacturers of diesel-fueled power-generating sets.
These partnerships laid the foundations for Cummins’s success in India. Similarly,
in China, Cummins’s joint venture with Dong Feng Motors has been a game changer. Cummins
has fifty-five JVs worldwide; fifty-three of them are doing well, according to Solso,
the former chairperson and CEO under whose leadership many of them were formed.