Read Conquering the Chaos: Win in India, Win Everywhere Online
Authors: Ravi Venkatesan
A JV’s future hinges on the chemistry between senior executives on the two sides.
One business leader compares joint ventures to India’s arranged marriages, which are
“full of hope but not necessarily of knowledge.” Not only should the CEOs of the two
companies get to know each other, but also approximately two dozen senior executives
on both sides must become familiar with one another. They must make the time to have
informal meals and get to know their Indian counterparts. What sports do they follow?
What are their hobbies? What about their families? Western executives are often transactional;
they focus on the issues and numbers, but fail to develop relationships. Such partnerships
are brittle, with the two sides unlikely to have the ability to work through even
simple disagreements.
CEOs, like Persson of Volvo and Cummins’s Solso, underline the importance of relationships
at the top to create trust and work through problems. “At the working level, things
often get messy; people are imperfect, so disagreements and angst can quickly lead
to suspicions and distrust. That’s when the two CEOs must trust each other and cut
through the confusion,” points out Solso, who insists that CEOs must not leave relationship
building to chance. “Create a formal structural relationship,” he advocates, meaning
that the two CEOs must meet twice a year as must the global and local heads of key
functions such as product development, manufacturing, marketing, and sales.
Trust is the glue that holds joint ventures together; it is hard won and easily lost.
The fundamental principle is that both parents must advance the JV’s interests rather
than their own interests. When one or both partners try to maximize only their interests,
the JV is doomed. Managers will invariably try to optimize their company’s interests;
they believe that’s what they’re paid to do. They will do this by fiddling with the
transfer pricing of components or restricting exports because they may cannibalize
the parent’s nonexistent revenues overseas. At one automotive JV in India, the foreign
partner tried to discontinue a successful model and replace it with another, simply
to increase its license fees. Neither parent should subsidize the JV, but any attempt
to gain at the expense of the JV will erode trust. CEOs must be vigilant and stop
such behavior. Says Siddharth Lal, managing director, Eicher Motors: “Enter into a
JV if and only if you’re happy about sharing the spoils. If all you can think of is
100 percent, the JV will be frustrating and eventually fail.”
The manner in which partners deal with unanticipated developments is important for
maintaining trust. Usually, JVs model key scenarios and assumptions and develop five-year
business plans. However, as in the case of the Mahindra–Renault JV, despite the best
forecasts and planning, something—competition, pricing assumptions, regulations—will
turn out to be different. Rather than insisting that the agreement doesn’t cover that
contingency, the two companies must talk through the problem. That’s often hard for
multinational companies. They prefer to have majority stakes that they can use to
ram through their views.
Does it matter whether each partner holds a 50 percent stake or if one holds 51 percent
and the other 49 percent? A fifty-fifty joint venture may actually be more stable
because neither partner is in a position to issue ultimatums or run roughshod over
the other. Even when ownership stakes are unequal—say, 74 percent and 26 percent—it’s
important that the JV be managed as though the partners have equal stakes. “The actual
equity structure matters only in a worst-case scenario,” agrees Walmart’s Scott Price.
“Both sides must possess the conviction that a JV is the best way to approach the
market. They must have the tenacity to work through differences rather than outvoting
the other at board meetings.” An alternative, in some circumstances, is a transitional
joint venture, where the multinational company buys 50 percent to 74 percent of the
company’s equity, allows the incumbent team to run it, and, if it works out, eventually
acquires all the equity.
Another factor that can erode trust is exit. Smart companies focus on a JV’s success
strategy rather than the exit strategy. That’s critical because once executives have
agreed on business plans, legal teams take over. Trained to focus on downside risks,
they shift the conversation to exit strategies, worst-case scenarios, and wrangles
over minor wording. The environment can quickly get corrosive. While it’s important
not to be naive, focusing too much on the downside is unhelpful. What matters are
the partners’ values and track records, which provide confidence that each will do
the right thing if circumstances change.
That said, executives must recognize that most JVs are transient structures and have
a finite life. For instance, the partner may only bring something of short-term value,
such as helping to overcome regulatory hurdles, and cannot add anything operationally
or financially. In such cases, it is best to unwind the joint venture amicably rather
than allowing the situation to fester and turn acrimonious. During negotiations, the
two CEOs should have a frank discussion about such possibilities and talk about an
exit mechanism, the circumstances that would trigger it, and the principles that will
apply so that the separation is amicable.
People often determine a JV’s success, especially its board and management team. Companies
often wrangle over the number of board seats that each partner should have. This could
be important, but if something results in voting, it’s a sign that trust has broken
down. Far more important is the quality of the board members nominated. It’s vital
to have directors who may be senior but are not narrow or parochial. A board whose
members have global, long-term perspectives is better able to navigate difficult issues
without being stuck in entrenched positions. In my experience, it helps to appoint
one or two independent elder statesmen respected by both partners. They can intervene
thoughtfully when needed to ensure that the board doesn’t stay polarized.
The choice of a CEO for the JV is particularly crucial. She or he must have good judgment,
courage to do the right thing, good relationship skills, and the tenacity to work
through issues patiently. The CEO must also be capable of utter impartiality rather
than being biased toward either parent. The CEO’s role is to stay relentlessly focused
on what’s right for the joint venture, not what’s good for either parent.
There’s often a lot of negotiation about which parent gets to staff which role. The
chairperson is often from the local partner, and the global company nominates the
CEO, for instance. There can be a lot of angst around certain positions like the CFO
or purchasing head, but smart companies like Volvo and Cummins don’t fuss about it.
“The most important thing is that each partner puts in its best players, never people
they want to get rid of. That’s more important than arguing who nominates which position.
It doesn’t matter who the CFO is; we rotate the role to signal trust,” explains Cummins’s
Solso.
One reason companies enter into joint ventures is learning. Sending very bright people
to staff them is the key to ensuring that actually happens. Learning more or faster
than partners ensures that companies retain power and influence in the JV, as Komatsu
has demonstrated.
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International joint ventures are great schools, so nominating promising leaders to
their boards is a good development experience for promising global leaders.
When late to a market, a company has no way of gaining critical mass except through
acquisitions. With Indian companies’ valuations becoming more realistic, and with
the rupee weakening against the US dollar, this is not a bad moment for multinational
corporations to pursue mergers and acquisitions (M&As) in India. The number of acquisitions
across industries has been growing: witness Vodafone-Hutch, Daiichi-Ranbaxy, Abbott-Piramal,
Disney-UTV, and International Paper–Andhra Pradesh Paper.
While acquisitions are important, they destroy more value than create value; this
is true globally and in India. Acquirers face three risks. The first is the risk of
paying too much. Until recently, valuations in India have been unrealistically high,
and multinationals can be tempted to pay premiums. After all, that may not be much
in dollar terms. However, buyer’s remorse is common, as happened in the case of Vodafone’s
acquisition of Hutch and Daiichi’s acquisition of Ranbaxy, followed by big write-downs
of goodwill.
A second risk is poor governance. Many Indian companies are so opaque that normal
due diligence may not uncover financial problems. Finally, the biggest risk is that
the multinational will assimilate the local company, imposing its processes, policies,
operating philosophies, and frequently its management, and killing or marginalizing
the acquired company’s brands. This destroys the competitive advantages of the local
company’s entrepreneurship, agility, market knowledge, or distributor relationships
and therefore undermines the rational for the acquisition in the first place. Coca-Cola’s
acquisition of local brand Thums Up is a classic example; the American giant virtually
killed the market leader, but was eventually forced to reverse course when demand
for the Made in India cola simply refused to die.
By contrast, when DHL Asia acquired local courier Blue Dart, it quickly figured out
that Clyde Cooper and Malcolm Monteiro, who had built Blue Dart into an Indian powerhouse,
knew the rules of success better than it did. DHL placed its Indian operations under
Blue Dart and let Monteiro run both companies. “The more change and integration that
is required after an acquisition in India, the greater the risk. The best acquisitions
are those that provide market access, done at a reasonable valuation, and where you
have to do absolutely nothing in the first year. The ones where there is upheaval
on day one are the riskiest,” explains Walmart’s Price, who then headed DHL Asia.
One company that seems to be doing M&As the right way in India is Schneider Electric,
a serial acquirer that has taken over six companies, including Meher Capacitors, Digilink,
APW President, Conzerv, Zicom, and a 74 percent stake in Luminous Power. M&As have
dramatically increased Schneider Electric’s reach to twenty-five thousand retail outlets
and its portfolio of brands, and its revenues have trebled in three years to $1 billion.
“Acquisitions have enabled us to get in five years to where it would have taken ten
to fifteen years organically,” says Olivier Blum, Schneider Electric’s country president.
According to Blum, four things are important while conducting M&As in India. One,
be clear about the strategy. M&A opportunities should not influence the strategy,
but the strategy should drive M&A as a way of achieving the organization’s goals.
Two, the strategic intent should determine how tight or loose the integration of the
acquired company should be. Blum comments, “We follow two different models depending
on the strategic intent of the transaction. It can be a fully integrated model that
starts from day one, where integration takes between three and six months until it
is fully integrated in terms of HR processes, manufacturing, functioning, etc. In
the second model, a transaction does not involve any integration at all. Conzerv was
a fully integrated acquisition as that is how the benefits could be maximized. In
the case of Luminous, we want to protect the DNA of the company—its brand, low-cost
business model, and agility—because that’s critical in the consumer market.”
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Third, according to Blum, M&As always require support from the top. If senior management
does not support the M&A strategy, the deal will fail. “Once you decide to go ahead
with a transaction, you need to be able to act quickly and execute flawlessly. If
senior management does not support the M&A strategy and does not fully empower the
local team, there are many risks that will likely cause the deal to fail,” says Blum.
Fourth, cultural fit is critical. “So much so that even before we finalize a deal,
we evaluate how likely and synergistic people integration is. If we have doubts about
being able to integrate the cultures of the two organizations, the deal will not happen,”
adds Blum.
After closing the deal, it is critical to focus on integrating people. Blum’s advice:
The first one hundred days are the most important. Our focus at this stage is totally
on people: their roles, their development needs, their ambitions, etc. The biggest
risk is losing people after the deal. This is especially true due to the demand-supply
mismatch of talent. We have been able to retain 95 percent of the talent after our
acquisitions. The credit goes to our agile process of integration, which ensures that
people know their place in the new organization and feel engaged, valued, and motivated.
We ensure that any employee of the acquired entity has the same benefits as that of
a Schneider employee, with the same tenure from the joining date of the acquired organization.
This helps establish a sense of belonging and unity.
While Schneider has been thoughtful in its approach to acquisitions, that’s uncommon
in India.