Mortality rate high for foreign JVs

DIFFICULT PARTNERS PART-I

A day after Vodafone announced its $11.1 billion acquisition of Hutchison's equity holding in Hutch-Essar, India's fourth largest mobile service provider, it received an unsolicited advice from the Egyptian CEO of Orascom, Naguib Sawiris.

The Essar group, he said, was "a troublesome partner" and Vodafone should buy out the Ruias, the Indian conglomerate's promoters, if it wanted a smooth run in India.

Sawiris' words, who bickered with the Ruias over Orascom buying a 19 per cent stake in Hutchison Telecom, seem prophetic as the Ruias are threatening to go to court to enforce what they interpret as their right of first refusal, nothwithstanding Vodafone CEO Arun Sarin's attempts at conciliation.

With yet another joint venture partnership falling by the wayside, analysts say it was a matter of time before the Ruias took the fight to the enemy camp.

"We do not mind the divorce with Hutchison, but they should not have dictated to us who to marry next," says Vikash Saraf, the CEO of Essar Teleholdings, about Hutch not giving the Ruias an opportunity to increase their stake from 33 per cent to 100 per cent.

Joint ventures, which became par for the course in the mid-1990s as multinational companies queued up to enter India and looked for help in wading through local regulations, began to fall apart barely half a decade later. However, at that time, the reason mostly was that the foreign partner wanted greater control or more rapid growth.

Now, however, many partnerships are turning sour because foreign players are unable to accommodate the ambitions of their Indian partners. The Ruia-Hutch and Wadia-Danone disputes and the Modis objecting to Guardian Industries investing in a 100 per cent subsidiary are recent examples.

A 2005 study by McKinsey & Co on "the right passage to India" says multinationals are better off going it alone in India.

According to the consultancy, of the 25 major joint ventures established between 1993 and 2003, only three survive. Multinationals such as Hyundai, Samsung and LG have achieved success in India without partners and newcomers feel encouraged to follow in the Koreans' footsteps.

For India Inc, the lack of joint venture partners or their low life-expectancy means they have to find their own cash and technology and take a long-term view of what their business would look like.

Hutch had to file a caveat in the Mumbai High Court in case the Ruias approached the courts for a stay on the Hutch-Vodafone deal. The same court is set to hear on March 20 a petition filed by Nusli Wadia, who wants his French joint venture partner, Danone, to divest its newly acquired holding in Bangalore-based bio-nutritional company Avesthagen.

Although Wadia's official complaint to the court and to the Indian commerce ministry is about Danone's ¤5 million investment in Avesthagen, insiders say the battle is really over the control of Britannia, a 50:50 joint venture between the two parties.

"It seems Danone wants to enter India on its own and does not want us," says a Wadia insider.

The Wadias and the Ruias are not alone in fighting their partners. The public fracas in 1997 between the government of India, led by late industry minister Murasoli Maran and O Suzuki, Chairman of Suzuki over Maruti Udyog was well-documented. It was only when the government changed that peace prevailed with Suzuki finally buying out GoI's stake.

While it was facing a hostile government in New Delhi, Suzuki was also getting impatient with TVS promoters. By 2001, Suzuki broke up with TVS promoter Venu Srinivasan and went on to launch its own products with moderate success. TVS, meanwhile, prospered.

In the two-wheeler segment, the Firodia-Honda venture broke up in 1998 as the Firodias insisted on running the company even as the joint venture's profits and revenues fell. Honda sold off its its stake and set up its own company with its products meeting greater success than its erstwhile partner.

The Delhi-based Modi brothers have perhaps signed the maximum numbers of joint ventures with international companies and then end up fighting. From Xerox, Luftahansa to Walt Disney, the Modis worked with the best of international brands but could not keep the JVs alive beyond few years.

"Even when a joint venture is unavoidable, successful multinationals should ensure from the outset that they retain management control and have a clear path to eventual full ownership," suggests Kuldeep Jain of McKinsey.

Vodafone won't need Sawiris to tell them about difficult partners.

"The growing domestic market and Indian manufacturing and R&D capabilities are now compelling partners to take a more serious look at India. They are having to deal with their previous business relationships "" clearly what they agreed at that point in time does not make sense today, and this has resulted in a number of disputes, as both parties try and protect their commercial interests," says Sanjiv Krishnan, executive director with management consultancy PricewaterhouseCoopers.