Has the template for a successful jv changed?

Arati Menon Carrol
The Economic Times

A year and a half ago, against the backdrop of a thriving Indian economy and an automotive market on overdrive, the Hero group announced a Rs 4,400 crore joint venture partnership with Daimler Trucks, a division of Daimler AG, giving Hero the opportunity to enter the commercial vehicles segment in India. In April this year, however, the Munjals unexpectedly announced a pull-out. Speculation had it that financial constraints forced them to re-focus on their core business of motorcycles; Hero Corporate Services chairman Sunil Kant Munjal blamed crashing demand in the commercial vehicle segment.

News of failed JVs has been doing the rounds; Britannia-Fonterra, TVS Group-Wabco and UTI-Shinsei Bank are among those who are either reviewing or have called off partnerships. Larsen & Toubro (L&T )’s plans to enter the non-life insurance business through a JV with US-based Travelers Insurance have also reportedly fallen through and engineering and construction company Punj Lloyd is exiting its two-year real estate business JV; chairman Atul Punj has admitted that a bad real estate environment prompted this decision.

So has the global economic meltdown found its latest victim? Strangely enough, industry pundits say this is a false alarm; partners aren’t necessarily pulling the plug on JVs just so they can shore up revenues or cut costs. “If JVs are not working out it’s less a sign of the times and more a factor of partners going their separate ways over the inability of the Indian partner to match investment dollar for dollar or a mismatch in business strategy,” says Akil Hirani, managing partner at top law firm Majmudar & Co.

Ranjan Biswas, partner and national director India, transactions advisory services at Ernst&Young says a weak global economy does put pressure on JVs but not necessarily enough to break large numbers of them, but adds that for a joint venture to stand up to the event, both parties need to have thrashed out the harder parts of their partnership right at the start.

Hirani actually believes the opposite might be true. “A lot of Western multinationals are looking to beat the blues in their jurisdictions by partnering with Indian companies to leverage existing manufacturing or distribution networks in India.” He might be right—news of fresh JVs has started doing the rounds.

IT training solutions provider Aptech is betting big on the Latin American market by entering into a JV with the Falgo group to set up IT training centres in Brazil.

So global recession may not have played spoilsport on this front but what it is having a significant effect on, says experts, are the foundations upon which partnerships are built. “The global recession is actually a great leveler. Traditionally the Indian promoter has always had his eye on taking the lion’s share of profits by putting in the least amount of money.

So, has the template for a successful JV changed? Everyone agrees that the transparency factor will be key. Bajaj offers his advice: “If you have the right balance between aggression and focus on profits and follow similar corporate governance standards you’re on the right track.” Everyone agrees that there’s likely to be less tip-toeing around common irritants like management and financial control and exit strategies.

Crucial issues that were just left open in the hope that they would be solved later on will now likely be knocked around at the outset. At the end of the day though, says Biswas, every JV has a shelf life. “The average life expectancy of a US company is 32 years. Recession or not, it’s unreasonable to imagine a JV will continue in perpetuity.”