This article is written by Smuti Sudha, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from lawsikho.com. Here she discusses “Five interesting Joint Ventures by US Companies in India”.
The world is considering India as an appealing investment destination with lucrative commercial incentives and strategic advantages. Foreign companies and investors should seriously consider entering India by forming joint ventures with Indian businesses so as to gain advantage from the inherent benefits offered by an already existing Indian partner with relation to local knowledge, market access or quick ramp-up. Even if India has progressed rapidly, it still lacks management processes and cutting edge technologies. With the help of foreign partners who possess such management processes and technologies, significant value can be added to joint ventures in India where advantage can be taken of the relevant market and local skills as well. If proper planning, partner assessment and market research is done prior to the process of establishment of a joint venture in India then commencing the business can be comparatively simple. For pulling off an efficient joint venture calls for identifying and assessing potential partners and relevant markets, setting of specific and measurable objectives, and determining the right format and mode of joint venture.
What is a Joint Venture?
A joint venture means any arrangement where two or more parties get together to achieve a common objective or to run a business for commercial purposes. The arrangement may be on a long-term basis which involves running of a business in a continuous process or on a limited basis which involves realization of a particular objective. It may include a wholly new business or an already existing one that is presumed to benefit from the involvement of a new participant. The concept of joint venture is therefore considered to be highly flexible. Any particular joint venture will depend on its own characteristics and underlying facts and on the wishes and resources of the parties involved. To put it all together, a joint venture may be summed up as a business alliance whereby two or more companies mutually share the complementary resources of the partners and put it to use. For enhancing positioning, client acquisition and marketing which has stood the test of time, joint venture has proved to be an effective business strategy. The arrangement can be an informal understanding or a formal contractual agreement between the parties.
Important features of Joint Venture
- Exploiting Expertise and Capabilities– Synergistic benefits will be produced if the parties to a joint venture have experience in various diversified industries or have complementary skills or capabilities to contribute to the joint venture. The principle behind a joint venture is to share the expertise and capabilities of the involved parties on mutually agreed terms. Such sharing of resources allows competitive advantage to the partners entered into joint venture over other players in the market.
- Sharing Liabilities– The parties to a joint venture also have an opportunity to jointly manage the risks involved with new ventures. They can limit their individual exposure in a joint venture by sharing their liabilities. The pressure on each individual partner decreases when the risks and liabilities are shared mutually among them. The risks associated with these types of arrangements automatically reduces as the business activities of the joint venture can be increased with smaller investment than if done by financing independently.
- Leveraging Resources– With globalisation, access to capital, technological resources and labour have become a major force for modern businesses to achieve “economies of scale.” Nowadays, business commitments are far too immense to be carried on by a single company. If seen from a wider perspective then these days a huge pool of resources are needed to conduct a business which extends from huge financial backup to plenty of experienced and trained manpower. Cross-border businesses are more demanding in nature and the best way to resolve is to either share them by entering into a joint venture or by outright acquiring them. The best way of reducing manufacturing and research costs while limiting exposure is by co-operation.
- Market Access– Joint ventures are turned out to be the most effective mode of gaining market access. Joint venture agreements are adopted by companies to expand their business into various other product markets, geographies and consumer segments. The involvement of a locally based party may be desirable or necessary in a cross-border joint venture as it is difficult for a foreign company to infiltrate the market or where the ownership structure by foreigners are limited by the local laws. Such as in India certain relevant market sectors are restricted for foreign investment, and for commencing business and making investments certain shareholding by a local partner in the company is a regulatory necessity.
- Business Diversification– Many flexible business diversification opportunities are offered to the partners through joint venture. It provides a way for the companies to enter into non-core businesses by maintaining a safe exit option. Many companies adopt joint ventures as a resort to progressively separate a part of the business from the rest of the company and sell it off in due course of time. For entering into a new market, joint ventures may be set up with strategic investors so as to provide the foreign participants with guidance and local infrastructure in the beginning and with an objective to integrate the functioning of the joint venture into the main organization in the future. Once the venture is up and running, the foreign participants in this situation may choose to acquire the local participant’s interest. This can be beneficial for both the involved parties as the local party gets a liquid exit while the foreign party is able to establish itself in the local market.
Why would a US Company do a joint venture in India?
An international dimension has been brought by the joint ventures through global proliferation of business and commerce. Corporate bodies across the globe go for cross-border alliances in order to share the opportunities, resources and to deliver cutting edge performance. These types of alliances are designed to focus on the commercial requirements of the parties and thereby differ from a mere transitory arrangement to establish its presence in the relevant market towards a calculated step to go for a full merger of technologies and capabilities of the involved partners.
What are the five joint ventures of US companies in India?
- Hindustan Aeronautics Ltd (HAL) – Hindustan Aeronautics Ltd is India’s aerospace and defence company which is located in Bangalore. HAL is considered to be one of the “Navratna” companies of India which means that it is one of the forces that drives the country’s economy. It has the maximum number of joint ventures in India. They include various joint ventures for making helicopters, wing fighter and civilian aircraft, defence systems and aerostructures, aircraft engines and other aeronautic and aerospace-related products. HAL holding 50 percent of the stake has entered into a joint venture with Edgewood Ventures LLC of USA holding 26 percent of stake and Edgewood Technologies Private Limited of India holding 24 percent of stake in the joint venture named as HAL Edgewood Technologies Pvt. Ltd. It was incorporated in 2007 and started operations sometime in 2009 by making hardware for the Open Architecture Mission Computer used in Jaguar aircraft of the Indian Air Force. It is having a negative net worth and is still an active company.
- Tata Global Beverages– Tata Global Beverages, a unit of Tata Sons which has various joint ventures in India, bases its production for fast moving consumer goods. These joint ventures includes NourishCo Beverages Ltd which is a 50:50 joint venture entered between Tata Global Beverages (now Tata Consumer Products Ltd) and Pepsico of USA formed in 2010 to manufacture Himalayan brand of spring water drawn from the Himalaya range sources, bottled drinking water with copper and zinc, Tata gluco plus energy drink and Tata water plus which later consolidated all its consumer products business with all branded food businesses of Tata Chemicals. Tata will now be terminating the eight year old joint venture by acquiring the remaining stake in NourishCo Beverages thereby making the firm a wholly owned subsidiary. Another one is TATA Starbucks Pvt Ltd which is also a 50:50 joint venture entered with Starbucks Corporation of USA that carries a chain of coffee shops across India. The 50/50 joint venture was incorporated in 2012 and operates Starbucks cafés which is branded as Starbucks Coffee “A Tata Alliance.” Tata Starbucks saw a 27% growth in revenue while opening 28 new stores in the third quarter. Tata Global Beverages has made a profit of Rs. 94.2 crore, a 5% jump from the same quarter in the previous year. The jump in profits comes despite an economic slowdown in the country.
- Network18 Media & Investments– Network18 is a popular electronic media company held by India’s corporate giant known as Reliance Industries Ltd. The joint venture Network18-CNN was established in 2005 with America’s Cable News Network (CNN) which is a Time-Warner company that operates satellite TV channels like CNBC-News18, CNBC Awaaz, CNN-News18 and IBN7. Another joint venture entered between TV18 which is a subsidiary of Network18 with U.S. media conglomerate Viacom called Viacom18 which operates famous satellite TV channels such as Rishtey, MTV, Colours, and Colours HD etc. When the joint venture was established in the year 2007, it had three channels– MTV, Nickelodeon and Vh1. Viacom18 was a 50:50 joint venture where at a later stage TV18 paid $20 million to buy a 1% stake in Viacom18 thereby raising its shareholding from 50% to 51%.
- PNB MetLife– India’s state owned Punjab National Bank (PNB) which holds 30 percent stake has entered into a joint venture with America’s largest life insurer known as Metropolitan Life Insurance Company (MetLife) which holds 26 percent stake in the joint venture to offer PNB-MetLife insurance plans. PNB MetLife India Insurance Company Limited (PNB MetLife) is one of the leading life insurance companies in India which was established in the year 2001. These insurance plans are made available to PNB customers as well as to the general public. Other Public Sector Undertaking (PSU), private and cooperative banks in India are also distributing these PNB MetLife plans. The company continues to be consistently profitable and has declared profits over the last few Financial Years.
- Indo Cat Pvt Limited– Indian Catalyst Private Ltd is a joint venture entered with Intercat whose holders are USA. It was established on 1st of June 2006 where the areas of operation are focused on marketing as well as manufacturing of catalysts and FCC additives. Indo Cat Pvt Ltd is considered to be one of the joint venture companies which play an important role in the domain of manufacturing and distribution of various additives.
Joint venture companies in India have prospered a lot. Foreign or local companies combine their respective expertise through a joint venture in India to provide better services and products pan-world. No doubt there are many successful joint ventures in India which keep on escalating everyday but there are some popular joint ventures which became unsuccessful like Tata DoCoMo. The joint venture of Tata DoCoMo was entered between Tata Teleservices and Japan’s NTT DoCoMo which could not make enough profits. In spite of that, the joint venture helps in integrating the position of the country as an economic power and industrial major.
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