Are Joint Ventures Viable | Social Issue Essay, Article, Paragraph for Class 12, Graduation and Competitive Examination.

Are Joint Ventures Viable

Scheme of the essay

Exposition: Many foreign partners are willing to have joint ventures. Rising

Action: The Indian partner’s inability to invest capital is the cause of the failure of joint ventures

Climax:

(1) Foreign partners seek an increase in stake for reasons other than tapping potential

(2) Joint ventures are marriages, of the two partners.

(3) Indian partners offer little input

(4) The Govt.’s regulating Joint ventures destabilizes them

(5) Indian partners may be elbowed out of the business.

Falling Action: Indian partners should not lose their identity. Ending: They should change foreign partners.

The list of foreign partners seeking to enhance their stake in joint ventures with Indian companies is growing. The specifics of each case vary a great deal from Thapar-Dupont to PAL-Peugeot. But What Indian businesses cannot ignore is that it has not taken very long for the foreign companies to decide that the original agreements require review. Unless the causes for this trend for addressed by Indian businesses, it would be unrealistic for them to provide a major role for joint ventures in their future plans.

The off-cited reason for the failure of joint venture partners to stick to their original equity stakes is the inability of the Indian partners to come up with the required capital. This is not an unusual situation in a rapidly growing industry, as one of the partners may not be in a position to come up with the capital required to fully tap the emerging potential. In the context of the severe liquidity crisis the Indian industry faced last year, this may have been a significant reason for Indian partners not being able to meet their share of the commitment to a joint venture.

It is important, however, not to overestimate the role played by the resource crunch. When Indian partners oppose a rapid expansion, it is not necessarily because of their inability to invest. It could also be because they perceive the proposed investments to be enviable. And in some cases, the foreign partner is seeking an increase in its stake for reasons other than trying to tap the potential for unexpected growth. In the case of PAL and Peugeot, the hike in the state is being sought primarily to fund the losses the company has incurred.

A more comprehensive explanation for the changes being demanded by foreign partners in joint ventures could lie in their perception of such ventures. Contrary to most Indian perceptions of these companies, foreign partners often see these arrangements as being very flexible and, if necessary, temporary. This temporariness is not seen as a great disaster for a successful company, one partner gains control while the one that sells his shares benefits from capital appreciation. They are thus continuously evaluating the contributions of the partners and trying to alter arrangements to suit their perceptions of these contributions. As one senior Indian manager in the computer industry, with considerable experience in joint ventures, put it, these ventures are akin to living together rather than a marriage. Such a permanently temporary approach to joint ventures would explain the rapidity with which foreign partners have sought to alter companies. Some of this need to change the equations can be attributed to unforeseen changes in the ground reality. The liquidity crisis that ensured that some Indian companies would not be able to live up to their part of the deal, was one such unforeseen circumstance. But the tendency to alter the terms of joint ventures could also be the result of some other, more predictable, aspects of Indian business and government.

The contributions of an Indian partner to a joint venture are often elements that are easily absorbed. The Indian company’s knowledge of the local market may have been a critical contribution immediately after the economy was opened up. However, once a joint venture is set up, the required knowledge is easily absorbed into the company. There is then little additional input that the Indian partner can offer. The same would be true of access to dealers or manpower resources that the Indian partner may originally have provided. Once these resources are absorbed into the joint venture the Indian partner loses control over them. The foreign partner could then decide that the current contributions of each of the partners are no longer reflected in the original equity-sharing arrangement.

The government’s preoccupation with regulating joint ventures at the point of entry of foreign companies does not help the cause of stability either. When the proportion of equity holdings is fixed at the point of entry a foreign company could seek out an Indian partner solely with the purpose of seeking entry into the Indian market. Once they are in, they could then exert pressure to increase their stake in the joint venture. With the threat of a joint venture closing down, the government would be under pressure to accept the higher equity stakes being demanded by the foreign partner. This reality is reflected in the new FIPB guidelines for foreign direct investment, which allows the board to recommend an increase in foreign equity holding up to 100 percent. True, this is only for cases where the Indian partner is unable to raise resources for expansion or technology upgradation. But this condition could easily be met by either choosing technology upgradation or expansion of routes that the Indian partner is not keen about; or quite simply by choosing weak Indian partners to begin with.

The instability of arrangements between joint venture partners in the current context is thus inevitable. But it is not entirely without a positive dimension. The Indian partner of a successful joint venture, who sells his stake, will benefit from capital appreciation. He would have, in effect, sold products, like his knowledge of Indian market conditions, which could not have been sold, if foreign capital had not entered the Indian market. Similarly, the need for a foreign company to first take on an Indian partner and then buy him out is an opportunity for smaller Indian businesses to get a share of the entry costs of a foreign company. But these benefits are just short-term ones and if Indian businesses were to be satisfied with them, the long-term picture would be quite bleak. A pessimistic scenario would see Indian partners being elbowed out of joint ventures. The foreign-company-owned former joint ventures would then have the knowledge base of local conditions to challenge Indian firms. With the advantages of foreign technology and their brand names, they would then be able to dominate any segment of the Indian market they wished to enter.

What makes this scenario unduly pessimistic is the emergence of Indian companies that share the flexible approach to joint ventures of their foreign partners. The Wipro strategy for joint ventures, for instance, reflects considerable realism. The equity shares of its joint ventures are not based on any rigid formula but vary according to specific situations. Wipro has a 55 percent share in Wipro-Acer but a minority holding in Wipro GE. And the realism extends to recognizing that the longevity of their joint ventures depends on the partners needing each other over the long term. There is thus an emphasis on jointly developing new products. Wipro is not the only Indian company using such a permanently temporary approach to joint ventures. Whether these companies do manage to retain a major role for themselves would depend on their ability to continuously have something to offer their joint venture partners. This could take the form of identifying new products and contributing to their development. The Indian company could ensure that its corporate brand name develops a value that is high enough to continuously interest a foreign partner. Indeed, if an Indian company can step up its contribution to a joint venture it may even be in a position to pressure the foreign partners to step up their contribution. The ability to contribute to joint ventures may be easier to develop if Indian partners retain their identity. They can then go in for separate joint ventures with different foreign companies. The lessons from one joint venture could be tapped by the parent company to increase what it has to offer in its other joint ventures. And if, through the sum of their individual actions, Indian companies manage to step up the overall level of competition in the Indian market, it will enhance the value of what they have to offer their foreign partners.