There are good reasons to enter into a joint venture in India. A potent Indian partner not only offers know-how and market access, but above all brings customers, the local infrastructure such as a sales network, personnel and, last but not least, capital into the joint venture.
To ensure that the “mechanics” of a joint venture actually work, the lawyers of both parties often spend months - sometimes years - working on the joint venture agreement, the articles of association and the memorandum of association.
Nevertheless, we discovered that around 50 percent of all German-Indian joint ventures fail within the first three (!) years. In the long term, significantly fewer joint ventures survive and very few of them are economically successful.
How long do German-Indian joint ventures survive (in%)
Reasons for the failure of joint ventures
Only very rarely is it due to the contracts concluded or the structure of the investment. The actual reason can almost always be found in the soft factors of intercultural cooperation. It is therefore very unfortunate that so much time and money goes into joint contracting, but so little attention is paid to the soft factors of two diametrically opposed business cultures. There is particularly great potential for conflict in the following aspects:
- Communication problems to Disagreements the owner in relation to the company strategy. Often enough, one of the partners does not communicate their real goals clearly and transparently or even pursues a “hidden agenda”.
- Management style especially regarding the Personnel policy: Unfortunately, human resources are not yet given much importance in India. Even high-ranking managers - regardless of whether they come from India or from abroad - are often treated with little regard by Indian owners. Permanent interventions or leadership changes understandably strain the relationship between local operational staff and cause frustration.
- Lack of ability to compromise: Indian culture is characterized by status and competition. In India, sons in particular are often treated like little princes. The children of entrepreneurial families grow up in privileged circumstances and absolute abundance. Very few of them are given the opportunity to learn cooperation, sharing and the ability to compromise during their upbringing. However, these would be the critical social skills that are needed later in life for a functioning joint venture. What may be considered a strength in purely Indian business life prevents a partnership of equals in the case of an international joint venture.
The intention here is not to give the impression that “the Indians” are per se responsible for the failure of such business relationships. But we would like to raise your awareness: Indians – as a rule – don’t behave like Europeans.
A joint venture in India is always an INDIAN company
No matter what is defined in the contracts, ultimately a joint venture is always a joint venture Indian Companies with German/Austrian/… participation – and not the other way around.
But here lies another imponderable for business success: Indian companies tend to have a penchant for one laissez-faire approach to (corporate) standards and legal regulations. A certain one sloppiness (in Hindi: chalta hai), for example in accounting, is almost considered normal and almost an expression of flexibility. There is a fairly elastic definition of Quality or is characterized by exploiting all sorts of creative possibilities.
This Indian flexibility is not always seen as a strength. If overused, it can become a “red line” for the European partner. In the best case, the effects of this adaptability will come to light relatively quickly during an internal or external audit. In the worst case scenario, only when it is already too late and the JV partnership may already be crumbling. Because a critical and strict look from outside behind the scenes of the Indian joint venture is often missing for years. The foreign entrepreneur completely trusts the Indian partner without monitoring compliance with his own (!) company standards and his own (!) unwritten laws.
The main problem with a joint venture is that, as a foreign partner, you cannot prevail in case of doubt. As a shareholder, you are dependent on cooperation with the Indian shareholder. Regardless of whether he holds 1 percent or 99 percent of the company, decision-making authority remains - in practice! – always with the Indian partner and you are unable to act yourself. Because you are far away and therefore solely dependent on the Indian partner, as they have information sovereignty, the local network and thousands of opportunities to create a lack of transparency. Especially if the Indian side wants to escalate, you have no chance of intervening.
Here is a real case study of a joint venture
The bridge collapsed
A German-Indian joint venture that had never really become operational was finally about to close. There were neither employees nor sales there and people had almost “forgotten” it here. Therefore, the German company decided to clean up the “thing” and close the company. But the JV company was his for years Compliance-Duties (annual financial statements, etc.) were not fulfilled and – without the German shareholder even noticing – they were burdened with loans, guarantees, even personnel and other costs. The Indian partner simply did not report this to Germany. The company therefore now posed a significant financial and legal risk and was de facto insolvent.
The Indian joint venture partner had more or less disappeared; he simply stopped responding to emails for the next few months or put off the German partner (“next week”). And so over a period of several years (!) the company could not be closed at all, because the prerequisite would have been to clear up the legacy issues (compliance and liabilities). But the Indian partner had no interest in that. And although the German partner wanted nothing other than the end of the company, in practice he was unable to do anything: the Indian did not want to buy the German shares, and the Indian was not available for the necessary shareholder meetings at which the liquidation should have been decided order etc. etc.
Develop solutions: apply (personal) pressure and build (golden) bridges
Build up threat potential against JV partners
In fact, you cannot force an Indian joint venture partner to do something you want - unless you have leverage against him, such as clear documentation of his misdeeds that would enable a lawsuit against him, or the ability to conduct his business outside of the country of the joint venture. So work it out – right from the start! – sufficient negotiating leverage and a certain “Threatening potential“, so as not to just be a silent passenger in India. But this is foreign to us Western Europeans, as it means that we already have to prepare for the “bad times” “in the good times”, which are characterized by euphoria and friendship. There are often moral sensitivities/a bad conscience here. But we can take this away from you with peace of mind. They don't do anything that the Indian partner hasn't already done themselves! They merely create Equality of arms.
Building golden bridges
Another strategy - if escalation has not yet occurred - is to To build “golden bridges”.. In India, as in all Asian cultures, it's about status and not losing your own face under any circumstances. To get rid of an Indian joint venture partner - without risking your own business - you can build a golden bridge for them. For example: “You are leaving the operational business. But at the same time I am setting up a foundation for social purposes in India. And you can lead the foundation and present yourself to the public as a savior in a media-effective way. Or we can set up an industry association and you will be the chairman, etc. Of course, something like this can only be implemented if there has not yet been a dispute and you can prepare your Indian partner for it without any time pressure.
If you want to start a joint venture...
... first ask yourself very critically what exactly the potential joint venture partner wants to bring in and whether you could buy it yourself. If you don't want to be dependent on an Indian partner, a wholly owned subsidiary is definitely the better way.
Joint venture with exit scenario
If it ultimately ends up being a joint venture, an intensive check of the seriousness and reliability of the future partner is essential - a banal rule that is surprisingly little taken into account in reality.
Also consider creative solutions. A “Temporary joint venture” could combine short-term market access and long-term independence. Before the joint exit begins, the future calculation method for the price of the shares will be clearly and unchangeably regulated.
In any case - especially because of the high divorce rate - you should always think about the possible termination of a joint venture right from the start and definitely arrange it in advance. “Unfortunately, exit issues are often not addressed on the German side.”, according to Mike D. Batra's experience, “Because people think they will scare away their Indian partner.” The result of such negligence can be long-term disputes over who can sell their share to whom, when – and at what price.
WB Turnaround Management supports European companies with their Exit strategy in India
