Why joint ventures in India are again in demand among German companies
Suddenly everyone wants it again: the joint venture. After joint ventures with Indian companies were in high demand among German medium-sized companies around 20 years ago, the joint venture fell “out of fashion” in the last decade. Disappointed expectations, financial debacles, unachieved goals, disputes with the Indian shareholders - joint ventures failed and clever exit strategies were required.
But for almost two years now, we have been experiencing a noticeably increasing demand for joint ventures with Indian partners in our consulting practice. Why is that? What has changed?
New entrepreneurial goals for joint ventures
In the years 2000-2010, joint ventures were mostly in demand by German companies that hoped to gain “market access” from their Indian partner. The challenging Indian market was unknown and experience in other Asian countries was often limited. The Indian partner should therefore primarily provide market know-how and a functioning network as a local expert. [https://www.wb-indien.de/2017/01/18/woran-joint-ventures-in-indien-wirklich-scheitern/]
Now the situation looks different: German companies now mostly have years or even decades of local experience and are internationally established. They have already been through the culture clash, know the special requirements of the Indian market and have market access and a reliable network themselves. In contrast to the “newcomers” in the Indian business, those interested in joint ventures today often have known their desired Indian partner for years and have already worked successfully with them. They therefore know exactly what added value a closer collaboration with them should offer them, where the difficulties but also opportunities lie in the joint project.
They therefore focus on two motivations as their primary goal:
- Relocation of parts of the value creation to India and
- Participation in the “service” or “after-sales” or “refitting market”.
Relocation of parts of the value creation:
Not least because of the increased energy prices on the domestic market, but also because of significant logistical advantages and material availability, many German companies are almost forced to relocate parts of their value chain to India. You would like to set up local production in India in order to benefit from cost advantages there, for example. Key technologies remain in Germany, but the production of less critical parts (such as housings, castings, stampings, etc.) sensibly takes place in India. India has now developed into a lucrative sales market, and if customers and the material are already there, then from logistical considerations alone it is only logical to produce there directly.
In addition, existing or upcoming “local content” requirements are taken into account. Internationally operating companies have already had the experience that every government at some point issues so-called local content regulations as an element of foreign trade policy control. India also wants to promote industrialization and, as a result, create jobs, initiate investments, train technical and commercial personnel, transfer know-how, substitute imports, improve the infrastructure, etc. That is why companies in India, for example, take part in tenders for key technologies (e.g. power plants , large industrial plants, railways, ports, energy production) or to (partially) state-owned companies, preferably those that manufacture on site.
After-sales business:
In the past, German companies were often unable to serve the so-called “after-sales business” in India. Spare parts for machines, updates, refittings, etc. were purchased locally from Indian companies. Long delivery times, high transport costs and import duties make the import of such goods from Europe economically less lucrative from the point of view of Indian customers; “Good Enough Solutions” can also be found locally at lower prices.
The “after-sales business” often accounts for up to 50% of sales for many companies - but not in India. In order to enable sales here, a local production or service company can reduce the corresponding costs and enable access to the after-sales market in the first place.
The idea that this activity could take place in cooperation with a representative or Indian dealer that has perhaps been familiar for many years is obvious.
Summary:
German-Indian joint ventures today are being set up for different reasons and with different goals than they were 15 years ago. However, the "pitfalls" are similar and require special attention when planning such a partnership. You can find out exactly what these are and where you need to be vigilant in the second part of our "Joint Venture Series".
