Foreign Firms Find Rough Passage to India

Foreign Firms Find Rough Passage to India
Barriers, Rules Taint Allure of Partnerships As Entry Point to Fast-Growing Market
By PETER WONACOTT in New Delhi and ERIC BELLMAN in Mumbai
WSJ, February 1, 2007

International companies including the likes of Wal-Mart Stores Inc. and Fiat SpA are rushing to India through joint ventures with local businesses. But the history of such partnerships offers a warning to newcomers that despite its torrid growth and rising urban middle class, India can be a tough market for foreigners to crack.

This hasn't just hurt those seeking a foothold in this huge and potentially lucrative market. The barriers -- legal, cultural and logistical -- also pose a burden for the Indian economy, depriving it of investment in key areas needed to sustain the country's rapid growth and spread the benefits.

Dozens of ventures forged by foreign and Indian firms have bogged down, and in many cases dissolved, since New Delhi began opening the country's economy in the early 1990s. Some ended because the Indian government has gradually allowed foreign companies to operate alone in some industries. But many others have been hobbled by differences between partners, clashes over expansion plans or the competing interests of the companies.

Danone SA, for instance, is facing resistance from the Wadia Group, its Indian joint-venture partner in the Kolkata-based cookie maker Britannia Industries Ltd. The Wadia Group has taken Danone to court in Mumbai to try to stop the French company from investing in another Indian company on its own. Britannia is 25% owned by the Wadia family and 25% owned by Danone through a holding company in the U.K.; the rest is publicly held. Both sides say the disagreement won't derail their partnership.

Joint ventures remain mandatory for foreign companies looking to enter huge areas of India's fast-growing economy, including retailing, consumer banking, telecommunications and media. The ability of foreign and Indian companies to navigate the potential pitfalls will have a big impact on the momentum of India's rapid expansion. Already, some foreign companies are reluctant to push hard into India because of the poor track record of partnerships.

The world's second-most populous nation after China, with an estimated 300 million of its billion people considered middle class, India's economy has grown an average of 8% in each of the past three years. The Indian government predicts foreign direct investment will hit $12 billion for the fiscal year ending March 31, a fraction of the $69.4 billion of foreign investment in China last year. India needs to attract more money from abroad if it is going to reach its target of $350 billion of public and private infrastructure investment during the next five years.

"Anyone that gets into a joint venture [in India] should assume it will fail and should be comfortable with the terms of what happens when it does fail," says John Band, president of Zoom Cortex, a financial consultancy in Mumbai.

Even Indian companies that once welcomed foreign partners are now reluctant. During the 1990s, Modicorp, a family-controlled Indian conglomerate, lined up alliances with Motorola Inc., Walt Disney Co. and Xerox Corp., among others. Modicorp's chairman, B.K. Modi, earned the moniker "Mr. JV."

Since then, about a dozen of his joint ventures -- including those with the three U.S. companies -- have dissolved either because of government rule changes that meant partnerships were no longer required or because of disagreements with his partners.

Mr. Modi now views joint ventures as a recipe for friction and an obstacle to building Indian brands. He recalls being advised years ago against such set-ups by Azim Premji, founder of Wipro Ltd., the Indian technology giant, because Mr. Premji believed foreign companies would overshadow Indian partners and their fledgling brands. "He said, 'You will regret it,' " Mr. Modi said. "Later, I did."

Of 25 major joint ventures between foreign and Indian companies established from 1993 to 2003, three survived, according to a 2005 study by consultants McKinsey & Co. The study said most ran into trouble because the local partner couldn't invest enough to expand the business quickly to match the ambitions of the foreign company.

Some have worked out well for both sides. In 1984, Japan's Honda Motor Co. joined forces with Indian bicycle maker Hero Cycles Ltd., which is controlled by the Munjal family, to form motorcycle maker Hero Honda Motors Ltd. Honda owns 26% and the Munjal family owns 26% of Hero Honda, and the rest of the company is held by the public. Hero Honda dominates the Indian motorcycle market with a share of about 50%. It builds about three million motorcycles and scooters a year and Hero Honda says it is planning to ramp up capacity to more than five million during the next three years.

But many others have foundered. Guardian Industries of Auburn Hills, Michigan, set up a float-glass plant in India in 1989 with an arm of the Modi family empire. The closely held glassmaker is now embroiled in a case with its financially troubled partner Modi Rubber Ltd. before the Delhi High Court. The government had given Guardian permission to expand in India, despite Modi Rubber's objections, after the rules were changed to allow foreign companies to establish glass factories without partners. But Modi Rubber has thus far stalled the expansion even as Guardian's global competitors arrive.

A spokesman for Guardian declined to comment. V.K Modi, vice chairman of Modi Rubber, didn't respond to written questions seeking comment. B.K. Modi said the dispute is in the process of being resolved.

Many foreign companies, where they can, are splitting from their joint ventures to go it alone. Goldman Sachs Group and Merrill Lynch & Co., have separated from their partners in the past year to set up independent operations after the government eased restrictions in the investment-banking industry. Merrill Lynch bought most of its joint-venture stake in DSP Merrill Lynch for about $500 million. Goldman Sachs sold its stake in its successful joint venture with Kotak Mahindra Bank Ltd. for about $75 million.

But even in areas where the government has relaxed restrictions on foreign investment, existing partnerships continue to create headaches. When a foreign firm seeks to establish an independent unit separate from an existing joint venture, a government rule known as Press Note 1 requires the foreign company to first obtain a "no-objection certificate" from its Indian partner if the independent unit plans to be in the same business.

That has upset the plans of Japanese auto-parts maker Takata Corp. to establish an independent unit in India. Takata in 2000 established a joint venture with Abhishek Auto Industries to make seat belts and power windows. The government no longer limits foreign participation to joint ventures in the industry, but Abhishek has refused to grant Takata permission to proceed with an independent business there, according to Dhiraj Dhar Gupta, a spokesman for Abhishek. A Takata spokesman in Tokyo declined comment.

And in many important sectors, partnerships remain mandatory. Wal-Mart, for instance, has struck a partnership with Bharti Enterprises Ltd., the group that runs one of India's largest wireless-communications network. While Bharti will own the retail stores, which can't be controlled by foreign investors, Wal-Mart will provide the wholesale and logistics support -- two industries in which foreign control is permitted. Wal-Mart rivals Tesco PLC of the U.K. and Carrefour SA of France also are seeking partners in India.

In August, The Wall Street Journal, published by Dow Jones & Co., entered an agreement with HT Media Ltd., the parent company of the Hindustan Times, to provide articles and other content to HT's new business newspaper, Mint, which launches today. An earlier proposed joint venture between Dow Jones and the Times of India newspaper expired in 2004 because anticipated changes in the rules governing foreign ownership of media didn't happen, according to a Dow Jones spokesman in Hong Kong.

A joint venture between Hong Kong's Hutchison Telecommunications Ltd. and the Mumbai-based Ruia family, meanwhile, has been riven by friction to the point where Hutchison has put its stake up for sale. The partners have acknowledged differences, but maintain the potential split is a strategic business decision. Still, the Ruia family's company, Essar, raised eyebrows with moves to create a telecom network outside the joint venture. And Hutchison angered its Indian partner by not informing Essar before it sold a slice of parent Hutchison Telecommunications to Egypt's Orascom Telecom Holdings SAE.