MNCs Are Derisking In India Through JVs Thanks To Several Business Roadblocks

More than thirty years after liberalisation, many MNCs are reluctant to come into India alone. They would rather enter through the joint ventures (JV) route once again.

That is the paradox of India’s foreign direct investment (FDI) landscape: as the government relaxes FDI entry and opens up more sectors to 100% equity holdings, the latest being the space sector, foreign investors prefer to go through the joint venture route.

Some recent and large partnerships include Tata Electronics-Taiwan Semiconductor Manufacturing Company, Reliance-Walt Disney, Dr Reddy's-Nestle, JSW Energy-LG Energy, Reliance Brands-Mothercare plc, JSW Steel and JFE Steel Corporation, Japan.

What gives? Are MNCs derisking themselves in India or are Indian companies confident enough now to go through a JV route and match up to the foreign partners?

Gopal Nadadur, senior vice president of The Asia Group, a US-headquartered business consulting and services firm that focuses on the Asian market told The Core, “The country has made progress in improving appeal for foreign investors. However, many MNCs lack familiarity with India. MNCs might also face unknowns or constraints in some sectors, such as on equity holdings or compositions of boards of directors. MNCs might therefore seek joint ventures with Indian partners who are more familiar with the ecosystem at the Union and state levels.”

Indian businesses and foreign investors are however portraying a win-win formula. They argue that multinationals can provide superior technology and the latest innovations. On the other hand, Indian companies have local market knowledge and deeper access to distribution channels especially in the fast-moving consumer goods (FMCG) segment.

Some recent JVs in India have been in key sectors such as automobiles, energy, fast moving consumer goods and banking, financial services and insurance.

But beyond the obvious benefits of partnerships, the critical question remains — why MNCs are derisking themselves in India now.

Indian Firms Match Prowess Of MNCs

First, many joint ventures are with large Indian conglomerates like Reliance Industries, Tata Group and JSW, all of which can match the financial clout of MNCs. Additionally, many of these Indian firms have operations across the world and can be called Indian MNCs.

Last year, Tata Technologies, a global product engineering and digital services company and the BMW Group, one of the world’s leading premium automotive manufacturers came together to launch their 50:50 joint venture BMW TechWorks India.

One of the key attractions for BMW to collaborate with the Tata Group was to leverage their superior engineering talent in India. Another indicator of the strength of Indian companies is seen in the case of Maruti Suzuki where the Indian firm’s current market cap is twice that of its parent Suzuki Motor Corporation.

Arbitrary Taxes

Second, in recent years, many Western firms have not succeeded in India for a variety of reasons including regulations, lower profitability and even losses, arbitrary tax regimes, decreasing market shares and changing global strategies. Resultantly, many of them exited the country. These include Ford, General Motors and Man Trucks in the automobile sector, cement major Holcim, Carrefour in retail, Henkel and Cairn Energy. The experiences of these MNCs caution other global majors which in turn look at partnerships with Indian companies.

Hedging Their Bets

Third, as the Indian economy grows, a whole raft of sunrise industries is emerging. These include renewable energy, electric vehicles, artificial intelligence, green hydrogen, space, e-commerce, semiconductors and biotechnology. Many of these sectors are not only new in India but are also relatively new across the world. Therefore, to hedge the bets, Indian and foreign firms may realise that it is better to take the JV route.

For example, about a year ago, Sajjan Jindal-led JSW Group announced it would take a 35% equity stake in China’s MG Motors. At that time, JSW Group’s Parth Jindal had said, “Our strategic collaboration with SAIC Motors aims to grow and transform the MG Motor operations in India with a focus on green mobility solutions. The joint venture paves the way for bringing a world-class technology-enabled futuristics suite of automobile products, including the new generation of intelligent connected NEVs and ICE vehicles.”

JVs A Better Route?

Finally, the Indian government has imposed restrictions on Chinese companies ever since the Galwan Valley clashes in 2020. While some of these have been relaxed with the current thaw in Indo-Chinese relations, many Chinese companies still need Indian partners.

Despite the current bullishness for JVs, they often face problems and challenges. One of them is that the Indian partners often are reluctant to put money into the company. They want quick results.

Ram Ramasundar said, “A joint venture is like a marriage. There should be a common goal and the JV partners need to play the long-term game. Otherwise, there would be a lot of challenges and the JV may not last.” He should know. He is the former executive director of operations of PepsiCo India when the soft drinks major entered India in the 1990s.

PepsiCo then was a joint venture with Voltas Ltd and Punjab Agro Industries Corporation. His experience in managing JVs was also seen at Electrolux India where he was the CEO. Electrolux then had a joint venture with Kelvinator.

While MNCs are now going in for JVs in a big way, they should also be mindful of the challenges and problems.