Building a joint venture in India as a foreign enterprise
A quick look at the pointers for foreign companies considering the possibilities of a joint venture with an Indian enterprise.
The Basics: What is a joint venture?
Any business entity created by two or more parties is called a joint venture (JV). This forms what can also be called 'shared ownership'. Why do companies get into a joint venture? Mainly looking for a win-win business relationship. The reasons can include:
- Access to a new market, especially in emerging markets
- To complement one's business gains by combining assets and operations
- To share risks for big investments or projects
- To have share or exchange skills and capabilities
The Possibilities: Kinds of joint ventures in India
There are primarily two forms of joint ventures in India - Unincorporated (a.k.a. Contractual) and Incorporated (a.k.a. Equity-based). In the first, the business relationship is based on a contract and there is no new jointly-owned/shared-owned entity. Both parties agree to work together in a form that is longer-term than a transaction-based relationship. The most common and typical use is in the case of a franchise. In the second type, a separate business entity is created, with joint ownership. All aspects of the business, namely management, profits, losses, and responsibilities of the joint venture may be shared by all the parties.
Such a structure can be used by a foreign company to have a foothold in a sector of Indian market where Foreign Direct Investment is not allowed. There are two main types joint ventures for foreign companies:
1. A company or enterprise that is a private limited company or public limited company.
2. Limited Liability Partnership (LLP). This option is permitted for foreign companies only since 2015. It is interesting as it combines the advantages of a partnership while limiting the liability feature of the involved companies.
The Cultural Risk – Common causes of friction in joint ventures in India and how to avoid them
The one obstacle that a foreign (especially western) company can face while exploring the possibilities of a joint venture with an Indian company is culture. Could this be one of the reasons why some joint ventures never see the light of day? Of course, there are multiple business reasons for failures — strategy, team, resources — but companies should not overlook what seems to be obvious: the cross-cultural nature of working in India.
During the Indo-French Business Day in Marseille that took place on the 30th of November, 2017, the Indian Diplomat and Head of Economic and Commercial Wing (from the Embassy of India in France) was asked a very simple question by a French entrepreneur eager to enter the Indian market for its skilled workforce. He asked, “How can we start a joint venture with an Indian company, why is it so difficult to get in touch with a prospective partner?”
Mr. Sarvjeet Soodan instantly replied: “You have to present yourself to your potential business partner and show your interest by travelling to India. In India, the boss of a company will definitely want to meet you in person.”
In the age of the Internet and hyper-connectivity, we tend to rely entirely on the worldwide web and emails to communicate. No doubt, there are various companies that function seamlessly while communicating merely through the web. However, the Internet has not replaced the cultural touch that can be vital or even indispensable when wanting to establish a business partnership, especially in a country like India.
Often, the cross-cultural context is downplayed since there is almost no language barrier with an Indian partner, due to the widely used English language in business and corporate environments. But keep in mind that the lack of a language barrier does not always mean there is understanding.
As a foreign entrepreneur, you must be ready to step out of your cultural comfort zone to avoid any misleading or misunderstood conclusions.
Indians are rooted in their culture and habit of meeting the potential partner face to face. Compare a joint venture meeting to the concept of arranged marriages if you like! While this might come across as being guarded, it is not false that Indians have good social skills and are welcoming to the western world.
So first, book that ticket to India.
Joint Ventures in Indian Aerospace
What are the specificities of building a foreign joint venture in the aerospace sector in India? This is an important question that the 'Make in India' program's Foreign Direct Investment policy can answer.
It is true that the 'Make in India' initiative does come with certain regulations that constrain foreign companies who want to invest in India. However, the Foreign Direct Investment policy has made the Indian market alluring as an economy that grows and strengthens. Several aerospace-related sectors can be the subject of a joint venture with up to 100% equity from the foreign parties and without central government approval. The sectors that still require government approval (through the Foreign Investment Promotion Board and/or Reserve Bank of India) are: defence with more than 49% equity (recently increased from 24%); scheduled air transport services with more than 49% equity; and the establishment and operation of satellites.
What are some important foreign joint ventures in the aerospace sector?
1. Starting from 2009, the Aerospace Processing India Pvt Ltd (API) is a joint venture between Aequs and Magellan Aerospace. The company provides aerospace surface treatment. Their facility, located in Belagavi, Karnataka, was the first in India to be approved by both Airbus and Boeing.
2. In 2015, Tata Advanced Systems and Boeing announced a joint venture to manufacture the fuselage and other aero-structures of the Boeing AH-64 helicopters in a new facility in Hyderabad.
3. In September 2016, the India and French Aerospace sectors came together for an $8.8 billion deal for 36 French-made Rafale fighter jets that India bought from Dassault.
Venturing into the game of joint ventures can seem both exciting and worrying, but what needs to be remembered is that it's possible. The India government has cleared out the way to welcome FDIs and we here at Arsha Consulting can be contacted for collaborations.
Maleva Robert | Blogger