Without its Indian joint venture partner, the Swiss global company Ammann would never have become the market leader

The Swiss family-owned company Ammann is the world leader in construction and road building machinery. "In almost all of the 100 countries in which we operate, we have started and become successful entirely on our own," explains Rolf Jenny, Ammann's managing director in India. "Except in India. There we quickly came to the conclusion that without local knowledge and support we would never make it."

Rolf Jenny and Apollo's managing director, Asit Patel, open the joint venture's first factory

"Ammann's first steps in Asia were made in China. At the end of the 1990s, the Chinese government was extremely interested in our technology because they wanted to improve their entire road network in a short space of time. We were therefore given a warm welcome with attractive tax rates and special support programmes," says Jenny. "We didn't have to make many changes to our product in China to be successful, just a small reduction in price. That was easily solved with a local production site and we had the market in no time."

With this smooth experience in his back pocket, Ammann then set off in good spirits for the other big market in Asia: India. "There we were suddenly at a loss for words. The Indians were not interested in our advanced products and certainly not at the price we were offering them," says the managing director. "What worked great in China did not work at all in India. In India, we couldn't get away with just minor adjustments to our products, so we said to each other: 'We're not going to manage this ourselves, we need a partner who understands the Indian way of thinking'."

Know well what you have to offer an Indian partner

Ammann starts a big market research in the hope of finding a company they want to buy, but instead comes across the Indian company Apollo. At the time, Apollo was the leading producer of road building materials in India. "And that was exactly why they were interested in our technologies, but immediately said no to the idea of a possible partnership," says Jenny. "They said that they had been operating at the top end of the Indian market for 50 years and so there was no advantage in entering into a joint venture with an inexperienced European company. With this harsh rejection, they wiped out our possibility of a successful start-up in India in one fell swoop."

But the Swiss company was lucky: two years later, Apollo sought contact again and this time the Indian manufacturer was open to a joint venture. "That was the start of tough negotiations, because we didn't immediately agree on the terms of our partnership," says Swiss top executive. "Ammann is normally always a 100 per cent shareholder in the companies we set up abroad, so for us it was unmentionable to own less than 70 per cent of the joint venture. Apollo, on the other hand, wanted the shareholding to be split 50-50. We also wanted the joint venture to focus only on India, while Apollo wanted to start exporting to neighbouring countries. Once again, we were facing quite a challenge in India."

Bridging differences

In order to bridge the differences during negotiations, Jenny initially focused on the similarities between the two parties. "We are both family businesses, which immediately created a bond. We decided to invite Apollo to Switzerland to get to know our company even better and gain more insight into how we could complement each other," explains the managing director. "We are the world leader in high-tech products, Apollo in low-tech, low-cost versions. So together we could deliver a good quality product at a mid-price. By building up trust and proving that we really saw them as an equal partner, we were able to convince them of the benefits that the joint venture with us would bring them. Without compromising on our own terms."

According to Jenny, a successful joint venture rests on a number of basic principles. "You have to be able to trust each other completely and treat each other as equal partners, even in our case where we owned 70 per cent of the company. All decisions within the joint venture were always made by mutual agreement. From the very beginning, we also had it agreed what would happen if one of us wanted to leave the joint venture. A joint venture should always be equally beneficial to both parties. That is why it is so important to think not only about what a happy marriage will look like, but also about a friendly divorce if one of the two wants to go on alone."

Ending the joint venture 

After eight years of running a successful joint venture together, Ammann and Apollo decided to call it a day last year. "We have learned a lot from each other over the years and have always worked well together without any disagreements. But Apollo was ready to stand on her own two feet again," says Jenny. "The 70-30 ratio meant they were more like investors than the entrepreneurs behind the business and something was starting to itch again - they wanted to get back to work." Apollo sold the remaining 30 per cent for almost 27 million to Ammann. "Not only did they get a very good deal with this sale, but they also benefited from the boom that the company has experienced in recent years. Together, we have not only increased the value of the company enormously, but also tripled its turnover. The joint venture has always been a success for both parties, despite the separation. We are therefore parting as friends and will continue to have a good relationship."

Jenny therefore recommends an Indian partner to every European company that wants to start up in India. "You can only be successful in India if you understand the wishes of the customer and if you adapt your product and price to these wishes. To do that, you have to manufacture in India, the product has to breathe India. If you are confident that you can do that on your own, then go for the adventure. In our case, we knew our products didn't fit the market, but we needed the local knowledge to understand how to improve that. If you go it alone, you have to be in it for the long haul and expect it to be a process of trial and error. We wanted a quick market entry without too many setbacks and we couldn't have done it without our great partner. So do your research and strategise accordingly, but be aware that local help makes a lot easier in India."

Opportunities in infrastructure and construction

Ammann is looking forward to the future in India. "Construction and infrastructure are two sectors that will grow significantly in India in the coming years. Indeed, more infrastructure is needed in the country if it is to maintain the same high economic growth rate in the long term," says the Ammann foreman. "But even though these sectors will offer interesting opportunities, it is important that foreign companies realise that India is not a quick fix. I have seen many international companies come and go, hoping to get a slice of the investment in the road network. But if your product doesn't fit India's needs and Indians don't trust you, you have a choice: either invest for the long term or pack up."

Joint venture in India: how to do it

Starting with a partner can be smart in a country like India. Despite the fact that the rapidly growing Indian economy offers opportunities for companies in every sector and industryIndia is also a country where you need to have good connections and really understand the market in order to succeed. As a newcomer to the Indian market, starting a joint venture brings a lot of advantages. You can rely on the market knowledge and extensive network of your Indian partner and you share the risks. But there are also examples of joint ventures in India that failed due to cultural differences and a lack of leadership, such as McDonalds happened to McDonalds.

Memorandum of Understanding

A joint venture almost always involves the creation of a new company owned by two or more partners. A joint venture is often set up for a special project and is usually not intended to be a long-term business connection. The partners contribute their assets (people, machinery, capital and knowledge) for a specific purpose and for a limited time, but remain completely separate companies while the joint venture forms a new company.

Before setting up a new entity as a foreign company with an Indian partner, it is highly recommended that due diligence be performed, just like any other business transaction. In addition, drafting a memorandum of understanding (MOU) is very common in India. Such an MOU ensures that all parties fully understand and agree on the purpose, responsibilities and risks of the joint venture. It is a short document without much legal jargon, which states the roles of both parties and establishes a roadmap for the future on the parties' intentions, management structure and cost allocation.

Articles of Association

Most joint ventures in India are structured in the form of private limited companies, the equivalent of the Dutch BV. It is mandatory for a private limited to have at least two directors and at least one director who is resident in India, that is, someone who has resided in India for a period of at least 182 days in the previous calendar year. So this does not necessarily have to be an Indian. In a private limited, the Articles of Association (AoA) are a very important document. The AoA are a requirement while incorporating a private limited in India and contain regulations for the internal management of the company.

The Companies Act 2013 gives companies the freedom to determine the content of the AoA. For example, the AoA contains a clause on the steps to be taken in the event of conflict or termination of a joint venture in the event of an impasse. It is therefore advisable to devote time and attention when drafting the AoA and not depend on a standard off-the-shelf concept. The Companies Act, 2013 requires every company to have an MOU and AoA. The MOU and AoA are the charter documents of the company. As such, both must be filed with the Registrar of Companies (the Indian Chamber of Commerce) of the province in which the foreign company wishes to establish itself.

Joint Venture Agreement

Once the MOU and the AoA have been drafted, the foundation for the joint venture has been laid and the Joint Venture Agreement (JV Agreement) can be drafted. This is a working document that explicitly focuses on what decisions the partners can and may make about the shares, management structure, withdrawal rights, competition issues, dispute resolution, intellectual property rights and any guarantees. The JV Agreement is not a binding document and is drafted purely to define the cooperation between and responsibilities of the partners. Indian law provides sufficient flexibility for the parties to set out their own arrangements in a final agreement.

The JV Agreement or other agreements related to the joint venture necessarily require skill in drafting the documents without room for ambiguity. Complicated and vague documentation can be fatal to the joint venture and impede the interest of the parties. One of the things that requires expertise is the exit strategy. The JV Agreement establishing a joint venture should also include a planned exit strategy so that all parties are protected once the partnership has reached its goal. 

Most joint ventures are dissolved through a partner buyout. It is advisable to include clear terms for terminating a JV in the agreement. Once the parties have determined the key points for the JV Agreement, it is wise to turn the matter over to a lawyer in India. Taking into account Indian laws and regulations, he or she can convert the key points into the official Joint Venture Agreement document.

Local support in setting up joint venture

So setting up a joint venture offers you, as an international company and newcomer to the Indian market, interesting advantages. No long start-up time in which you have to build a network, find the right distributor and acquire customers. For all this you can rely on your Indian partner. But the responsibility of setting up the joint venture itself does rest on your shoulders, of course. Local knowledge and support is no luxury in that process. Do you want to do all the preparatory work for the joint venture in a sound manner and start off with the right documents in your pocket? We have a team of local experts ready to make your start as smooth as possible. 

Joint venture in India: three lessons from McDonald's

McDonald's grew rapidly to 430 outlets in India thanks to two successful joint ventures. One of these joint venture partners is now throwing a spanner in the works, forcing McDonald's to close 169 branches. Three lessons from McDonald's problems in India.

Remarkable success story
McDonald's has been a success story in India for years. A remarkable achievement, because who would have thought that the American hamburger chain would gain a foothold in India? Selling Big Macs in the country where eating cow meat is unacceptable for religious reasons and even prohibited in many states? Good luck. But McDonald's is doing it anyway. The Americans are developing an entirely Indian menu. The McSpicy Paneer (Indian cheese), Aloo Tikki Burger (potato and pea burger) and Chicken Maharaja Mac appeared on the menu.

Affordable, quality and status
But McDonald's is not there yet with these specially adapted products for the Indian market. At the end of the nineties, eating out is a luxury for Indians. Market research shows that of the hundred meals that Indians eat in a month, only three are eaten out of doors. Most of these meals are bought at food stalls, not in restaurants. To get Indians into McDonald's, Americans must therefore compete with these street stalls. This is only possible with extremely competitive prices (read: extremely low margins). The introductory price for the Aloo Tikki Burger was 20 rupees (25 euro cents) at the time; in 2017, it is still only 30 rupees (39 euro cents). This approach works: McDonalds has more than 320 million customers a year in the 430 branches it has built since 1996.

McDonalds India developed a whole new menu for India. This video shows some of the differences.

Problems with Indian joint venture partner
McDonald's owes its meteoric growth largely to its two joint venture partners. The Americans have divided India into two regions: there is a joint venture partner for the north and east of the immense country and one for the south and west. With the partner in the north, there has been trouble for four years. There are problems with hygiene in the restaurants and there are complaints about the quality of the meals. According to the Americans, there is mismanagement and financial irregularities. They wanted to buy out the Indian partner, but the parties could not agree on the price. Meanwhile, McDonald's is involved in two lawsuits: one in Delhi and one in London. Last month the conflict escalated and the Americans decided to close 169 branches in India. In July, 43 McDonald's restaurants in the capital New Delhi already closed their doors. More than 10,000 jobs are at risk. The conflict not only caused enormous financial damage, but also enormous damage to the company's reputation.

Lessons from McDonald's troubles in India
How could things have gone so wrong at McDonald's in India? And what can be learned from the Americans' problems for Dutch companies that have or are considering a joint venture in India? After all, a joint venture is the most popular market entry strategy in India. Logically, a JV with a reliable Indian partner strengthens the credibility of the foreign company in the Indian market, provides a strong network and reduces bureaucratic challenges. But a joint venture is not without risk, as the example of McDonald's shows once again.

1. Take time to find a partner
Indian parties love joint ventures. For them too, a joint venture offers great opportunities: working with a reputable foreign player improves status and offers interesting growth opportunities. It is not for nothing that Dutch parties are regularly surprised with a proposal for a joint venture contract. Companies would do well to take their time in selecting an Indian partner and carry out extensive due diligence on potential partners. Consider carefully in advance what criteria a joint venture partner should ideally meet (knowledge, corporate culture, size, region, experience with other foreign parties, etc). Also realise that choosing a partner in many cases means excluding cooperation with another partner. If you work with Tata, you will not get in at Reliance. This is also true at the regional level where smaller family conglomerates compete with each other. So be aware of the choices you make and gather information from different sources to get a good understanding. Visit India and invite the potential partner to the Netherlands. Investigate how serious the Indian party is and who ultimately takes the decisions, especially if the partner is an Indian family business.

2. Take your time for a solid contract
A joint venture agreement must specifically set out how decisions are made, what the procedure is in the event of a future divorce and where a legal conflict is fought out (preferably in the Netherlands of course, given the huge backlog of Indian courts). Invest in a good Indian lawyer to gain a good understanding of the Indian law surrounding joint ventures and the protection of your intellectual property. Also realise that you can limit your risks by starting several JVs in different states. In this way, you also benefit from the local knowledge and network in these states that these partners have at their disposal. Remember also that the shares of a joint venture do not necessarily have to be divided 50/50.

3. Temporary marriage to achieve a common goal
A joint venture is usually seen by multinationals as an ideal market entry strategy and by definition temporary, but SMEs often see a joint venture as a permanent arrangement. This is where they go wrong. A joint venture is usually a good way to enter the Indian market, but as a permanent construction, a JV rarely works. The reason is simple: after four or five years, the interests of the Indian and the foreign partner diverge. In that respect, it took McDonald's a long time to go wrong. At the start of the cooperation, it is a good idea to agree on decision-making powers, concrete goals and a common roadmap. Don't make it all up, but choose a range and stick to it. Furthermore, make clear from the start that the cooperation is temporary and outline in advance an exit strategy for when the goals of both parties have been reached. The most common scenario: the Dutch party buys out the Indian party and continues as a 100% subsidiary in India. Agreements about the valuation of the company can also be made in advance.