Business acquisition in India: why due diligence is an essential step

Acquiring a company in India is not without risks, noted Johan de Boer, managing director of KROV. The Dutch manufacturer of train, office and store fittings decided to abandon the acquisition of a manufacturing partner in the Indian city of Bangalore after extensive due diligence.

Have thorough research done before you engage with an Indian partner

"It's not down to the products the Indian company makes," De Boer reflects. "The quality is fine. We offer their products in Europe and they themselves sell directly to customers in America." After the owner indicated a desire to sell the company, De Boer visited the factory in August for an initial thorough inspection. Then began the due diligence process, conducted by an Indian accountant and a local lawyer. In December, they delivered their report with the advice: don't do it.

Both financially and legally, the producer was found not to have its affairs in order. Those figures did not match the reporting. That was surmountable, according to De Boer, but the findings of the lawyer were less innocent. The company turned out to be incorrectly registered, irregularities regarding personnel contracts came to light, and the administration and payment of social security contributions were not in order. "That not only carries hefty fines, as an owner you can even end up in jail for that," he said.

Work with local advisors

For De Boer, this experience reaffirms the importance of recruiting good local consultants in India. "If we had conducted this process independently, we might not have been able to bring this to the surface. Then you are suddenly liable for a company in which things are not properly arranged. Afterwards, you can't fix that. The consequences, financial or worse, are then yours." To put it mildly, the current owner was not happy that De Boer renounced the deal. "He still tried to tone down the irregularities, but I didn't hire advisors for nothing. It would be stupid to go against their advice."

Still, De Boer remains interested in the Indian producer. "I know that this factory in India delivers quality and the relatively low production costs are of course attractive. That is why we have now discussed an alternative route. If the Indian owner liquidates the company, we would then like to take over the factory premises, machinery and some of the employees. That would remove the legal risks for us. The current owner is keen on this. We have agreed to discuss this further in the coming year."

Producing in India has interesting advantages

De Boer has another reason for wanting to manufacture in India. "KROV has a good reputation worldwide as a supplier of train equipment, such as tables, chairs and backrests. India has the ambition to build a nationwide network of high-speed trains and we are already in talks about this through main manufacturer Kawasaki. Our position is stronger when we have a production facility in India, because the Indian government would like to create as many jobs in India as possible. So an Indian plant would also be interesting with a view to sales there."

Do you want to enter the Indian market, but are unsure what is the best first step for your business? Or are you looking for a local party to conduct market research or due diligence for you?

How the Dutch potato ended up in India

It took HZPC, the world market leader in seed potatoes from Friesland, almost ten years to get its high quality potato varieties on the market in India. CEO Gerard Backx takes this long lead time for granted. "India is one of the most promising markets in the world."

Strategic focus on India

Fifteen years ago, at the end of 2007, Gerard Backx and his fellow directors at HZPC decided that the company should seriously consider India. "Occasionally we came to India, but we had never given the country structural attention." That has to change, Backx believes. Coincidence or not, a few months later an employee of Indian conglomerate Mahindra calls him. He asked if he could come and visit them in Joure. Backx is curious. "What does such a gigantic concern that is mainly strong in iron and engines want with seed potatoes? I was curious where their interest came from."

That first appointment almost went wrong, Backx recalls. "Mahindra's representative arrived at Heerenveen station on Friday at 6.30pm instead of 11am. He had taken a wrong train and then got lost." But when the two struck up a conversation that Friday night, it clicked. Mahindra appears to have decided to expand their agro-business and would like to introduce the potato varieties of world market leader HZPC in India. The meeting led to a cooperation agreement in 2008 under which Mahindra will represent the Friesians in India.

Opening of the factory in India

Gerard Backx, director HZPC

Potato plants in test tubes

"Wherever we start new activities, it takes about ten years to get the business up and running," Backx emphasises. "That is in the nature of our business. In India it takes a little longer. HZPC is not allowed to export seed potatoes to India, but test tubes with small potato plants, which go through a quarantine procedure and which we can further cultivate there. Before these varieties are put on the list of varieties and can be used commercially, they have to be tested extensively for all kinds of characteristics.

In most countries, these tests take four to five years, and in India a few years longer. Backx: "The institute that carries out these tests also breeds potatoes itself. Since we are the first foreign company to start producing potato varieties in India, that breeding institute is actually our biggest competitor in India. They are clearly not waiting for us: one year our samples were lost, the next year a test field failed. This process took a lot of time and energy, but now six of our varieties have been officially registered."

The HZPC team in India

Joint venture

Meanwhile, HZPC and Mahindra were not sitting idle. In 2014, the two companies set up a joint venture: Mahindra HZPC. That company started with the cultivation and trade of common Indian potato varieties. Backx: "That own structure is now in place. We have a network of qualified, professional growers. Slowly but surely, we are cultivating and marketing more of our own potato varieties. We multiply our potatoes by a factor of 10 per year, so it will take some time before we reach a serious volume. We expect our varieties to grow to an annual turnover of 20,000 tons of seed potatoes in the next five years."

Sales market in India

The potato varieties of HZPC will soon be sold to the processing industry and supermarkets in India. "The processing industry - think of large french fries and crisps manufacturers such as Lays - are very happy with our arrival. With our high-quality varieties, they can make better products and more profit. The fresh market is by far the biggest market for potatoes in India. Traditionally, growers take little account of the eating preferences of Indians: they focus mainly on technical cultivation issues such as disease resistance and the amount of water needed. Our varieties have different tastes, are smoother and look nicer than the classic potato varieties with deep pits. With this, we think we can primarily serve the middle class and the elite through the supermarkets." 

An Indian partner opens doors

HZPC has an interest of 40 percent in Mahindra HZPC. Backx: "We have looked for a good balance. They do the finances and the HR policy, we the technology and the potato varieties. The joint venture pays our Dutch company a licence for the use of the varieties. As far as we are concerned, we are in good balance this way. The fact that we have a minority interest is not a problem. If the joint venture makes a profit, that is great, but for us it is mainly about the income from the licence stream. The more Indian farmers who grow our varieties, the better. We are not completely dependent on Mahindra and are also talking to third parties to get more farmers in India to grow our varieties. By the way, we are having these discussions together with Mahindra. Our relationship is excellent."

Curious about the opportunities in the Indian food processing or agricultural sector for your business? In our sector overviews, we give you a glimpse of interesting investment options in India's various key sectors.

The Belgian company Soudal found a suitable business partner in India.

Soudal is the European market leader in the area of sealants, adhesives and PU foams. For 12 years the company has had a joint venture with the Indian company McCoy, which was initially a customer of Soudal in India. "Meanwhile, we are growing by about 20% every year," says Emmanuel De Smedt, regional director of Soudal.

In 2007 De Smedt travelled to India for the first time, to participate in a small trade fair and to make his first contacts in the country. At that time Soudal was expanding in and outside of Europe. For instance, they were working hard in China. India was not really in Soudal's sights at that time, but De Smedt did manage to win a customer during this first visit. "There I met McCoy, one of the players in India in the field of sealants, adhesives and PU foam", says De Smedt. "They were interested in us and our products, and of course we were interested in them too, because in the long term we wanted to conquer the Indian market too."

Soon McCoy became a Soudal customer and the Belgians started a sales office in India. "In the meantime, we built up an increasingly good relationship with McCoy. On every trip I made to India I met with them and they also came to our headquarters in Belgium. The relationship grew very organically and Soudal is always looking for new opportunities, so we decided to sit down with McCoy and set up a partnership."

"Indians are very gifted negotiators. They don't give up until you give in a little - whether you have a friendly relationship with them or not."

- Emmanuel De Smedt - Regional Director Soudal

In six months, they got out and the two companies set up a 50:50 joint venture. "We both had a good understanding of what our strengths were and what we could therefore contribute to the JV. McCoy had been active in our segment for 10 years and therefore not only had a good local team, but also the local know-how and an existing customer base," De Smedt says. "But they were not yet a strong brand, acting mainly as a distributor for a number of European brands. Our knowledge of sales, marketing, production and R&D complemented that perfectly. A strong story with which we could conquer the Indian market together."

Despite the good relationship between the two companies and the clear role they would play in the joint venture, negotiations were occasionally tough. "Indians, whether you have a friendly relationship with them or not, are very gifted negotiators and don't give up until you give in a little. I was able to improve my own negotiating skills considerably in India," says De Smedt. "It is important to have a good lawyer at your side. The specialist and local knowledge that a lawyer brings is essential in any contract you conclude. Don't automatically choose the biggest or most expensive firm, but really be guided by specific knowledge and experience."

Cooperating successfully

In the joint venture, the roles are also split 50-50. The managing director, for example, is from McCoy and Soudal has the local management. "But it is not the case that there are two captains at the helm. We both know very well where our strengths lie," says De Smedt. "In addition, we have regular board meetings where all partners come together to discuss the ins and outs of the company. We work towards a common goal and the different perspectives of the various partners are an advantage rather than an obstacle."

A good example of this is the lightning-fast construction of a production site near New Delhi. Thanks to McCoy's knowledge and network, a piece of land was purchased within a year of setting up the JV and the right parties were found for the construction. "As Soudal, we were able to bring in our technical know-how and thus set up a factory in which we can produce products that are a good match for the local market in terms of price and quality level and that also meet our requirements," says the Belgian director. "We have had to adapt our products to suit the Indian market and climate. In Europe, for example, people want a kit that can be used for many different jobs, but in India they want a specific product for a specific problem. With our production location, we can respond very quickly to specific wishes of this kind and also scale up quickly if the market starts to grow."

A growth market

The Indian market for McCoy Soudal products is still relatively small. "We are growing more than 20 percent a year and our ambition is high," De Smedt says. "In the urban areas we see more and more that sealants and foams are used, in the rural areas the windows, doors and sanitary facilities are still often finished with cheap white cement. We have therefore started an academy to introduce contractors to our products and to teach them how they can be used. Of course this will not double our customer base in a year, but we are taking it step by step. The Soudal motto is 'Dream, think, dare, do and persevere' and that is exactly what we are doing in India. We dream of great results and persevere to make them a reality."

Entering the Indian market with the right partner

Entering the Indian market with a local partner is advantageous for many international companies, as you do not have to reinvent the wheel and can rely on your partner's contacts and knowledge. A joint venture can therefore be a good option for you, but it is certainly not the only way to get started in India without worries.

IndiaConnected offers you the possibility to quickly, easily and cost-efficiently set up your own office, with staff, in India without having to register your own entity. We call this the business incubator, in which we take a lot of time-consuming processes out of your hands:

• Export to India and sales processes through existing IndiaConnected structures in India.

• Existing administration structure and control mechanisms for your Indian employees.

• Use of our Office Management Services at four locations across India (optional).

• Transparency and monthly reports (tailored to customer requirements).

• Partner in India with over 20 years of experience.

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