The news of McDonald’s Corp. terminating its franchise arrangement with its joint venture (JV) in India is of little surprise. It’s the latest development in the conflict between the two JV partners, the American company McDonald’s and the Indian partner, Vikram Bakshi of Connaught Plaza Restaurants Ltd.
When McDonald’s entered India in 1996, there were many foreign and Indian companies joining hands in partnership to take on the promising and complex Indian market. The JV structure seemed to be just what the doctor had ordered. On the one hand you had a foreign firm, often a global leader in its field, bringing brand and technology or savoir faire, and on the other an Indian company that had knowledge of the Indian consumer, possibly some relevant infrastructure and a route to market. The perfect combination to share investments, reduce risks and achieve success.
Things did not play out like that for most of the JVs. IndSight Growth Partners Advisors’ analysis of India entry strategy of 38 foreign consumer good companies over the last 25 years shows that of the 21 JVs started, only six have survived. Of the 15 that were terminated, a third of them ended in a public conflict.
McDonald’s JV was one of the few remaining success stories. Let’s rewind to 2013 before the conflict. McDonald’s had two JVs in India—for the north and east with Bakshi and for the west and south with Amit Jatia of Westlife Development Ltd whose subsidiary Hardcastle Restaurants Pvt. Ltd runs the fast-food chain.
One of them (Hardcastle) was given charge to develop the Indian vendors but they both innovated for Indian consumers. They were both touted as success stories. Building a burger business without a beef offering—never done anywhere else in the world—then innovating with items like aloo tikki and finally developing affordable price offerings such as the soft serve cone at Rs14.
The JV with Bakshi seemed to be working well. But clearly the events of the last four years show that this was not the case.
What are the reasons behind many of the JVs failing in India, especially those between Western companies and Indian companies? Surely, there are business reasons for the failures—strategy, team, resources—and in some cases values that don’t match—dishonesty, fraud and impropriety. There are, of course, solutions and frameworks to address those the business and value issues. However, in our analysis, most JVs fail because they do not acknowledge and manage the inherent challenges within the structure of a JV in India.
What are these inherent challenges?
Cross-cultural nature: These were JVs between companies of a foreign culture (American, French, British, German, ...) and Indian companies.
There is an inherent cross-cultural context, which is downplayed since there is no language barrier in discussions with the Indian partner, due to the pre-eminence of English as the language of business in India.
Further, Indian partners are well travelled, good communicators in general and have high social skills, all of which provide a false sense of cultural comfort.
The reality is that speaking the language is different from understanding each other. The two partners can finish a meeting with each other drawing opposite conclusions and interpretations of the same discussion.
It’s not just language and communication— work ethic, value systems, corporate culture within teams and other cultural aspects are different too.
Different ownership context: Foreign companies are often large corporate entities with institutional ownership and professional managers while most Indian companies are family owned and family member-led.
Typically, most managers focus on short- to mid-term goals to earn their bonuses and be recognized for promotions while a family has a longer-term view linked to shareholder returns.
Further, foreign company managers change regularly, which creates uncertainty about the India strategy while the Indian family is more stable.
Mismatched financial access: Most foreign companies can access wider sources of capital and at a lower cost. They draw on market-driven banking partners, government funding agencies, tax incentives and other innovative sources of capital, which are not as accessible to many Indian companies.
Most importantly, they access bank debt at interest rates that are 5-7% cheaper, although they may have to account for foreign exchange depreciation in the future. However, the Indian partner needs to fund the JV at a higher cost right from the start. Consequently, the Indian partner has a need for a shorter break-even period and a higher return on capital employed.
Poor start-up culture: Many JVs are start-ups, like the McDonald’s one. Even in acquisition-driven JVs, the challenge is to develop new lines of business.
This calls for the ability to invent or reinvent. Many large foreign companies are no longer entrepreneurial and are run by managers who didn’t build these businesses. They tend to over-research and over-plan for all scenarios. While the Indian company has a strong entrepreneurial culture, Indian partners come with the arrogance of recent success in their core business and have a “know-it-all" attitude. They are unwilling to invest in a step-by-step approach to establish a new business.
Control expectations: Both partners want control. It’s natural since each feels that it is investing time and money. The foreign company is insecure about giving its brand and technology, and the Indian company worries about its financial investments. Yet, businesses need clear defined leadership structures to succeed. Solutions like equal 50:50 JVs, like in the McDonald’s case, don’t really work.
Further, most partners don’t have prior experience of working jointly with people from another company to build a business. They have always worked internally with others like themselves. A JV is an “arranged" marriage set up by the “elders" and requires everyone to align their behaviour and expectations.
‘Win-Lose’ approach: Most people have a “Win-Lose" approach to doing business with outsiders and they encourage the same culture within their teams.
The respective “Win-Lose" behaviour of each of the partners affects important decisions where what’s best for the JV may not be best for one’s company.
Some examples are product strategy, industrial strategy, financial strategy and many others. This creates an environment where trust and transparency are lacking. Further, negotiating strategy of the two partners is different and based nearly always on a “Win-Lose" approach.
These are some of the inherent challenges for JVs in India.
In the McDonald’s case, it appears that these were not addressed in a timely and reasonable manner. Partners that acknowledge these challenges and work together to manage them effectively throughout the life of the JV are more likely to building a successful business in India.
Sumeet Anand is founder and CEO of IndSight Growth Advisors Pvt. Ltd, a strategy consulting and ventures firm advising global clients on India strategy. He has been part of JVs and advises clients on strategic partnerships.