How to Avoid Getting Burned in China and India

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These types of partnership arrangements in core business operations create a dilemma for multinational companies: how to exercise adequate strategic control in the absence of a dominant ownership stake? The goal can never be absolute control. In a rapidly changing economic and technological environment, absolute control may be neither desirable nor feasible. However, too little control over strategically important operations is also undesirable as it puts the company's future destiny in the hands of entities whose strategic agendas may be at best divergent and at worst in direct conflict with the company's own strategic agenda.

Four Proposals

In contexts where a controlling ownership stake is simply not possible (and, often, even when it is), companies face an important managerial challenge: how to build the ability to exercise adequate strategic control over the partnership? We propose four such mechanisms.

First, disaggregate your business operations in the host country and work with a different partner for each operation. Toyota offers an interesting contrast to GM in China. Unlike GM, Toyota (TM) has set up separate JV operations with two different local partners, FAW Group and Guangzhou Automobile Group. The separate JVs focus on different models aimed at different market segments. Our interviews with auto industry executives in China suggest that this disaggregated approach has made Toyota less dependent than GM on either of its JV partners.

Second, pick partners whose strategic agendas are likely to be complementary to rather than competitive with your own. Given Bharti's ambitions in the retail sector, it is not unlikely that the long-term strategic agendas of Wal-Mart and its Indian partner may be fundamentally in conflict. In contrast, consider the case of SABMiller (SBMRY), the world's second-largest beer company. Its China operations are run via a 49:51 JV with China Resource Enterprises (291:HK), a state-owned conglomerate whose primary goal is to earn an attractive return on investment rather than to become a global powerhouse in beer. As such, SABMiller is less likely to run into strategic conflict with its partner than may turn out to be the case with Wal-Mart in India.

Third, ensure that you have the formal authority to appoint some of the key managers to run the joint venture and have adequate visibility into the JV's operations and accounts. Clearly, this mechanism may be non-viable in situations where the multinational company has no equity stake in the partnership. However, as illustrated by the Danone-Wahaha case, there exist far too many cases where, despite a sizable ownership stake, the multinational company has been negligent in establishing these control mechanisms.

Fourth, cultivate indirect control over the partnership by controlling the ecosystem surrounding it. Here too, the differences in Toyota's vs. GM's approaches are illuminating. Unlike in the case of vehicle assembly operations, Chinese government regulations do not restrict foreign multinationals from holding a controlling ownership stake in operations that manufacture parts or subsystems to feed a vehicle assembly venture. Toyota holds a controlling 70% stake in its engine JV with Guangzhou Automobile Group. In contrast, GM owns a less than 50% stake in its engine JV in China. It is SAIC that appears to be in the driver's seat.

Given the rapid growth of emerging economies and the multiple regulatory as well as market challenges that these economies represent, companies have little choice but to deepen their engagement with them even if it means not having a controlling ownership stake. The future, however, will belong to those companies that can figure out how to do so smartly without losing their shirts.

Gupta is the INSEAD Chair and Professor of Strategy at INSEAD and based at the Institute's campus in Singapore. He is the author of Getting China and India Right (Jossey-Bass, 2009) and The Quest for Global Dominance (Jossey-Bass, 2008). He can be reached at anil.gupta@insead.edu. For his articles and videos, please see www.anilkgupta.com. Wang is Managing Partner of the China India Institute, a Washington DC-based research and consulting organization. She also serves as an Adjunct Professor of Strategy at INSEAD. She is the author of Getting China and India Right (Jossey-Bass, 2009) and The Quest for Global Dominance (Jossey-Bass, 2008). She can be reached at hwang@chinaindiainstitute.com. For her articles and videos, please see www.gettingchinaandindiaright.com.

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