Business Standard, January 4, 1994

Tie-ups between multinationals and local businesses are becoming more common. A look at the factors that ar aiding this process - HIRU BIJLANI

Tie-ups between multinationals and local business are becoming more common. A look at the factors are aiding this process

As the Indian market opens up, alliances between international giants and Indian companies are becoming increasingly common. But while tie-ups like Tata-Timex, PG & G or Parle - Coke have been forged in the recent past, alliances between Indian firms and multinational corporations have existed for over several decades. International hotel chains and multinational pharmaceutical and consumer product companies have been household names in India for generations. And fields as diverse as steel manufacturing and post-graduate education too have sported international connections - consider the Bokaro and Bhilai steel plants, and the Indian Institute of Management, Ahmedabad, for instance.

What we are looking at here, however, is the current world scenario with its almost universal trend towards globalisation, and how this is related to the formation of cross border alliances.

Why global tie-ups?

A company looking for a global presence can certainly kick off operations on its own anywhere in the world. But its progress will be rapid in some countries and painfully slow in others if it tries to start from scratch everywhere. And for multinational corporations, the unfortunate fact of life is that the "painfully slow" set of countries - low on the infrastructure spectrum, tied up in bureaucratic knots, and riddled as they usually are with social and cultural complexities - are the ones that offer the greates growth opportunities by virtue of being virgin markets rather who can help open local doors for it, and then help it to get acclimatised to the unfamiliar business and marketing environment. In return, the global giant bangs its own particular set of skills and experience to bear in the new relationship.

The tie-up of course has equal value for the local partner concerned. In the case of Godrej Soaps, the century-old family held company stands to gain from Procter & Gamble's worldwide experience and range of international brands even as its own contribution to the alliance is a considerable knowledge of the Indian market and Indian manufacturing and raw materials.

This pattern of mutual gain is equally relevant in the case of partners who are both from the developed world. The General Motors alliance with Toyota opened up US markets to the Japanese company. On the flip side of the coin, it enabled GM to develop new products hitherto unavailable in its product range, and exposed the American giant to Japanese management techniques such as TQM.

Or take SmithKline Beecham. One of the factors that prompted the US pharmaceutical company SmithKline and Britain's Beecham to merge was the need to avoid licencing and regulatory restrictions in their major markets of western Europe and the US. The result it has an EC identity in Europe and is simultaneously perceived as an American company in the US.

The motivation to global tie-ups finds its basis in a variety of objectives : to gain access to new markets : to derive economies of scale in manufacturing; to optimise on purchase and on production, recent times. For example, till a few years back we were exposed to lifestyles abroad only through snippets shown by Doordarshan. Today, because of satellite channels, we are abreast of foreign trends at all times. That in turn has led to our tastes as consumers becoming more homogenised and our wants more universal.

In keeping with these trends, and the fact that the world today is well on its way to becoming the proverbial global village, governments that hitherto functioned in economic isolation are shedding protectionist policies and breaking down business barriers. In our own country, these steps have been rather appropriately dubbed "liberalisation".

Types of Global tie-ups

Given that the lead time for a foreign company is set up its own local operations is considerable, and that much expense can be incurred in the process, to say nothing of the risk undertaken tie-ups of various kinds provide a viable option for achieving the same ends fast.

The kind of tie-ups that take place run the gamut from the more limited forms such as licencing agreements, distribution agencies, technology transfers, contract manufacture and franchise agreements, to partnerships of various kinds involving wholly-owned or subsidiary companies, as well as joint venture and strategic alliances.

Companies form alliances with other companies of parallel or complementary interests, where a business relationship may be shared, existing resources put together, further resources sometimes added, and respective strengths optimised to build on each other, with returns being enhanced into the process.

Alliances are also possible with multiple partners in various fields. IBM in Japan is a prime case in point. It has successfully developed distribution operations with Ricoh. And an alliance for computer integrated manufacturing with Nippon Telephones. It has also formed an alliance for financial systems marketing with Fuji Bank.

The setting up of joint venture companies are often part of the alliance process. With Coke and Parle, for example, one such join venture between the two companies will help upgrade the facilities of Parle's bottlers, and another joint venture company is slated to provide advertising, media services, promotional and sales support.

Forging an alliance

There is a considerable amount of work, however, that must be done before one even gets to the stage of forming an alliance. For the international company, this typically means drawing up a descriptive document of its operations and objectives surveying the state o its industry in global terms and undertaking comparative risk analysis of likely countries before homing in on a potential alliance partner or set of partners.

What are the parameters to be considered before making the final choice, and actually entering into an alliance agreement? These factors are of equal importance for both parties concerned, and continue to be significant in the actual partnership process.

Of prime consideration are the strategic interest of each party. While synergy in this area is vital, there must also be a dove-tailing of the core competences of both, with a well-balanced contribution from each side to the relationship. Research has shown that contribution from both partners should be more or less equal. Similarly it has been found that successful tie-ups tend to be those that are of approximately equal nature in terms of equity contribution - that is a 50 : 50 partnership is likely to be more successful than an 80 : 20 one.

Corning, (which counts several successful alliances on its international business portfolio) in its joint venture with Siemens to produce fibre optic cable did so well because both partners brought a balanced amount of skills and resources to the table. Corning contributed the patented technology for high quality optic fibre. And Siemens brought to the table the necessary finances and distribution network, in addition to the manufacturing technology for the required equipment.

Another key factor in the making of an alliance is communication between the partners, particularly at the top level. This sets the style, so to speak, moulding the shape of things to come, and facilities the clear understanding of the individual roles of the companies dual roles of the companies involved. Compatibility between potential partners is mandatory, good chemistry even better. A willingness to share, whether it be in the area of technology or control, for example is as important, as is a willingness to adapt. Flexibility after all, goes a long way in facing the changes that are inherent in the new environment for one partner and in the new business relationship for both.

The key problem areas

Choosing the right alliance is only one hurdle crossed, other obstacles hitter the path to doing business happily ever after in any alliance relationship. The problems are not really as numerous as they are critical - and getting it right actually starts at the beginning.

Drawing up and detailing of the individual roles of the partners concerned is crucial, and even more so is the clear understanding of these roles in operation, and a mutual commitment to the objectives of the alliance agreed upon. Time and schedules are another danger area and all kinds of contingencies, cost over-runs and delays have to be provided for.

There are times, of course, where a successful alliance has had its beginnings in a rather less planned framework. A case in point very close to home is that of Maruti Udyog, and its partnership with Suzuki.

Starting off as a totally Indian venture to manufacture the low priced people's car, the project ran into various problems centered around the fact that a relatively sophisticated engine and a very basic body were not going to result in the happiest of hybrids.

Suzuki was asked to step in at this point and the Japanese came in as partner. The rest is history. While an indigenous, inexpensive car was certainly not the outcome, the Indian side of the partnership gained considerably in terms of exposure to advanced automobile technology and Japanese management styles as well as from Japan's credibility in the international market, thus leading up to Maruti's current export capabilities.

Dr Hiru Bijlani is present, Zenith Global Consultants Pvt Ltd. This article is based on his forthcoming book on the subject of globalisation of business.

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