Why foreign business partners are leaving India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why foreign business partners are leaving India? 

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In this issue:
» These loan sharks lend you at 6,000%!
» Why the road for new Fed Chairperson will not be easy?
» Are ATM's new investment fad?
» India needs a law against bribery
» ...and more!


00:00
 
Partnerships are critical for expansion. In order to expand into different geographies most corporates partner with a local or a regional player. This helps them navigate regional waters more smoothly. Local players are aware about regional dynamics while the foreign partner may bring in strong technical knowhow.

However, partnerships also cause friction. And this is what has been happening as far as partnerships between Indian and foreign corporates are concerned. Take the case of Bharti-Walmart for example. Both have decided to part ways due to growing differences over the way the business needs to be managed. In fact, this is not a one off case. There have been quite a few exits in the past on similar grounds.

Difference of opinion is one reason why exits have happened. But the fact is that trust deficit between partners is also on the rise. From the foreign partner's perspective, doing business in India has become much riskier than ever before. For one, the foreign partner does not control the domestic business. It is generally being done by the local player. Thus, the foreign partner cannot keep an eye on day to day operations. Also, if the domestic player gets involved in any kind of engagement which is unethical, it can impact the foreign parent's brand name.

Take the case of Australia's fastest growing coffee chain, Di Bella. In this case, both the foreign and Indian partners are involved in a legal battle blaming each other for professional and personal misconduct. Further, foreign players are increasingly becoming circumspect of tying up with domestic players because of corporate governance issues.

This again brings to the fore the corruption menace prevalent in India. Further, with rising bureaucratic interference, the ease of doing business in India has also deteriorated. In fact, noted industrialists have been vocal in raising their voice on this matter. Some have also expressed their willingness to move overseas.

This trend of partnership friction has its roots in corruption, inept bureaucracy and poor working environment. If the situation does not improve, more frictions could certainly happen. This will not only lead to withdrawals by foreign partners but will also make others, who are planning to enter into India, more nervous.

Does friction between local and overseas partners on business issues signify that foreign capital will be hard to come by in future? Let us know your comments or post them on our Facebook page / Google+ page

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01:40  Chart of the day
 
Unemployment is a big concern in the West. Widespread slowdown and rampant outsourcing due to cheap labor available in other countries have hurt the employment prospects particularly in US. With hiring having virtually come to a standstill, the western region is glaring at a big unemployment menace. While slowdown in the West has impacted the employment opportunities in other countries as well, however India Inc seems to be in a buoyant mood as far as hiring in 2013 is concerned. Approximately 62% of the businesses plan to hire workers in India this year. This is despite the fact that business sentiment in India is low. The hiring plans are quite surprising considering that bureaucracy has become a big hurdle for smooth functioning of businesses in India. In fact, many Indian honchos have expressed their desire to set operations overseas. However, the optimism reflected by India Inc in hiring is a signal that things are going to settle soon. After India, Georgia is likely to witness the next best hiring statistic followed by Peru and other smaller countries. No major developed country appears in the top 10 list. It appears that unless some sort of revival happens the developed world is likely to face the problem of unemployment.

Countries with best hiring prospects in 2013
Data source: Yahoo Finance

02:05
 
The news from the developed world just keeps getting weirder by the day. The developed countries like US and UK are facing one of the worst recessions in history. Most of this is thanks to taking more debt than what they could afford. Though they have faced criticisms, they don't seem to be doing much about it. And it's not just the countries that have taken on too much debt. Even the people of these countries use debt to fuel their needs. The latest on debt is payday lenders in UK. These are lenders who give very short term loans. The interest on these loans is charged on a daily basis. Most of the funds from these are utilized by people to pay for their daily needs. Interestingly, the interest rates on these can average up to 6000% for one year. If this is not ridiculous then what is? And the financial regulators are not even considering capping interest rates offered by such lenders or banning them. Why? That's because as per the UK's Financial Conduct Authority these payday lenders provide a needed service. Is it necessary to take debt to finance your daily needs? If that is the condition of the people in UK, then it begs a bigger question. If they don't have the money for such basics of life, where will they get the money to pay the high interest rates? Worse, how will they repay this debt? What will happen to the financial system when defaults take place? If only, questions like these were asked before US banks had handed out subprime mortgage loans then maybe the entire crisis of 2007 would never have happened. Maybe if UK authorities wake up now and take the necessary action, they would not be sitting on a ticking time bomb.

02:40
 
Although many would not agree, Ben Bernanke has set the US economy up for a disaster. Three rounds of quantitative easing and the Fed's balance sheet has swelled to US$ 3.7 trillion. Imagine what would happen if the velocity of this money picks up speed. Fortunately for Bernanke, he will not be around to preside over this tsunami of sorts. For he, is vacating his seat and most likely, the mantle will be passed over to a certain Ms Janet Yellen. And what a wrong time to be assuming the Chairmanship of the Fed we reckon. She will have before her what is possibly one of the biggest challenges a central banker has ever faced. Ensuring that the easing is rolled back without causing much damage to the economy. And this by no means is going to be an easy task. The mere rumour of the same happening caused significant volatility in the markets few months back. And thus when the actual winding down happens, it will be difficult to rule out a significant dislocation. After all, almost all monetary experiments have ended in disasters. There's no reason why this should be any different.

Thus, makes sense to have a small part of your cash in gold if you haven't already. But during such uncertain times what should you do with the stocks in your portfolio? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!

03:30
 
Fixed income investments are hardly offering any inflation adjusted returns. Bond yields have been very volatile. Stocks, mutual funds and property are already part of their portfolio. Hence, high networth individuals (HNIs) have been looking for alternative investment options that offer returns commensurate with risk. And they have found the answer in ATMs! Yes, you read that right. Investing in ATMs to fetch rent is the latest fad in Indian realty investment space. As per an article in Business Standard, the high demand for social infrastructure near new townships has created this opportunity. Townships need infrastructure such as schools, hospitals, malls and ATMs. Plain vanilla realty investments are no longer fetching the double digit returns per annum seen earlier. Hence, theme-based properties such as ATMs, warehouses, industrial plots, private schools, hospitals, high-street shops, etc are now being invested in. In this case, the HNIs buy the property from a developer that assures a guaranteed rent every month. The agreement to stay invested is with a pre-decided lock-in period. The lock-in period for ATMs and warehouses is usually three to five years. For hospitals and schools, it could be as high as eight to ten years. While there is seemingly nothing wrong with the nature of such investments, the potential risk could be for the tenants. Demand for higher rental from such social infrastructure could push the operating costs for schools and hospitals to unsustainable levels.

04:15
 
If you wanted to become super-rich, which would be the best profession? Engineering? Doctor? Investment banker? There seems to be this one profession in India which beats every other field when it comes to making big bucks. The answer is, as many of you would have guessed, politics.

And the latest validation comes from none other than a Congress MP from Haryana. As reported by NDTV, Chaudhary Birender Singh was at his satirical best while addressing a gathering in Haryana. He said that people turned to politics when they failed in businesses and professions. And many succeeded phenomenally, building massive empires worth billions of rupees. To remind you, this is the same gentleman who had created a furore some months ago. He had claimed that many people were willing to offer bribes of up to Rs 1 bn to get a Rajya Sabha seat.

This just goes to highlight how deeply rooted engraved is the culture of bribery. We need strong anti-bribery laws and enforcement to deal with this massive corruption problem.

04:40
 
After starting the day on a weak note, the Indian equity markets moved above the dotted line during the pre-noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 110 points or 0.6%. Barring stocks from the consumer durables and metal spaces, gains were seen across the board with realty and pharmaceutical stocks being the top performers. Midcaps and smallcaps were trading firm as well with the BSE-Midcap and BSE-Smallcap indices up by about 0.6% and 0.5% respectively. Stock markets in other parts of Asia were trading positive with China and Japan trading higher by 0.6%, and 1% respectively.

04:50  Today's investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."- Charlie Munger
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7 Responses to "Why foreign business partners are leaving India?"

Gkripa

Oct 10, 2013

Foreign companies on their part are also not so honest as made by this article. Many of these companies are bribing their way in developing countries to get things done. Let's not forget Walmart officials are reported to be involved in bribing for opening up retail.No doubt there is rampant corruption but there is another angle to breaking the partnership. Many of us are ignoring that in case of Bharti-Walmart, it's Walmart that wants to stay in india. Why can't it be because of FDI policy which allows now 100% foreign ownership in retail. I would say companies like Walmart, Honda, Suzuki look for an indian partner just to get foot hold in Indian market and they jump to break the JV on the first opportunity when FDI norms are relaxed in respective sector.

Like (1)

Tikam Patni

Oct 9, 2013

when indians unless u r a vadra, find it difficult to do business in India, how can foreigners ???

Like (1)

utkaarsh

Oct 9, 2013

Sir, l hav been reading standard phrases like inept bureaucracy etc for deteriorating business environment but wht I suggest a deeper analysis is called for than merely standard phrases. One key reason is govt inaction and rest assured it won't change much.in the present corrupt and berserk media which can do anything for breaking news, hyperactive judiciary and biggest of all our own mistrust in the system has resulted everybody avoiding taking decisions in the government. Yes one can trash the present system but does anybody has an alternative. Relentless system bashing has taken us to the present mess...it is not that one shd protect corruption but indian public has proved themselves too naive and media too irresponsible for making differentiation between corruption and action...

Like (1)

Prakash

Oct 9, 2013

In India the role of the local partner is not only to become 49% investment partner but also to be the New Delhi conman for the foreign partner ! With corruption at politician and civil servant level having reached such heights the need for Neera Radia's to grease the palms of such corrupt people in authority has increased a million fold ! However , with the 49% restriction of local investment the Radias have to share the booty with the "babus" and the politicians ! One interesting point to note here is the age old "expertise" in handling corruption deals in Delhi has been with the Marwaris and Banias for the last many generations ! If you look at India's history you will notice these "vaishya" caste trading communities have been practising "bribing" and "court jestering" since the times of RajaMaharajas , Mughals and British ! So much so that the skill has now descended into their DNA/RNA (I.e. genes) as a way of life ! Even a 7 years old Marwari or Bania kid can now a days tell you how to do the conman things ! The poor foreigners can hardly come to know when they are swindled by our local "experts" ! No wonder HDFC's Parekh once mentioned that corruption will not go from India ! He knows !

Like (1)

krishnaMurthy

Oct 9, 2013

The present business community know how to do a business, but they do not know how to run the business. It is very unfortunate education imparted by the business school and the section of business community in India. They through all ethical values to the wind. They concentrate only on loot and let loot along with the political, bureacrats, and could be some judiciary,and others.

Like (1)

I C Vijay

Oct 9, 2013

foreign policies are not made black and white, like in the case of MTR brand acquisition , indian co has started same business by name Mayyas which is making investors to think twice before coming to India and the Indian co's also look at cheating foreign investors because it is not defined and it is not punishable also as per law for Indian cos .

Like (1)

Nalin

Oct 9, 2013

One of the reason for such partnerships not working, is that Indian companies (local partner) too have evolved over the years, have become bigger in size,have more capabilities, than they had a few decades back. Obviously their aspirations for the role they play in a JV too have increased and they would perhaps not like to play a second fiddle.

Like (1)
  
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