Joint venture in India: Three lessons from McDonald’s

McDonalds in India: a success story

For years, McDonald’s has been a success story in India. A remarkable achievement, because who would have thought that the American hamburger chain would gain a foothold in India? Selling Big Macs in a country where eating cow meat is unacceptable for religious reasons and even prohibited in many states? Good luck. But McDonald’s does it anyway. The Americans develop a completely Indian menu. The McSpicy Paneer (Indian cheese), Aloo Tikki Burger (burger made of potatoes and peas) and Chicken Maharaja Mac appear on the menu.

Affordable, quality and status

But McDonald’s is not there yet with these specially adapted products for the Indian market. In the late nineties, eating out is a luxury for Indians. Market research shows that of the hundred meals that Indians eat in a month, only three are eaten outside the home. The majority of these meals are bought at food stalls, not in restaurants. In order to get Indians into McDonald’s, the Americans have to compete with these street stalls. This is only possible with extremely competitive prices (read: extremely low margins). The introductory price for the Aloo Tikki Burger was 20 rupees (25 euro cents) at the time, in 2017 it was only 30 rupees (39 euro cents). This approach works: McDonalds has more than 320 million customers per year in the 430 branches it has built since 1996.

Problems with Indian joint venture partner

McDonald’s owes this rapid growth largely to its two joint venture partners. The Americans have divided India into two regions: there is a joint venture partner for the north and east of the immense country and a partner for the south and west. There has been trouble with the partner in the north for four years. There are problems with hygiene in the restaurants and there are complaints about the quality of the meals. According to the Americans, there is mismanagement and financial irregularities. They want to buy out the Indian partner, but the parties cannot agree on the price. McDonald’s is now involved in two lawsuits: one in Delhi and one in London. Last month, the conflict escalated and the Americans decided to close 169 branches in India. In July, 43 McDonald’s restaurants in the capital New Delhi closed their doors. More than 10,000 jobs are at risk. The conflict not only leads to enormous financial damage, but also causes enormous reputational damage.

Lessons from McDonald’s problems in India

How did things go so wrong at McDonald’s in India? And what can global companies that are considering a joint venture in India learn from the problems of the Americans? After all, a joint venture is the most popular market entry strategy in India. Logically, a JV with a reliable Indian partner strengthens the credibility of the foreign company in the Indian market, ensures a strong network and reduces bureaucratic challenges. But a joint venture is not without risk, as the example of McDonald’s shows once again.

1. Take your time to find a partner

Indian companies are fond of joint ventures. A joint venture offers them great opportunities: working with a renowned foreign player increases their status and offers interesting growth opportunities. It is not without reason that global companies are regularly overwhelmed with a proposal for a joint venture contract. Companies would do well to take their time when selecting an Indian partner and to perform extensive due diligence on potential partners. Consider carefully in advance which criteria a joint venture partner should ideally meet (knowledge, corporate culture, size, region, experience with other foreign parties, etc.). Also realize that choosing a partner in many cases means that you rule out cooperation with another partner. This also applies at a regional level where smaller family conglomerates compete with each other. So be aware of the choices you make and collect information from different sources to gain a good insight. Visit India and invite the potential partner to your headquarters. Investigate how serious the Indian party is and who ultimately makes the decisions, especially if the partner is an Indian family business.

2. Take the time for a solid contract

A joint venture agreement must specifically state how decisions are made, what the procedure is in the event of a future divorce and where a legal conflict is fought (preferably in the Netherlands of course, given the enormous backlog of Indian courts). Invest in a good Indian lawyer to gain a good insight into Indian legislation surrounding joint ventures and the protection of your intellectual property. Also realize that you can limit your risks by starting multiple JVs in different states. In this way, you also benefit from the local knowledge and network in these states that these partners have. Also remember that the shares of a joint venture do not necessarily have to be divided 50/50.

3. Temporary marriage to achieve a common goal

A joint venture is generally seen by multinationals as an ideal market entry strategy and is by definition temporary, but SMEs often regard a joint venture as a permanent construction. This is where they immediately make a mistake. A joint venture is usually a good way to enter the Indian market, but a JV rarely works as a permanent construction. The reason for this is simple: after four or five years, the interests of the Indian and foreign partners diverge. In this respect, it took McDonald’s a long time before things went wrong. At the start of the collaboration, it is a good idea to coordinate decision-making powers, concrete goals and a common roadmap. Do not completely seal this off, but do choose a bandwidth and stick to it. Furthermore, make it clear from the start that the collaboration is temporary and map out an exit strategy in advance for when the goals of both parties have been achieved. Most common scenario: the foreign party buys out the Indian party and continues as a 100% subsidiary in India. Agreements can also be made in advance about the valuation of the company.