HI - 1 liner on Escorts AND advantages and disadvantages of JV

[Sarah Lim]

JCB chose Escorts, probably because they saw a possibility in Escorts
selling their construction business to them because it was not among
their core competence area.
Entering into a joint venture with Escorts was particularly
attractive to JCB because of the tremendous benefits it could reap
from it. Firstly, being a foreign company, JCB needed to acclimatize
with the entirely different culture of India, hence, JCB could benefit
from Escorts’ specialist knowledge of India’s competitive conditions,
local markets, and entry to required channels of distribution, access
to supplies of raw materials, government contracts and local
production facilities, culture, language, political systems, and
business systems. Thus, reducing political friction and improve
national acceptance of JCB. Furthermore, JCB could share the high
costs and risks of developing in India with Escorts; hence it would be
more cost effective for JCB to enter into a joint venture with
Escorts. Also, due to the strict government regulations and high
tariff barriers, joint venture was about the only feasible mode of
entry into India, they would be less likely to face the risk of being
subjected to nationalization or other forms of adverse government
interference. Joint venture may allow JCB to gain new capacity and
expertise and allow them to enter new geographic markets, namely the
Indian market, and have greater access to resources. Also, it allowed
JCB to gain some flexibility as a joint venture had a limited life
span and only covered the areas that JCB was of strong competence,
hence limited both their commitment and business’ exposure. Also, JCB
saw Escorts as a very good opportunity as it enabled Escorts to exit
from their non-core businesses, a creative way of divestiture and
consolidation. Delving beneath the obvious benefits, JCB saw this
joint venture as a creation of temporary consortium companies and
alliances to undertake particular projects that are considered too
large for JCB to handle.
When JCB chose to enter into a joint venture with Escorts, they had to
foresee what the potential disadvantages that may throw up a host of
complex challenges were and to take the relevant steps to prevent any
major pitfalls from happening. Firstly, JCB had risked giving control
of its technology to Escorts. Secondly, it did not give a firm the
tight control over subsidiaries that it might have needed to realize
experience curve or location economies nor over a foreign subsidiary
that it might have needed for engaging in coordinated global attacks
against its rivals. Also this shared ownership arrangement could have
led to conflicts and battles for control if their goals and objectives
change or if they take different views as to what the strategy should
be. To further substantiate, JCB felt that this joint venture had
limited its ability to expand and since it did not have a majority
stake in this venture, it had made JCB very hesitant about
transferring this know-how. In the initial stages, it faced the risk
of having to spend substantial time and effort to build the right
relationship, problems were likely to arise when the objective of the
venture are not fully and clearly communicated to everyone involved.
Also, with their imbalance in levels of expertise, investment or
assets brought into the venture by JCB and Escorts may lead to
potential conflicts and the different cultures and management styles
may result in poor integration and co-operation. Also, joint ventures
may lead to the blurring of management responsibilities as there is no
clear line drawn between the management of either company. The joint
venture had interfered with JCB’s long term plans to make India an
export base as joint ventures are very difficult to integrate into a
global strategy that involves substantial cross-border trading. In
such circumstances, there were almost inevitably problems concerning
inward and outward transfer pricing and the sourcing of exports, in
particular, in favor of wholly owned subsidiaries in other countries.
To add on, trends toward an integrated system of global cash
management, via a central treasury, may lead to conflict between
partners when the corporate headquarters endeavors to impose limits or
even guidelines on cash and working capital usage, foreign exchange
management, and the amount and means of paying remittable profits.
Like many joint venture failures, JCB faced the risk of potential
conflicts of tax interest with Escorts.