Infosys, McDonalds: What ails India’s foreign tie-ups?

Infosys, McDonalds: What ails India’s foreign tie-ups?

By Gautam Mukherjee | 27 August, 2017
Infosys, McDonalds, Orient Express Group, Laxmi Mittal , NCLT, H1B visas
There is, at the nub of the problem, a massive mismatch of cultures between the need for new engines and the old bogeys still trundling along.

India may be grappling with some chronic problems in its ease-of-doing business profile. This is a combination of a trust deficit between Indian and foreign partners, and a historical governmental insensitivity to its credibility deficit, which the Narendra Modi administration is trying hard to fix. It is a complicated and subtle terrain, as much a matter of business parameters in transition, a moving of the cheese as it were as regulatory matters and issues connected with India’s dreaded red-tape.

It is an old problem in Indian collaborations with foreigners. Whether they arise from top level personnel recruited from the international job market. Or within company to company joint ventures with significant shareholding on both sides. It affects even Indian multinationals that strike out overseas, acquiring a mixed personnel profile along the way. And then there are Indian government regulations, strictures and taxes, quite often applied retrospectively.

Non Resident Indian (NRI) steel baron Laxmi Mittal, one of the richest people in the world, never had difficulty reviving and running the sick steel mills he acquired. He could pull it off anywhere in the world, as long as he manned all key positions with Indians. The success story was also because of the Indian talent for frugality and their lack of resistance to doubling up to perform multiple functions. But as he diluted this approach, issues began to crop up. Combined with a cyclic downturn in the steel business, his biggest acquisition lately, Arcelor of Belgium began to fall apart and almost from the very start.

Tata Chinese-walled the problem by refusing to mix Tata Motors at home with acquisition Jaguar-Landrover in England. It gave the latter, run by British and German top management with British workers, complete autonomy. So far, this has worked admirably and profitably, though bringing in foreign CEOs to run and revamp Tata Motors has not.

It did not succeed with its Japanese joint venture with Docomo in India either, though with their divorce landing up in arbitration in London, it has cost them a fat separation fee. In fact, Tata under former CEO Cyrus Mistry tried to use the Indian legal system to avoid paying it. The reasons for the Tata Docomo business failure are many, including hostile market conditions, but the acrimony and misunderstanding between the partners cannot be brushed aside.

Another awkward situation arose when UK based Vodafone purchased the Essar-Hutchinson mobile network in India and the Indian government thought it fit to slap retrospective taxes on the acquisition.

An older echo of this kind of thing recalls the dispute between the Government of Maharashtra, with the Central Government as guarantor, and American energy company Enron in the Dabhol power plant fiasco of the 1990s. Once again, the foreign entity invoked the clause allowing foreign arbitration at the International Court of Justice at The Hague, rather than agreeing to be governed by the Indian judicial system.

Looking at the problem from the outside in, the Orient Express Group (OEH) of luxury hotels in Europe stoutly refused to consider repeated acquisition bids by Tata’s Indian Hotels Limited, citing cultural incompatibility.

Sometimes, the problems surface after the marriage, sometimes before.

So what is the solution? Can joint ventures only work in independent, if parallel silos? Should foreign acquisitions or operations be taken over and run by Indians in all key positions, Laxmi Mittal style? We need to find some viable answers. Particularly now, because India is keen on attracting more and more manufacturing projects and others in the digital area from varied geographies. This culture, standards, speed and emphases mismatch and the problems it creates cannot be ignored. Make in India has a human resources (HR) cum finance department problem that must be resolved.

The contentions usually surface quite early with regard to priorities and the costs involved. Foreign personnel, even if they are of Indian origin, approach things very differently, particularly if they are located abroad. This kind of friction is not evident when, say, an American or European multinational, wholly-owned, comes to India. This even if the country head is Indian and most of the personnel likewise. The culture of the company remains that of the foreign entity. In joint ventures, or Indians working with foreigners in different geographies, confusion runs riot, hitting profitability at a minimum.

Non Resident Indian (NRI) steel baron Laxmi Mittal, one of the richest people in the world, never had difficulty reviving and running the sick steel mills he acquired. He could pull it off anywhere in the world, as long as he manned all key positions with Indians. 

Infosys is in turmoil today because the old company that was run by the promoters from India exploited an entirely different market opportunity. This has since been lost to automation. The new attempt to revive the company’s fortunes is at the high technology level, necessarily animated from the United States in the absence of an appropriate R&D base in India. But here, the margins are compacted and the cost of business acquisition including the skilled people required is very high. Some of the growth must typically come from inorganic acquisition. There is a raging controversy over Infosys’ recent $200 million acquisition of a company called Panaya and the sudden resignation of its US based CEO, Dr Sikka. The tensions between the management, the board, the shareholders and its original promoters threaten to spill over into prolonged “class-action” litigation, that too in several countries. There is, at the nub of the problem, a massive mismatch of cultures between the need for new engines and the old bogeys still trundling along.

It probably calls for an American entity that is independent of the Indian company—the silo solution.

To-ing and fro-ing on H1B visas may have to be given over to a new kind of structure. Can the company come to it quickly enough before it descends into chaos?

In the global franchise model too there are problems in India. International fast-foods giant McDonalds, an early and highly successful mover into the Indian market from over two decades ago (23 years), has been battling with its North and East Indian franchisees for some years now (since 2013). It abruptly sacked the franchisee from running the day-to-day operations as managing director, citing incompatibility, hinting at financial issues and a drop in standards, but could not make an acceptable offer to buy out its substantial (50%) shareholding. The franchisee is also responsible for the rapid growth of the franchise, establishing its 169 outlets and putting it on the map from scratch. McDonalds also refused a counter offer from the franchisee to divest its holding in the North/East India operations.

McDonalds has a different Indian franchisee for its Western/Southern India operations that it apparently does not have any problems with. Perhaps it is seeking to consolidate its India operations around a single operator. This even though it has just decided to fire the North/Indian franchisee altogether and claims that it is looking for a replacement. However, the North Indian franchisee says the company is trying to oust him unfairly and has obtained a couple of rulings from the National Company Law Tribunal (NCLT) in its favour, the latest reinstating him as managing director in July. The current position is that 43 outlets of McDonalds in North/East India are closed, with the rest about to be. The aggrieved franchisee, meanwhile, is unwilling to take responsibility for operating standards, or sign on licence renewal applications when he stands reduced to a passive shareholder. McDonalds has chosen to invoke both the Appellate at the NCLT and resort to the foreign arbitration clause (at London), rather than settle with the franchisee, or adhere to the directions from the NCLT. And now it has decided to get rid of the franchisee altogether.

The narrative, over and over, seems to be that if it comes to a dispute between an Indian partner and a foreign one, the latter does not find adequate comfort with the Indian mechanisms for redressal. There is probably a fear of presumed bias on the one hand, and of inadequate recompense on the other.

To tackle this, there will have to be judicial reform to raise standards of jurisprudence, compensation and moves to cut delays. But also perhaps market access given to foreign law firms, as well as set up internationally acceptable arbitration mechanisms locally.

As for NRIs, ethnic Indians and foreign nationals inducted into Indian companies and expected to both mingle with domestic employees and inspire them, it tends, of late, to also go badly. Even government appointed advisors from abroad have not been an unmitigated success and there appears to be a rethink on appointing them in future.

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