Why Renault entered into joint venture with Mahindra

Internal Benefits: Joint ventures are formed in quest of managing company’s resources in efficient manner. This includes techniques to reducing cost and risk that the firm faces, obtaining scarce resources, obtaining cheap factors of production (land, labour and capital), to include new information and increase the managerial know how so that productivity can be increased and to retain innovative employees of the firm. There are many capital intensive techniques followed by companies in oil and gas exploration, metals processing and mineral extraction.

Internal benefit include building company’s core strengths  

Helps in to develop economies of scale by gaining access to other financial resources

Joint venture help company to acquire new technologies and customers and

gives access to knowledge, skills and better management

Competitive Benefits: Joint venture helps companies to restructure their organisational structure. Competitive advantage is achieved by vertical integration or consolidation of the firms. This also helps the firms to have an influence on industry structure and competitors. Responding to the new globalisation trend this approach may help in creation of more effective competitors. Some other benefits are:

Joint ventures are helpful in building competitive barriers against the new entrants.

They act as a defensive strategy in response to the converging markets

Helps in creation of small and competitive units of the firm in various geographical locations

It also helps in reducing the time cycle to the market they are involved in

Strategic Benefits: Joint ventures help in companies to implement change in their strategic position. This helps in better creation and exploitation of synergies among the two companies. Joint venture facilitate in the transfer of technology and diversification of the firm.

Technology transfer helps in building knowledge to expand into key markets

It also helps to develop new products and improve productivity by shared expertise and lower costs because indulging in research activities to develop new products can be time-consuming and costly. Small businesses also gain lead-time

In the total number of joint venture formed, many were international joint ventures. Many of them were due to the cost involved in the operations. Companies in some industry depend on the technology to reduce costs. Joint ventures are favourable for them because they help them in accumulating money and people to work in short time, with not much time wasted in training and later to develop specialisation in a specific activity. This all leads to reduced exploration and production costs and thereby increase in the profit margins. Joint ventures are not as easy to manage as we are talking about. Sometimes companies are forced to follow a joint venture strategy because of the host country’s business regulations. For example China does not allow outside company to own a majority of domestic business. Mexico requires the companies for any foreign company which is operating in the country to have a joint venture with a domestic company. In addition to government regulations, other reasons for multinational joint ventures as mentioned above are cutting the costs of doing business, sharing risks with acquiring technological information and management expertise from other companies.

Kogut (1988) gave 3 different reasons for the existence of joint ventures. They were:

Transaction cost approach: The cost aspect of a transaction in joint ventures helps in explaining joint ventures in terms of market failure for intermediate inputs in the production, various asset specificity, and high uncertainty over specifying and monitoring performance. As inspired by Penrose’s (1959) work, it is specified and shown in recent development in management research that to one should analyze and develop a firm’s strategy by focusing on its resources instead of the external environment. Two key behavioural assumptions of TC theory are opportunism and bounded rationality (Williamson 1991a). The transaction theory suggests that if firms with complementary resources try to produce individually then they will have to fight for the scarce resources and acquire them at greater cost. Another major motive behind joint venturing is the possibility of creating Ricardian rents. A Ricardian rent means the presence of scarce resources which generate higher profits than other resources of the same type.

Strategic behaviour approach: A joint venture addresses the difficulties faced by the organisation by providing a superior alignment of incentives through the mutual dedication of resources and by sharing the residual value of the venture. Joint venture is established in a spirit of mutual trust and commitment to its long-term success, the potential threats posed by opportunism and a small-numbers condition can be reduced.

Organisational learning approach: Joint Ventures help in organisation learning Williamson (1991b) extends his analysis to strategic alliances, which is said to have the hybrid mode of governance, which are considered to occupy positions between the two ends of the market-hierarchy continuum. These hybrids in joint ventures are said to have stronger incentives and adaptive capabilities than hierarchies, which helps in providing more administrative control than markets. In global industries with globalisation there is higher need for organisational learning. This asks the firm manager to look for global efficiency, which later plays an important role in resource based theory. In a joint-venture setting, there is interaction and communication between the members of different firms. This information flow increases the boundary permeability with respect to the partners’ resources. This helps in offering an opportunity for learning. A popular example of this is Toyota–GM joint venture, in which both partners had clear learning objectives (Adler and Cole 1993).

Another use of joint ventures is to get rid of a business unit, that is, disposal of resources. Nanda and Williamson (1995) have argued that converting the business unit into a joint venture between the parent and buyer helps in selling of the unit. The joint venture operates for several years during which buyer learn about the operations of the unit is going to acquire and slowly resources will be integrated with those of the buyer. By initially running the business as a joint venture, the buyer in benefit of obtaining hands-on management experience and an insider’s s view of its operation. Seller also has interest to teach the skill and tricks to buyer of business, since the price that the buyer is willing to pay when buying out the business depends on the joint venture’s performance.

Firms often go for the local partners in the domestic market in which they want to mark a presence, these are because of the following reasons:

Items readily capitalised

Human resource needs

Government regulations and incentives

Market access needs and speed of entry

Knowledge needs and learning of new marketing methods

A joint venture is formed only when all the organizations involved individually arrive at a positive net benefit calculation. For example, one partner considers the joint venture as an opportunity for learning a new technology while the other uses the venture to further exploit the technology. When two firms have had a great deal of experience of working together, they get to know more about one another’s culture and management style, and adjust their own accordingly thus the two firms are in a better position to explore collaborative opportunities compared to other firms which don’t form any alliance with other firms. This all leads to identify ways of complementing joint venture their resources effectively for creating rents. This involves the proper analysis of costs involved in different companies. For example If there exist two oil companies which want to set up a new drilling platform in ocean areas, and neither one has capability to finance the project on its own, so the simple solution to them is to look for joint venture. That way, they share the costs of setup of drilling platform and other projects which later helps them in reducing their individual risk should they find no oil. That is a decided advantage to many business people.

A complete study of operation, management and finance has to be done to successfully implement the joint venture. Joint ventures are quite helpful to some companies in gaining access to foreign markets. Sometimes both the firms forget the primary objective of their operation and just form joint venture to come into foreign market. These products bring in the foreign domestic investments in the host country through the firm with which joint venture is formed. So many governments give incentives for joint ventures.

Joint ventures are a sometimes used to boost up the creeping sale. This can be the first step in acquisition of a business. It can also be used to act as catalyst for change, which is by bringing in a partner one, can stimulate more entrepreneurial activity in a particular area of a firm’s business. Joint venture also helps in expansion of customer base by expanding the scope and utilising other firm’s strength in different geographic market, using its distribution or sales network

International joint ventures have also been pushed by international financial institutions such as the International Monetary Fund, the World Bank, and the World Trade Organization, who have given incentives by forming policies to eliminate trade barriers and deregulate foreign ownership restrictions and the international flow of capital. This helped in creating a climate in which international investment and partnerships have become increasingly attractive. In new scenario joint ventures have become means by which companies seek to expand profit margins and market share. In addition, regional trade areas such as the North American Free Trade Agreement (NAFTA), the European Union (EU), and the Association of South and East Asian Nations (ASEAN) have worked to establish favourable conditions for joint ventures within specific, relatively localized regions.

Why Renault entered into joint venture with Mahindra & Mahindra?

As told by the CEO of Renault Mr. Carlos Ghosn this joint venture was seen to be useful to mark a new step in Renault’s global expansion strategy. The joint venture has started the Renault operation in the Indian market which is highly emerging market with respect to automotive sector. As Renault had no experience with the needs of Indian customer joint venture with M&M was seen to help to create the first right hand drive version of Logan created to meet the needs of our Indian customers. Renault was also eyeing to mark its presence in Indian market in short period of time, Mahindra and Mahindra gave them that adequate platform.

In the beginning of 2005 Renault designers visualized a low-cost car that was to retail for under Euro 5000. The car had quite good features however it looked robust and trustworthy compared to the sleek beauties manufactured by the Japanese and the Koreans. The car became a big hit and enjoyed pampering from buyers in most parts of Europe. Europeans liked the car’s no-frill appeal. Renault thought of entering into Indian market, when it analysed the companies it sought upon Mahindra and Mahindra which was the main force behind the Tata Group. Mahindra and Mahindra helped Tata Motors for over ten years helping them build the modern day passenger vehicle. Mahindra also in seeing the future prospects of snatching the opportunity and mark its presence in Indian market started working in unison with Renault and started building and selling the Logan in India.

Both Mahindra and Renault shared the profit of gaining knowledge and expertise. M&M would get all important expertise needed to build monocoque or unitary construction. Renault, on the other hand, would gain direct knowledge of the cost-effective supplier base that Mahindra enjoyed in India. A labour-intensive car plant was established as against a fully automated one to analyze the quality and cost-effective work force available in India. The two groups concluded a framework agreement for setting up a joint venture in India with Mahindra retaining a 51 per cent share and Renault 49 per cent. The JV will be called Mahindra Renault Ltd. The estimated project amount was 125 million Euros. With other European automotive counterparties like Fiat and Skoda had little presence this venture was also seen a major competition to them.

Mahindra did a customer research in Logan segment and found strong response for this C-segment car. Renault was looking for major global expansion; along with India it was also starting its operations in Romania, Russia, Morocco, Colombia and Iran. Renault was looking for a long term relationship with Mahindra and Mahindra and was looking for greater prospects in coming years of 2010 to 2012. Renault chose Mahindra and Mahindra because of the following reasons:

Mahindra Group a US $ 2.5 billion company is the market leader in multi-utility vehicles and tractors in India.

Mahindra and Mahindra had 55 years of manufacturing experience

M&M had built its high network of distributors and suppliers in India efficiently

Mahindra group had built a strong base in technology, engineering, marketing and finance (Mahindra intertrade and M&M financial services Ltd.). It also has a significant presence in key sectors of the Indian economy

High presence in automotive components, information technology & telecom (Mahindra British Telecom), and infrastructure development (Mahindra GESCO, Mahindra Holidays & Resorts India Ltd.)

Mahindra had a reputation of providing TATA Motors the platform to harness the automotive growth in India

M&M had not much presence in Sedan segment i.e. C-segment so Renault had no fears of having conflicts of interest

Mahindra as a brand was a trusted brand in India.

With the leverage of Mahindra as a brand Renault was also leveraging its own brand in Logan, as the joint venture was called Mahindra-Renault

The transfer of knowledge and technology was mutually beneficial for Renault and Mahindra, it was good symbiotic relationship