The Bharti-Walmart Breakup: Where Does FDI in India Go Next?
The move wasn’t entirely unexpected. Days before the statement
was released, Walmart Asia CEO Scott Price told the media during an
Asia-Pacific Economic Cooperation meeting in Bali that “the existing franchise
to Bharti is not tenable as the base” for Walmart in India. Both sides were
looking at the best way to move forward, he added.
Under the agreement reached by the two firms, Bharti will
acquire Walmart’s indirect stake in the Easyday chain of retail stores through
acquisition of compulsory convertible debentures of Cedar Support Services, a
Bharti group company. In turn, Walmart will acquire Bharti’s stake in the 50/50
Bharti Walmart joint venture, which is a cash-and-carry business-to-business
operation under the Best Price marquee. India has allowed 100% foreign direct
investment (FDI) in the cash-and-carry segment since 2006. “Given the
circumstances, our decision to operate independently will be beneficial to both
parties,” said Price.
Even though the split was no big surprise, it didn’t make much
sense to many observers. Walmart has been leading the campaign to get government
permission for 51% foreign holding in multi-brand retail. In single-brand
retail, 100% FDI has been allowed since September 2012. The FDI policy in
retail has been extremely controversial and the Manmohan Singh government had
to stake its survival on the issue. “The Walmart withdrawal is a victory for
small traders,” says Praveen Khandelwal, secretary general of the Confederation
of All India Traders, an anti-FDI organization.
But according to Wharton lecturer Edwin Keh, India may actually have little to
do with Walmart rethinking its strategy in the country. “I suspect the current
moves in India are part of a larger shift by Walmart to put focus back on its
domestic business,” says Keh, who was formerly chief operating officer and
senior vice president of global procurement for the retail giant. “In the
current environment of a recovering U.S. economy, the opportunities may be back
at home.”
Even though the divorce was no big surprise, it didn’t
make sense to many. Walmart has been leading the campaign for 51% foreign
holding in multi-brand retail.
Keh cites other recent Walmart moves to support this theory.
“India, China and Mexico have been the countries where Walmart is ‘rebalancing’
its stores,” he notes. However, he sees Walmart’s total business in China as
poised for growth with its investment in online grocery retailer Yihaodian.
Walmart has a 51% interest in Yihaodian and plans to integrate its logistics
operations with that of the latter.
Yet everything is not black and white. The retail giant has
recently run into problems with the U.S. authorities over allegations that
Walmart de Mexico had bribed its way to market dominance in that country. Even
as this investigation was proceeding, further accusations were made about
similar transgressions in India, China and Brazil.
Probe in India
Unlike in the U.S., lobbying is illegal in India, and there was
significant outcry when Walmart disclosed to the U.S. Senate and the House of
Representatives that it had been indulging in India-specific lobbying.
Opposition lawmakers in India forced the government to take action, and a
retired judge was appointed to probe the issue. While initial indications are
that the findings have been inconclusive, a new controversy has arisen. The
prime minister’s office has declined to give sought-for details of meetings of
the prime minister and his officials with Walmart lobbyists. While this
exemption can be claimed under India’s Right to Information Act, it has
strengthened the arguments coming from the anti-Walmart contingent.
The Walmart-Bharti
separation was orchestrated with unnecessary controversy on another front. In
early July, the head of Walmart’s operations in India, Raj Jain, was let go.
The announcement was made by Price at a town-hall meeting and came as a big
surprise to the employees, who assembled on short notice after a summons via
e-mail. Jain had been a trusted general of the company for seven years, and his
departure was read as action against those accused in the bribery allegations. The New York Timeshad
earlier reported that the joint venture “had suspended several senior
executives and delayed the opening of some stores in the country as part of an
internal bribery investigation.” Now, many were sure that the kingpin had been
identified.
After the break-up, however, Jain was given a vote of confidence
from Bharti via a post as advisor to the firm’s retail division. When Rajan
Mittal, vice chairman of Bharti Enterprises, made the announcement at yet
another town-hall meeting, the employees — who had heard Price in stunned
silence — broke out in applause. Jain was unavailable for comment.
Walmart’s discomfiture with its Indian partners is familiar
territory for multinationals, according to Keh. “Some countries may prove to be
too difficult for multinationals,” he notes. “Multinationals are often held to
higher standards and so are often handicapped when competing with national
operators.”
Finance Minister P. Chidambaram says more relaxations are
unlikely. “We have a policy,” he told business channel CNBC-TV18. “A genuine
investor must work within that policy. It may not be the ideal policy from [the
company's] point of view. But this is the policy that we have today. You have
to take it as it is.”
Policy
Pains
What is it about the FDI rules that Walmart is finding difficult
to accept? The trouble in India is that every policy is accompanied by
subsequent clarifications, some of which are difficult to digest. Swedish
furniture maker IKEA’s $2 billion proposal to set up single-brand stores in India
was stalled because it wanted to operate cafes and restaurants in its stores.
According to the government, this would make it multi-brand retail, logic
officials first used while rejecting a Marks & Spencer application. IKEA
ultimately received the approval move forward; the chain is allowed to sell
coffee but only for consumption on store premises. The first IKEA store in
India is expected to open in 2017-2018.
Walmart is facing a different obstacle. A contentious clause
says that multi-brand foreign retailers must source at least 30% of their
products from small industries. This may be possible in textiles and
handicrafts, but what about electronics?
The second problematic clause relates to investment. The policy
states that 50% of investment must be in back-end infrastructure. The
clarifications issued by the Department of Industrial Policy and Promotion
state that this must be entirely for green-field assets, meaning Walmart’s
investments in India thus far do not count toward meeting that mandate.
With its cash-and-carry venture, Walmart has retained a
toehold in India, and observers feel it will make a comeback in multi-brand
retail when the regulations are relaxed further.
“It is now clear that foreign players will have to create
capacities from scratch. This means that they will need to go back to the
drawing board, assess their appetite for investment and rethink their
strategies,” Ankur Bisen, vice president for retail at New Delhi-based research
and consultancy firm Technopak Advisors, told Knowledge@Wharton in an earlier
interview.
Bisen noted that the new set of clarifications has “added more
rigidity and disincentives and will result in further delay in investment
decisions.” And according to a KPMG study: “These clarifications may pose
additional road blocks for global retail players.”
Not
Just Walmart
The Walmart-Bharti breakup is not the only recent severing of
ties between multinationals and local partners. Fast-food giant McDonald’s,
which has a 50/50 joint venture called Connaught Plaza Restaurants, has accused
Indian partner Vikram Bakshi of looking after his own business interests in
preference to those of the joint venture. On August 30, McDonald’s issued a
public notice that deposed Bakshi as managing director. The company would
henceforth be run by the board, it said. The affair has ended up with the
Company Law Board.
Meanwhile, a year-old 30/70 partnership between Australian
coffee chain Di Bella Coffee and Indian entrepreneur Sachin Sabharwal is now
embroiled in legal suits and defamation charges. The 26-year-old joint venture
between the Munjals and Honda of Japan broke up in 2010, albeit with much less
acrimony. Other joint ventures said to be on the rocks include Gillette India
(with key shareholder and chairman Saroj Poddar) and German stationery maker
Faber-Castell (with partner and managing director Anup Bhaskaran Rana).
Traditionally, JVs break up mainly because of incompatibility
issues or big egos. But in India, it may be more the external environment than
the internal environment that is causing separations. “In the Bharti-Walmart
case, I suspect it is more the FDI policy and possibly the U.S. Foreign Corrupt
Practices Act (FCPA) investigation which led to their decision,” says Pradeep
Mukherjee, India head and CEO of global HR consultancy firm Mercer.
“U.S. companies entering into a JV are required to have a clear
understanding of their duties and responsibilities under the FCPA,” adds S.
Raghunath, professor of corporate strategy and policy, and dean of
administration at the Indian Institute of Management, Bangalore. “We also know
that compliance issues affect U.S. company executives and heighten corruption
risk. They are, therefore, extremely concerned about the potential impact of
corruption on their business.”
This is the reason why when Raj Jain was shown the door,
speculation immediately started that the change was evidence of Walmart trying
to “clean up its act” in India. In recent times, several CEOs of multinational
subsidiaries in India have been let go. Reebok India’s managing director
Subhinder Singh Prem was even arrested for fraud.
“The Bharti-Walmart case is completely different,” says Raveendra Chittoor, professor of strategy at
the Hyderabad-based Indian School of Business. Pointing out that the partners
in the joint venture came together based on certain assumptions on the
regulatory front, Chittoor notes: “For Walmart, their proposed business model
does not fit in with the new regulations.”
Traditionally, JVs break up mainly because of
incompatibility issues or big egos. But in India, it may be more the external
environment.
A joint venture is a partnership between two companies, each
bringing its own strengths — “local market knowledge from one and international
best practices from the other,” says Bundeep Singh Rangar, chairman of
Indusview, a London-based advisory specializing in business opportunities in
India for multinational firms. ”Like all relationships, however, one party
might fail to fulfill its share of responsibilities, which leads to a breakup.”
Chittoor observes that the breaking up of alliances is very
common, both globally and in India. “According to various studies, almost 60%
to 70% of joint ventures fail. Failure can be due to many factors. For
instance, the objectives of the partnership may not have been thought through
or articulated clearly; lack of planning and lack of articulation leading to
misunderstandings; different leadership styles; information asymmetry leading
to ideological and cultural differences [or] HR issues.”
He makes a distinction between partnerships that spin out of
control and those that are designed from the very beginning to break up. Pepsi
started in India with the Tatas (Voltas). The moment the laws were changed, the
two abandoned the venture. Procter & Gamble-Godrej and Tata-IBM came to an
amicable end because the objectives set out at the beginning of the
relationship were achieved.
“There is no clear evidence as to how many of the partnerships
that break up are by design or because of actual failure,” Chittoor notes. “So
even if there are more partnerships breaking up today in India, it is important
to see how many of them are a natural progression because the objectives have
been met.”
Rangar adds that it would be “unfair” to cast most of the joint
ventures being dissolved as acrimonious breakups. “The reason for having a JV
is that the overseas company needs handholding as it understands the nuances of
doing business in India, and the Indian company needs to learn the best
practices in product development and adopt manufacturing technology from the overseas
entity,” Rangar says. “When the purpose of the JV is achieved, the partners
don’t feel the need to piggyback on each other.”
Raghunath sees a different set of reasons for incompatibility
issues between multinationals and Indian partners. “Foreign investors often
have deep pockets, a longer-term view of a joint venture’s financial returns
and a willingness to reinvest profits and increase capital, while the Indian
partner often has a more short-term view and relatively shallow pockets,”
Raghunath notes. “The result can be different priorities for investments and a
lack of cooperation, both between the JV partners and within the joint
management team.”
The bigger issue today for India, which is currently being
crippled by a huge current account deficit, is the impact on FDI inflows.
“Walmart will be a speck in India’s retail market,” says Chidambaram. “Its
absence won’t make any difference to the country.” Rangar is also optimistic.
“As long as the broader investment case for an India entry is compelling and
overseas companies are patient enough to commit to India for five-to-seven
years to see stability in their Indian operations, FDI will keep flowing in,”
he predicts. “What’s more, the Indian companies that have deep domestic
execution skills will find themselves being courted by overseas companies, not
necessarily for a joint venture but on a project-by-project basis.”
But Chittoor sees Walmart as a key player. Since the FDI rules
were amended more than a year ago, India has not received a single application
for multi-brand retail. “The impact of the Bharti-Walmart breakup on FDI
depends on what Walmart plans to do now,” he says. “If it decides to continue
in India on its own, it means that it is confident of the potential of the
Indian market. That is very positive for FDI. However, if it decides to pull
out of India completely, it could have a negative impact.”
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The Bharti-Walmart Breakup: Where Does FDI in India Go Next?
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