In Overseas Partnerships, Never Assume
The short version of Timex’s first business foray into India reads a lot like the company’s famous slogan: It took a licking and kept on ticking.
When Timex entered the market a decade ago, it was illegal to export watches to India; if Timex wanted to sell timepieces there, it had to make them there. By law, it also had to have a local partner.
So Timex chose as its partner a small watchmaker, assuming it could dominate the relationship and have the Indian manufacturer carry out its manufacturing needs on cue. That assumption would prove very costly to the Connecticut-based wristwatch giant.
“In real estate they say, ‘Location, location, location,’ ” said Robert D. Werner, head of Timex’s joint venture in India. “In joint ventures, it’s ‘Partner, partner, partner,’ particularly in emerging markets, because not only can the good partner make things happen, but the bad partner can delay you.”
At the time, Timex executives felt they had found the perfect partner after doing some financial and legal due diligence. Werner now acknowledges that Timex should have asked more questions of its prospective partner and spoken with more of his former business associates.
Because more questions weren’t asked, Timex entered a joint venture in India with a partner it scarcely knew. The American company made assumptions about how the local watchmaker conducted business and what its priorities were going into the joint venture, all of which would prove incorrect.
After 18 months of frustration, Timex wanted out of the partnership. It took an additional six months of negotiations before the company could rid itself of the partner. Excluding an undisclosed sum Timex paid to buy out its partner, Werner said, its poor choice of an ally kept Timex out of the Indian market for two years and cost the company $60 million in lost revenue.
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Timex’s unpleasant early business experience in India came as no surprise to Glen A. Michel, managing director of the global market entry practice of Deloitte & Touche, who views India as one of many foreign markets where extensive due diligence is essential to setting up a successful joint partnership.
“It’s very, very important to make sure you know who you are dealing with,” Michel said from the firm’s Los Angeles office. “In some countries . . . you’ve basically married that partner. They will have different rights to the relationship that normally wouldn’t happen in the U.S. And getting out of a relationship with a bad partner overseas can very often be an excruciating experience.”
Doing extensive background research on the individuals involved in an overseas project is critical, consultants say, especially in emerging markets where accurate and reliable financial and court records are often difficult to access or simply nonexistent.
“In the U.S., we do 80% public-record work and 20% human intelligence,” said Carl P. Genberg, Western region director of business intelligence services for Kroll Associates in Los Angeles. “Overseas, we go out and do almost 80% human intelligence and 20% public records.”
Thomas J. Cowley, managing partner of the San Francisco-based Noesis investigative consulting firm, said the level of professional management abroad has risen, as has the number of foreign managers who’ve attended business schools in the U.S. But, the former FBI special agent added, that shouldn’t keep American companies from looking beyond their prospective partner’s credentials.
“What is their reputation for integrity, for ethics and for competence?” Cowley said from Noesis’ Los Angeles office. “Are they good at what they do? Are they experienced in the field? The basic questions really are: Can they be trusted, and do they have a track record of living up to their agreements and acting in good faith?”
Had Timex known the answers to these questions, it would not have gone into business with its initial partner in India.
Thirteen years ago Timex was eager to build a factory in New Delhi and start producing watches for the Indian market. As Werner tells it, the American watchmaker thought that by choosing a small local manufacturer it could control all aspects of the business relationship.
But from the outset its local partner, which had ostensibly agreed to the same business plan, dragged its feet.
What Timex discovered was that even though it owned most of the joint venture, its partner could prevent Timex from doing almost anything. Timex owned 40% of the business, its partner owned 20% and the public would have owned the remaining 40%.
Werner still heads Timex’s India operation but now spends much of his time as president of Dua Consulting, a Wallingford, Conn., firm that offers advice on how to do business in India. Until its Indian joint venture, he said, Timex had been accustomed to owning companies outright, and its problems in India were a learning experience for many at Timex, he said.
Werner recalled that Timex’s first partner in India “had absolute control of when the government issued us our permits because we needed his influence to get the permits to begin with.” Werner added, “If he decided he wanted the thing delayed for three months for whatever reason, you could be sure that the government would suddenly write us a letter and ask us to come in [because] they had a couple of questions. And three months later, either they’d issue the permit or ask more questions.”
Why the Indian partner stalled the project remains a mystery to Timex, but eventually Timex decided it needed to replace its partner. In India, however, replacing a business partner isn’t easy.
Not only did the pair have to reach an agreement on the value of the smaller partner’s shares, but Timex had to obtain a certificate from the partner stating that it had no objection to Timex’s finding another partner with whom to produce watches in India.
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Today, Timex is happily partnered with Indian watchmaker Titan Industries, which is a subsidiary of Tata Group, one of the largest corporations in India. The Timex-Tata joint venture went to market in late 1992 and in its first year sold 400,000 watches. Two years later, annual sales by the joint venture, Timex Watches Ltd., had leaped to 1.9 million watches.
Deloitte & Touche is one of the consulting firms that assists American companies by providing extensive research on prospective overseas business partners. The research is conducted by U.S. professionals supported by local staff, Managing Director Michel said.
Michel urges any company considering a joint venture to look at the total scope of the potential partner’s business.
“You start out at the periphery of who they buy from and who they sell to, who they supply, who supplies them, who lends them money, what their reputation is, what groups and organizations they belong to,” Michel said. Then you verify the information you’ve received by talking to former customers and suppliers, business partners, employees, even the local police and government officials--anyone who may be familiar with your prospective associate.
The cost of hiring professionals to conduct international due diligence ranges widely. At Noesis, a typical overseas due diligence report costs $15,000 to $20,000, Cowley said, with a few reports exceeding $50,000.
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Cowley, who has been doing corporate due diligence for 10 years, estimated that 15% of his overseas business consists of “post-mortems”--when he’s been called in to figure out what went wrong. One post-mortem he did involved a multinational telecommunications firm that had gone to a Latin American country and given a local operator permission to distribute its product throughout the country.
“This person didn’t do what he said he was going to do [and] ended up giving away the product . . . and a lot of it ended up in the hands of drug dealers who were using it to conduct their business,” Cowley said.
Cowley, who wouldn’t identify the company, said the firm had lost more than $20 million by the time it hired him. The firm wanted to get out of its contract with the distributor and needed help to do it.
“As soon as we got in there, we talked to some of our sources at the U.S. Embassy and they said, ‘Oh, we’ve known about this guy for years.’ So the company hadn’t even done basic due diligence.”
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