595literally everything about his or her products. So we were not willing to surrender
control over training to an independent party”, Mr. Dondeyn explains. Second, in
view of the Government restrictions on the life of a license contract (five years) and
on the size of the payments (at most 5%), a joint venture could be expected to be
much more profitable than a stand-alone license contract.
Fusioneering, of Jamshedpur, was, amongst others things, in the arc-welding
business, but given the youth of the company and its as yet limited expertise its
managers felt that they needed more up-to-date know how and technology. Thinking
that the really big fish would not be interested in a small and as yet unprofitable
business, they talked to mid-sized players like Weltek. A visit led to lengthy policy
discussions, and ultimately to a Memorandum of Understanding. The parties agreed
to live with low or negative profits for a couple of years, during which free samples
would be distributed to build up credibility. TheJVwould buy the raw materials for
production of ten Lastek electrodes, and sell the output. Still, it took almost two
more years until all feasibility checks had been done and (especially) all investment
licenses were obtained. During that time, Mr. Dondeyn was busy with other things.
The Asian financial crisis and a misunderstanding about registration put the whole
project into the freezer, but talks were reopened after a chance meeting at a trade
fair. The tentative deal was as follows.
- Investments are estimated and timed as follows:
- Land is bought and paid for on 1/1/2000; cost: 5m rupees
- Construction (Plant and Equipment) starts on 1/4/2000 and lasts six
months; cost: 10m - Training of engineers starts on 1/7/2000; cost: 5m including travel to
and from Belgium
Total upfront investment is, therefore, 20m. Also to be financed are the initial
cash drains, estimated at about 5m in year 0 and 3m in year 1 (see below).
The equity is set at 10m, 40% of which is provided by Weltek and 60% by
Fusioneering. The equity is fully paid up on 1/1/2001 but lent back to the
shareholders at zero cost with the proviso that they should finance, 40%/60%,
any cash drain up to, cumulatively, 10m that would occur; if cash drains
exceed 10m, any shareholder has the option to sell his stake at book value to
the other; and if both want to sell, theJVis to be liquidated. The investments
themselves are financed by a loan (20m rupees at 8%), guaranteed entirely by
Weltek and Welteks house bank; the loan is to be taken up on 1/1/2000, and
amortized in five equal annual tranches of 4m as of (the end of) 2001.
- Production starts 1/10/2000. There is a 3-month lead time (production, stor-
age in Hyderabad, distribution, storage at the sales point) between the start of
production and sales, so sales start on 1/1/2001. The contract also stipulates
that Weltek receives an up-front license fee of 2m rupees, plus a five-year, 5%
royalty on net sales payable early April after the reporting period.