Beware The China Joint Venture
Regular readers of this blog know I am not a big fan of Chinese joint ventures. Though they are sometimes required under Chinese law for entry into China and they are also sometimes a near necessity for business reasons, they should generally be avoided if possible. Some incidents over the last few months have really brought this home, only one of which I can discuss online.
We got our third call the other day from a man with a successful U.S. manufacturing company. He keeps calling, but the facts never get any better. This person is married to a Chinese woman and had come to believe this alone qualified her to essentially act as his company's legal counsel.
He keeps calling us to see if we can assist in remedying a dire China joint venture problem, without resorting to litigation. The short answer is not in a million years.
The problem is that the wife/legal counsel had informed the company that because it owned 51% of the Chinese joint venture, it would be able to completely control the venture in China. Unfortunately, the Chinese company with whom the U.S. company entered into the joint venture sees things very differently and about as soon as the ink had dried on their joint venture contract, the Chinese company took over full control and essentially kicked the United States company out. The joint venture agreement gave the Chinese company the power positions in the company and the corporate seal and the Chinese company has gone ahead and run the company as though the U.S. company (and its quite large JV investment) are completely immaterial. Among other things (and this is the oldest JV trick in the book and one employed worldwide), the Chinese company hired its relatives and friends at inflated salaries to make sure the venture itself would never be profitable and thus there would never be any profits to share with the American company.
I mention this joint venture not to argue that all joint ventures are bad, but to highlight the risks.
For more on the potential problems with joint ventures, check out my previous posts on this:
- "WFOE vs. JV"
- "When in China, Don't Get Screwed--The Movie"
- "The Asianist Knows China"
- "To Succeed In China Know the Now"
- "Guaranteed China Savings--With Fine Print and Caveats"
- "China--Damn the Joint Venture"
WFOE anyone?
http://www.chinalawblog.com/cgi-bin/mt/mt-t.cgi/1496
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Comments
I completely agree that there are China JVs that are terrible...but, as I think you are saying, we should not blame the JV structure itself. This is like saying that, because the divorce rate in the West is so high, all marriages are bad. No, marriage is not bad...BAD marriages are bad. In 20 years of doing China market entry and growth strategy work, we have seen our shares of VERY bad JVs (and participated setting up a couple of them in the very early years) and have concluded that foreign companies most often fail in two ways:
1. They see a JV as their "China strategy." A JV is NOT a strategy: it is a tool to realize your China strategy (which should be expressed as "We are going after China growth opportunities in Market X with Product Y through Distribution Channels A, B & C and defending ourselves against Competitors D, E & F"). The JV should be seen as only one option for how to realize this strategy. China is becoming more open every year to creative structures so a potential JV should be compared to many other options...and chosen ONLY when it is the best way to realize your identified strategy.
2. The second way companies fail in China JVs is to "marry their first date." Honestly, too many times have companies approach us saying "we want to do a JV with this company that we just met at a trade show". One U.S. comany we know tried to force-fit a JV with a Chinese company like this and (thankfully) gave up after trying for two years. We started over with them again, confirming and validating their China strategy (see above) and, once we determined that our strategy required a JV of some kind, then looked at over 250 different companies before settling on 4 companies to do some serious due-diligence on and then, finally, one to begin negotiations with. By this time they were confident that a JV structure was for them, they knew EXACTLY what it needed to look like in order to work, and they had (as much as can be expected) confidence that they had found the right partner.
Posted by: Kent Kedl | October 12, 2006 6:50 AM
I worked for a US-Japanese JV for a couple of years in Tokyo. Based on that experience alone, I would rank US-foreign JVs -- even with partners in the G7 countries -- at the bottom of my choices for corporate structure.
I know some JVs work very well -- even some in China -- but those are the exception to the rule. I might even rank "doing nothing" above forming a JV.
Some people, apparently including your potential client, become so enamored with the location that they check their brains at the door. I think JVs can be made to work, but people whose initial introduction to China includes a fascination with China's language and history need to take a step back. Clever Chinese can spot those kinds of "lao pengyou" from miles away and will happily relieve them of every penny they invest. That's "Economic Darwinism" at work.
Posted by: GE Anderson | October 12, 2006 8:26 AM
Mr. Kedl --
Thanks for checking in. You are 100% correct and you have expressed it so well, I am going to take your comment and turn it into a post.
Posted by: China Law Blog | October 12, 2006 9:44 AM
GE Anderson --
Thanks for checking in. I concur. The problem isn't so much China and it really isn't even so much the joint venture itself, it is substituting joint venture for common sense; it's leaving one's brain on the plane.
Posted by: China Law Blog | October 12, 2006 9:46 AM