As regular readers of this blog know, we are not generally fans of China joint ventures. Our view is that if you as a foreign company are not required Chinese law to form a joint venture with a Chinese company in order to accomplish your China plans, you would in most cases (but not all) be better off going it alone. We made our views on Joint Ventures pretty clear in a previous post, entitled, “How We Really Feel About China, Part II: Joint Ventures. We Love Them AND We Hate Them.” In that post, we had this to say about China Joint Ventures:
We have developed quite a reputation for not liking joint ventures and that is not really true. Wary would be a better word for how we feel about them. I am always bothered when a client or potential client calls about their proposed joint venture and starts out by saying “I know you don’t like joint ventures.” Are we losing business because of this reputation, or maybe we are getting more because people believe that if we give the go-ahead on theirs, it really is as good as they think it is. Of course, we will never know, but we can at least try to clear the air. We like the appropriate and necessary joint ventures; we just think it is a big mistake to consider a joint venture as the default method for entering China.
Of all the China legal work done by my law firm, our work setting up and dismantling joint ventures is probably my favorite and certainly one of the most lucrative. We charge a flat fee for probably 90% of our China work, but for forming joint ventures, we always charge hourly. We charge hourly because setting up a China joint venture can range from fast and easy to difficult and contentious. It is the rare one that is fast and easy.
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Just to be clear, we love forming joint ventures, but only when they truly do make sense.
We also love taking apart China joint ventures that have gone wrong. And again, we love doing this not for because it is in any way a good thing for our clients, who usually are in dire straits when they come to us with their joint venture problems, but because resolving joint venture disputes is like a chess game, but at our hourly rate.
Over the last couple of months, I have spoken with three people involved in very successful long term China joint ventures (two of these people have been involved in more than one successful and unsuccessful China joint venture) on what it is about their joint ventures that have made them so successful. I have to note, however, that during this same time, the quantity of our work on behalf of Western companies seeking to bail out of failed China joint ventures was a major factor in our recent hiring of two new attorneys (both of whom will be going up on our website as soon as our re-designed website is complete).
Boiling down to their essence what these three people said about what it takes to have a successful joint venture with a Chinese company, I come up with the following:
- You have to constantly monitor what is going on with the joint venture. Just deferring to your Chinese joint venture partner because “it knows China” is not going to work. Your Chinese joint venture partner may know China, but it almost certainly does not know marketing, production, management, finances, operations or anything much else as well as you do. All three told me that the amount of monitoring they ended up doing was at least double what they expected and all three stressed that if you are not willing to put in the time and money to do this, your joint venture will fail.
- The Chinese joint venture partner will hold its foreign partners to a “what have you done for me lately” standard. If you are no longer making important contributions to the joint venture, or even if your Chinese joint venture partner wrongly believes you are no longer making important contributions to the joint venture, it will start acting to push you out. The Chinese joint venture partner typically does this by withholding information and by deliberately lowering profits in the short time.
I buy it. Do you?
For more on what it takes to succeed with a China joint venture, check out the following:
