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The Best Way To Do Business With China. Joint Venture, Rep Office, Licensing Agreement, Distributorship, Export Selling?

Posted in China Business

Richard Brubaker over at All Roads Lead to China just did an interesting post on the return of China Joint Ventures. The post is entitled “Who is up for another round of Joint Ventures,” and its thesis is that China is getting tougher on foreigners so foreigners are reconsidering the value of a Joint Venture in which they can take advantage of their joint venture partner’s local connections.  Yes, but….

Richard starts his post by relating a recent conversation he had with a friend in a large multinational about the “barriers that foreign (industrial) firms have been facing recently in realizing the ROI they had planned on for their investments in China.”  The conversation then went to the question of how companies would react to these barriers:

Which opened up what I felt was the most interesting questions… Would firms roll the clock back and start all over again? Would they open up their IP for access to the market? Or… would firms begin to exit?

Questions that have no answers, but unlike 3-4 years ago when China was the only market that was providing positive growth figures for many firms, there are now questions about China’s short/ medium term trajectory and other countries that are seeing positive growth in markets like Brazil.

Which is to say that China, even for all its promise, is  perhaps not as compelling as it once was depending on the industry, timing of the cycle, and whether or not the firms felt like they had heard that song before.

JV 2.0?  Is it right for all firms?

Things that make you go hmmm.

First off, Joint Ventures are not right for all firms. In fact, they are wrong for most firms.

But Richard definitely makes some good points. China is getting tougher on foreign businesses, both in the way government is treating them and in terms of competition.  But in determining how to go into China, there is absolutely no “one size fits all” solution and for most companies, there are a whole host of options short of jumping into bed with someone you do not know well.

For those who are not familiar with the inherent risks of China joint ventures, I urge you to read at least some of the following:

To grossly summarize all of the above posts/articles on China Joint Ventures, they are risky because you are not on an even playing field with your joint venture partner who may end up having a lot of incentive to kick you out of the joint venture just when the joint venture starts taking off.

Fortunately, there are all sorts of ways to dip one’s toe into China, without doing a Joint Venture.

Opening a Rep Office is one of those ways.  In the old days (say 5-7 years ago), Rep Offices were the traditional way to test the China market.  Forming a Rep Office was considerably cheaper and easier than forming a Wholly Owned Foreign Entity (WOFE) or a Joint Venture and yet by doing so, the foreign company could enter China on its own. The problem today with Rep Offices, however, is that the Chinese government has so limited their range of activities, that they now make sense for only a tiny subset of companies seeking to do business in  China.  For more on what it takes to set up a Representative Office in China and the pros and cons of doing so, check out the following:

But here’s the thing.  For many companies seeking to do business with China, neither a WFOE nor a Joint Venture, nor even a Rep Office makes sense.  For many companies seeking to do business with China, avoiding going into China at all can be the best option.  In fact, these days, in most instances when a company calls us wanting “to go into China,” our default position is to try to figure out how that company can achieve its China goals without going into China at all.  I am always saying that running a company in the United States is very difficult and time consuming and anyone planning to go into China must first realize that running a company is much more difficult and time consuming there, ignoring even the language and cultural difficulties.  Oh, and it is expensive as well.  Of course.
So if “going into China” via a WFOE, a Joint Venture, or a Rep Office does not make sense, what else is there?  Many companies have no real desire to go into China at all. Rather, their real desire is to make money from China by selling their product or service or technology to China. Looking at it that way, there are three common additional options:
  1. Selling your product into China via a distributer or distributers based in China.
  2. Selling your product into China simply by exporting it from your own country.
  3. Licensing or selling your brand name or your technology to a company in China.
Earlier this year, we did a post, entitled, Selling Your Product To China Through A Distributor. Just The Basics.  That post started out talking about how distributorships are a viable option for getting one’s product into China, without having to form any sort of China entity to do so:

I often get calls from companies that want to get their product into China or increase sales there. Many times, they are under the false impression that they have two choices: go it alone or form a joint venture with a Chinese company. Entering into a distributorship relationship with a Chinese company (or companies) is another option. From a strictly legal perspective, distribution relationships between foreign and Chinese companies are actually fairly straightforward and are far easier and generally less risky than joint venture deals and typically far less costly and time consuming than going it alone.

From a business perspective, taking most products into China (be they industrial or consumer), marketing it, selling it, and then delivering it, is a massive task for any foreign company. I hate to trot out a cliche, but China is a big and diverse country and it should be viewed as many markets, not just one. Yet with China’s wealth rapidly increasing, it is the rare company that is not at least desirous of adding China to its list of markets. China is becoming a consumer/buyer nation.

For more on China distributorship relationships, check out the following:

Licensing or Technology Transfer arrangements are other options for monetizing a product, name or technology in China and we have seen a number of companies succeed with those. In a licensing or technology transfer deal, the foreign company can sell rights to a Chinese company for a limited geographic area (maybe just China) and/or for a limited time.  Alternatively, the foreign company can just sell the rights to the Chinese company.  This sale of rights too can be limited geographically or even by product.  For instance, XYZ foreign company may make 20 different products but license or sell rights to use its name and product technology and product IP (such as patents) for only one product and limit that even further by limiting the geographical use to just China.  For more on China licensing agreements, check out the following:
Lastly, and certainly not least, is the option of simply export sell your product into China from your own country. We have clients who have done this particularly successfully with things like industrial equipment, where there is a real and perceived benefit to having the product made in the United States and selling from the US and shipping from the US works just fine because the price is so high (typically $100,000 and up) for the product that shipping costs are not that big a factor.  For more on this straight selling and exporting method, check out the following.

So what is the best way to do business with China?  It depends….

What do you think?

  • Rob Cain (Chinafilmbiz)

    Thanks, Dan, excellent overview. I’m contemplating options for my business and greatly appreciate your insights, and your generous list of article references.

  • Jim

    I have worked in China for over 15 year specifically in the IT sector. My comments are solely based on this experience.

    I agree with most of your post. What I must disagree with is the following:

    “But here’s the thing.  For many companies seeking to do business with
    China, neither a WFOE nor a Joint Venture, nor even a Rep Office makes
    sense.  For many companies seeking to do business with China, avoiding
    going into China at all can be the best option.”

    This is a non-starter in China these days. Let me tell you why.

    1. The days of the “fast buck” in China are long over. Too many Chinese “partners” were burned in the ’90′s and ’00′s by western companies entering into a partnership whereby the partner (distribution, SI, VAR, etc.) made the investment and were left “holding the bag” when the western company decided to move on and disengage from China. Old memories die hard here. Most Chinese technology partners I know won’t even meet with a western company without being here or at least assurances the company is dedicated to the market and will be here before any arrangement is consummated.

    2. Even the largest and best partners do not create demand for the products they handle. Western companies that try to do this today find that they don’t sell anything through their parter unless a customer asks for the western company’s specific product. This is unlikely if the western company does not have any brand recognition in China.

    3. Even large partners are geographic centric. The largest IT partners are the strongest in the area where they are located. Partner “A” located in Beijing might have coverage in all of China but are only strong in Beijing and Shanghai. Partner “B” may also have coverage in all of China but are only strong in Shanghai and east China. Partner “C” may only have coverage in west China but they are stronger than Partner “A” or partner “B”. This means to execute this strategy a western company would have to sign up the strongest partners in the various regions in China in which there is opportunity. By this time, the support (sales and technical) are so great a western company has to create an entity (either WOFE or Rep. Office).

    I don’t no a single western technology company that has had any real sucess (success being defined as revenue generation here) in trying to do business here without a physical presence.

    I think you suggestion offers up a false sense of security to technology companies that are considering coming to China. There is no free lunch. It’s far less expensive to do it right the first time and create the entity of the company feels there is genuine opportunity, then create the relationships.

    • http://www.chinalawblog.com/ Dan Harris

      Right, and that is exactly my main point. That there is no one right way. In fact, even as I wrote this, I contemplated pointing out how in some industries (high end software, healthcare, and environmental) one’s connection to China pretty much determines the likelihood of getting business.  Joint Venture comes first, WFOE second, Rep Office third, no entity fourth.  But just because something is true for your industry does not mean it is true for every industry and it isn’t.  As I said, we have a number of companies selling high end industrial equipment from the US and doing just fine.  

      • Jim

        Thanks for the reply. As I said in my post, my comments are specific to technology companies. I agree with what you are saying. My only point is that in my opinion, avoiding going to China and expecting to do business in China is not a viable option for these (technology) companies (and certainly other companies in other market segments as well).

  • Delta Seatlle

    Add the kitchen sink into that list of all of China’s available legal structures and one of ‘em is bound to work I guess. (Probably)