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China’s Views On Investment. Part II. Joint Ventures.

Posted in China Business

By: Steve Dickinson

This post is Part Two in our two part series on how Chinese companies typically view investments and how this view impacts Western companies that invest in Chinese companies, and even how this can impact all companies doing business in China.

As I explained in Part One of this series, Chinese companies simply do not value investment to the same extent as Western companies.  Chinese companies value work. I ascribe this, at least in part, to Communism, which values the worker over the investor.

China’s pervasive attitude towards investment explains many of the difficulties foreign investors have in joint ventures in China. The typical failed joint venture works as follows. A failing Chinese state owned company is desperate for working capital. However, the enterprise has been cut off from life support from the state and no bank loan is possible. Or a private enterprise finds itself on hard times and no bank loan is available.

The venture then sets out hat in hand and finds a foreign joint venture partner. The foreign partner contributes cash, technology and markets. The Chinese side contributes land, buildings, staff and management. The foreign side takes the position that the Chinese side ought to know what it is doing and so it becomes only  minimally involved with the Chinese domestic operations. Through the hard work and dedication of the Chinese staff and management, the joint venture business succeeds. Often this success is won only after years of struggle and financial losses.

With financial success finally achieved, the foreign joint venture partner now thinks: finally, we can relax and earn a return on our investment. However, the Chinese side thinks exactly the opposite: finally, we can be rid of our foreign partner. The response to the success of the company is exactly the opposite. Why is that? The foreign side is of the view that without its investment, the company would have failed. The Chinese side is of the view that it has already paid the foreign joint venture back for its investment with a small profit. The foreign investor is doing no work and has done no work. Work is all that counts. The foreign joint venture investor is acting in bad faith by insisting on being paid when it has done little or no work. The Chinese side with then go to extraordinary lengths to get rid of its foreign partner, even if it damages the company in the short term. In doing this, the Chinese side thinks it is doing the right thing and the foreign partner that insists on staying around is the one acting in bad faith.

This attitude has been pervasive in China since I started working here in the 1980s. I have seen little or no change and I therefore expect little change in the immediate future. My discussions with Chinese businesspeople and Chinese lawyers only confirm this. The reason is obvious. China was and still is very much a communist country. Labor counts. Investment does not. This fundamental value assessment must be taken into account in designing your investment program in China.

  • AlfredoCdV

    This helps to understand, why wealthy Chinese find it difficult to invest in their own country

  • dan berg

    Very insightful series of articles; one quibble. I don’t doubt that Chinese businessmen dismiss the distinction between a loan and an investment, especially when it’s in their interest to do so. (The same businessman, as an INVESTOR, would no doubt think differently). But your reason for them doing so (communism) I find less convincing. Between 1880 and 1980 very little private investment occured; most of this generation’s business people were educated (trained?) as engineers; where or when would they have acquired the distinction? Eric Li is a Stanford educated venture capitalist who certainly understands investments and remains a devote communist. So my alternative explanation: a fuzzy combination of history, economic illiteracy and self-interest.

  • twofish

    I’m very dubious of cultural explanations because it doesn’t explain why Chinese are “communist” in one situation but not in another. If people were really “communist” then why don’t Chinese factory owners form workers cooperatives. I think Chinese behavior in joint ventures has more to do with “capitalist self-interest” than “communist thinking.”

    The Chinese JV is very, very different from venture capital situations in the US. In a US VC situation, a private equity firm will put in capital but will expect to cash out in a few years when the company goes IPO. In that situation there isn’t a zero sum game between the funder and the founders because if the funders gets a ton of money for their equity, so will the founders, and if the company is successful then the PE there will only be there temporarily.

    In a Chinese JV situation, things are different because there is no easy way for an investor to “cash out.” So if the JV wants to get money, that means taking money from out of the company at which point it becomes a zero sum game between the PE firm and the founders.

    One reason that I think this is a good explanation is that it explains why PE and founders in the US start hating each other once it becomes obvious that the company is never going IPO. It also explains why you don’t see JV situations in places where you don’t have IPO’s available.

    Also, joint ventures are a great way of raising startup capital. They are a *TERRIBLE* way of raising working capital. The thing about startup capital is that it’s a one time infusion. You put in startup capital one time, and you take it out one time when the company gets sold. Working capital doesn’t work that way. You need constant infusions of working capital coming in, and constant repayment of working capital, and this becomes impossible to value properly if you are using non-liquid equity.

    The *ONLY* reason foreign companies use joint ventures to provide working capital to Chinese companies is there are no legal alternatives.

  • Amy Neagoe

    Please let me be a little more detailed than you are, because it is obvious the persons who already replied to this posting of yours dear mr. Professor, are Chinese businesspersons or diplomats/politicians, with different names and internet accounts too.(I only wish you’ll be real or from the West indeed) So, I live in Romania(that’s in the Balkans in Europe, btwn. Hungary, Russia and Bulgaria, you know) and I’m proud I’ve proved all the 33-34th years of my life, I’ll always be a top(of honesty and willing and bright mind and on). You could read more on my amyneagoe.wordpress and on myproblemsinromaniaandabroad.wordpress.com too. Contrary to these, one can never imagine my both hate and dissapointment twds. these idiot persons worldwide(and they are the majority from all), which make up any political regime in this world, starting with the Socialist and the Liberal(the Left and the Right) that are nothing more than forms of the Communist one, indeed. All in all, in not-Communist beaurocratic definitions or words/terms, ‘work’ is defined as an activity which is done with the effort of the brain or with the effort of parts of the body, the most. Because people are born differently..with different genetics, brains, bodies, strenghts or I.Q.s and on. And that is the first reason for any of them are servants, workers, cookers and others never make deep effort with their arms but they do with their brains…and God(the Christian one, at least, but there also are other minded Gods, as far as I know): He built a world with the power of his mind, first..And that is the reason for , in some nations, the superiority of the brain will be more well-paid and respected than all others too. Contrary to that, Europe is a Socialist nation as a whole with deep remains of the Communist effects from the Revolution of workers in France, and the corruption is also present everywhere you see the persons who never worked their brains for real, took the high positions(the high jobs) or the top-minded too. In my Romanian case, there are plagiators and prostitutes to rule over me with their top jobs they have, contrary to me… In conclusion, please read the definition for the ‘Capitalism’ in the Wikipedia and you’ll realise I really like that alike I also love the democracy and the elite. Contrary to that, they are only definitions of, worldwide, because everything is upside-down and different from the definitions, into the world. Thank you…please visit my blogs if you wish to help me first and/or only me, as I’ll deserve in a not-Communist world like that is, everywhere. Regards!