As regular readers know, both my co-blogger (Steve Dickinson) and I have written extensively on China Joint Ventures, both here and elsewhere. This is because we find them fascinating, mostly because they are so difficult to make work. Here are some of our previous writings on joint ventures in China that focus on when to enter into a joint venture and how to make one work:
- How To Survive A China Joint Venture. Or Not.
- How Not To Write A Joint Venture Agreement
- China Joint Ventures That Work
- Chinese Joint Ventures — The Information The Chinese Government Does Not Want You To Know
- Avoiding Mistakes in Chinese Joint Ventures (AmCham article by Steve)
- Love The One You’re With. When China Joint Ventures Make Sense.
- China Joint Ventures. Who’s Your Partner?
- Joint Venture Jeopardy (Wall Street Journal article by me)
What distinguishes the joint ventures that work from those that don’t?
According to a recent McKinsey article, Avoiding blind spots in your next joint venture, “even joint ventures developed using familiar best practices can fail without cross-process discipline in planning and implementation.” According to McKinsey’s own studies, JVs succeed only around half the time, even though JV best practices are well known:
When we interviewed senior JV practitioners in 20 S&P 100 companies—with combined experience evaluating or managing more than 250 JVs—they estimated that as many as 40 to 60 percent of their completed JVs have underperformed or failed outright. Further analysis confirmed that even companies with many joint ventures struggle, even though best practices are well-known and haven’t changed for decades. In fact, most of our interviewees endorsed several that have long been the gold standard for JV planning and implementation: a clear business rationale with strong internal alignment, careful selection of partners, balanced and equitable structure, forethought regarding exit contingencies, and strong governance and decision processes.
Why do so many joint ventures fail even when the Western company knows what it should be doing to make it succeed? Mostly a failure to follow best practices either initially or later on down the road when the company’s enthusiasm for the joint venture has waned:
Our interviewees suggest that in the rush to completion, even experienced JV managers often marginalize best practices or skip steps. In many cases, the process lacks discipline, both in end-to-end continuity and in the transitions between the five stages of development—designing the business case and internal alignment, developing the business model and structure, negotiating deal terms, designing the operating model and launch, and overseeing ongoing operations. Moreover, parent-executive involvement often declines in the later stages. Finally, many JVs struggle with insufficient planning to respond to eventual changes in risk. Such lapses, even in the early stages of planning, create blind spots that affect subsequent stages and eventually hinder implementation and ongoing operations. We’ll examine each of these issues, along with the approaches some companies are taking to deal with them.
The “rush to completion” is usually due to pressures to “get the deal done quickly.” How can this be remedied? “Companies must find ways to balance the pressure for speed with the demands of planning a healthy joint venture—especially allocating their time and resources in line with the potential for value and impact.”
I tend to agree.
If I look back at the China joint venture deals in which my law firm has been involved (and lets throw in the Russian joint ventures and the Vietnam joint ventures that we have drafted as well because why not?), I would say that there is a direct correlation between the time and planning and even difficulty of reaching a joint venture deal and the eventual success of the joint venture. Put simply, the joint venture deals that were completed in one month are less likely to be standing today than those that took three months.
Why is that?
Joint ventures are incredibly complicated. Just by way of one simple example, who is going to be in charge of hiring, you the American company or the Chinese company? The quick answer is usually the Chinese company, because the Chinese company certainly knows better who to hire in Dalian or in Wuhan than you do. But then what’s to stop the Chinese company from hiring 100 of its relatives or from charging mediocre people for jobs at your joint venture? And if it does that, where do you think all of your profits are going to go? So now that you realize the importance of your having some say in hiring, what say are you going to require? Certainly you do not want to do the hiring, but do you want veto rights? Should you be limited in the number of potential employees that you have the right to decline? What about firing employees? Certainly your position will be different on managers than janitors. Speaking of janitors, are you going to want to limit the number of janitors the JV can hire? The issues on control can be endless, and this is just one of thousands of issues that joint venture partners might resolve before they ink a deal.
Yet the more issues on which the putative joint venture partners agree before the joint venture is formed, the less room there is for arguments and disputes and wrenches being thrown in the works after the joint venture is formed.
So next time you are ready to kill someone (i.e., your China lawyer) during the third month of your trying to work out a joint venture deal, just remember that every day of delay is probably increasing your chances of the joint venture generating you money, as opposed to falling apart.
What do you think?