This is part 2 of our series on China Joint Ventures. We are writing this series now because our China lawyers are seeing a record number of potential joint ventures, due largely to China’s declining economy, the belief that truly foreign companies will not be well-treated in China, and a desire to try to “share the risk” of all this uncertainty. In part one of this series, China Joint Ventures: The Long Version, we talked about fake and exploitive joint ventures.
In this post, we are going to assume that your Chinese counterpart is legitimate and truly wants to do a legitimate JV with your company. But just because there is good potential for a profitable China Joint Venture and you are working with a putative China joint venture partner that is sincere and honest does not mean doing the joint venture will make sense. Before you do a joint venture with anyone you should make sure the two (or more) of you are truly on the same page regarding what will go into the joint venture and how it will operate once formed.
There is an old Chinese saying that applies to any sort of partnership without a meeting of the minds: “same bed, different dreams” (同床异梦). I applied this saying to China Joint Ventures (I was certainly not the first to do so) in a Wall Street Journal article I wrote back in 2007, titled, Joint Venture Jeopardy:
The much-publicized legal fight between French beverage maker Groupe Danone and its Chinese partner, Wahaha, calls to mind an ancient Chinese proverb often used to describe a bad marriage: “Same bed, different dreams.” Danone accuses Wahaha of breaking contracts and setting up competitor companies; Wahaha denies the allegations. The case is a highly visible test of China’s commitment to rule of law in matters involving foreign business. Whatever the outcome, China’s joint ventures increasingly look like unfruitful unions.
How can you avoid a bad joint venture marriage? By putting your dreams to the test before you wed.
China joint ventures are notorious for their high failure rate. Foreign companies too often rush into China joint ventures without ever discussing their respective dreams with their China joint venture partner. The sooner you seek to discern whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether it makes sense for you to keep spending time and money trying to do the joint venture deal.
To help our clients determine whether they have found their dream JV partner, we have compiled a list of questions they should ask their potential Chinese joint venture partner to determine whether there is sufficient commonality to press forward with their joint venture deal.
- What are you seeking to accomplish with our joint venture?
- What will you do for and with our joint venture?
- What will your company do to advance the business of our joint venture
- What do you want our company to do to advance the business of our joint venture?
- Who will make business decisions for our joint venture?
- What mechanisms will we use for reaching JV decisions?
- Who will control what of our JV?
- Who will make what decisions for our JV?
- What will you contribute to our joint venture, both now and in the future? Property? Technology? Intellectual property? Money? Know-how? Employees?
- What do you expect us to contribute to our joint venture, both now and in the future? Property? Technology? Intellectual property? Money? Know-how? Employees?
- If our joint venture loses money, who will be responsible for putting more money in?
- How will we resolve our disputes? The common Chinese company response will be something like “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything. This answer is meaningless. You need an answer that explains exactly how day to day disputes will be resolved so your joint venture does not collapse
- Can either of us use confidential JV information for our own business?
- Can our own businesses compete with our JV?
- Can our own businesses do business with the JV? What is that going to look like?
- How and when will the joint venture end?
- What if one of us wants to buy the other one out?
- How do we end the JV?
If you get answers you like to the above, you keep moving forward. If you get too many answers you do not like to the above, you move on.
In our next post, we will talk about how to structure a China JV so you do not lose your shirt.