China Joint Ventures: What Goes Around Comes Around

Just read an article on the white hot (at least for millennials) web site Ozy.com, entitled, Surfing China’s Business Boom … Without Wiping Out. The theme of the article is that the incidence of joint ventures is rising in China as foreign companies and foreign businesspeople are finding it just too difficult to do business in China on their own.

The Ozy article starts out discussing two foreigners, Charles Ezzell and Kaashiv Sampath, who are considering starting a restaurant in “Beijing’s trendy Sanlitun neighborhood. These two have planned just about everything but they still have “to make a crucial decision: Go it alone as foreign owners, or tie the knot with a local Chinese partner?”

The article sees going forward as a joint venture as bringing “Ezzell and Sampath serious guanxi — connections — not to mention X-ray vision into China’s chaotic and (to outsiders, at least) often enigmatic business landscape. Assuming all went well, of course. But a soured partnership might leave their business a smoking crater, whether from simple cultural misunderstandings or something more insidious. Staying independent, meanwhile, would preserve their flexibility, but might leave them vulnerable the next time the local health department unexpectedly changes its standards.”

Well okay, but….

1. There is the risk of a soured partnership between Ezzel and Sampath, not just between Ezzel and Sampath and whomever they bring into their joint venture.

2. Joint ventures are expensive to form and expensive to maintain. A joint venture must be well documented or it is almost certain to fail at some point.

3. Forming a joint venture may or may not help with “the local health department.” Hiring a good local manager might have the same chance of helping with the local health department.

I mention these three things above simply to very briefly highlight how complicated China company formation issues can be.

The article then notes the difficulties inherent in China joint ventures:

But in China, where arbitrary government regulation remains pervasive, such partnerships are rising at a dramatic pace, embraced by businesses from retailers and manufacturers to restaurants and car dealerships. So too, though, are complaints by foreign entrepreneurs who feel abused or taken advantage of by their local counterparts. Indeed, a survey released this year by the consulting firm Vantage Partners found that 59 percent of joint ventures failed to meet expectations. They “are notorious for their high failure rate,” warns Dan Harris, author of China Law Blog, which discusses the country’s legal rules and how they impact business there.

Despite the potential difficulties of partnering with a Chinese company or individual, joint ventures and strategic alliances are on the upswing:

Of course, business opportunities in China are like nothing most entrepreneurs have seen, even given the nation’s slowing economy. Fear of missing out is a big reason joint ventures remain stunningly popular. A whopping 76 percent of senior executives surveyed this year by advisory firm PricewaterhouseCoopers said they were planning to enter into a business partnership in China. But partners also bring a variety of risks, and not just to small businesses. In the past few years, big multinationals such as French beverage-maker Danone and the British supermarket chain Tesco have seen major joint ventures go south.

The PWC report is superb and I urge everyone to read it. That report is entitled, Courting China Inc: Expectations, pitfalls and success factors of Sino-foreign business partnerships in China and you can download it here. But just to be clear, the 76 percent figure is for both joint ventures and strategic alliances. A “strategic alliance” is not a legal term and can mean anything from two companies orally agreeing to “cooperate” on one small thing to a 500 page contract requiring that two (or more) companies do A-Z together as per the terms of the contract.

What makes the PWC report so helpful beyond just its numbers are its discussions on why and how to partner with a Chinese company. My favorite part of that report were the following two paragraphs of advice on how to maximize the likelihood of success in a joint venture/strategic alliance with a Chinese company:

In most of the speeches I give on just about anything involving Chinese law, I throw up the following PowerPoint that says something very similar:

The Ozy article also discusses why joint venture deals fail:

Most joint ventures stumble for exactly the reasons you’d expect — primarily bad management and poor planning, Vantage Partners found. But sometimes the problems arise when foreigners don’t check their Western business assumptions at the door. For example, owning a majority of a joint venture doesn’t always translate into control of the company, Harris points out. Chinese partners, for instance, often allow foreigners to hold 51 percent ownership of a venture in exchange for the authority to appoint senior managers — which, in practice, leaves them running the store.

To JV or not to JV, that is the question. The following articles should help you in making the right decision on how to proceed:

China Joint Ventures That Work

Avoiding Mistakes in China Joint Ventures

11 Key Issues When Starting A China Business

China Joint Ventures: How Not To Get Burned

The post China Joint Ventures: What Goes Around Comes Around appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.