China Joint Ventures: Testing the Dream

An old saying about lawyers is that we do well when the economy is rising and when the economy is falling and we do especially well when big changes are expected. Flat and steady we don’t like. The same holds true for China lawyers.

Well our China lawyers have lately been working nearly around the clock on forming WFOEs and working on Joint Ventures for American and European companies that want to set up a business in China, oftentimes because they see doing so as providing them cover should a trade war ensue. They are of the view that having a China business will make them less susceptible to duties and tariffs and blockages. We are seeing the same thing with Chinese companies seeking to enter the United States and Europe, either on their own or by buying American or European companies.

Today’s post focuses on China Joint Ventures for the simple reason we have not written on joint ventures since July of 2016, and that post mostly focused on how distributer contracts can be a great alternative. As part of our return to joint ventures, we will focus on the basics with this point.

As we so often point out, China joint ventures are notorious for their high failure rate. An old Chinese saying often applied to joint ventures is “same bed, different dreams.” This Chinese saying (同床异梦) actually predates joint ventures and it applies to any sort of partnership without a meeting of the minds. American companies and Chinese companies far too often rush into joint ventures without ever discussing their respective dreams. 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 to keep spending time and money in trying to do the joint venture deal, or simply walk away.

So towards that end, we compiled a list of questions for our clients to discuss with their potential Chinese joint venture partner to help determine whether there is enough commonality to move forward in trying to enter into the joint venture deal.

• Why are you seeking to accomplish with our joint venture?

• What will you do for, and with, the joint venture?

• What will your company do to advance the business of the joint venture and what exactly do you want our company to do to advance the business of the joint venture?

• Who will make business decisions for the joint venture, and what mechanisms will we use for reaching a decision? Who will control what? Who will make what decisions? The more specific you get here, the better.

• What will we each contribute to the joint venture? Property? Technology? Intellectual property? Money? Know-how? Employees?

• If the joint venture loses money, who will be responsible for putting more money in?

• How will we resolve disputes? Chinese companies love responding to this with something along the lines of “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything. That sort of answer is essentially meaningless. The answer you want is the one that explains exactly how day to day disputes will be resolved so the joint venture does not collapse?

• Can either of us use confidential JV information for our own business? Can our own businesses compete with the JV? Can our own businesses do business with the JV?

• How and when will the joint venture end? What if one of us wants to buy the other one out?

Posing these questions puts dreams to the test. For the better.

For more on China joint ventures, check out Joint Venture Jeopardy and Avoiding Mistakes in China Joint Ventures.

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.