Anatomy of a China Joint Venture

Despite the increasing difficulies with doing business in China (or perhaps because of those difficulties), our China corporate lawyers are seeing an increase in foreign companies looking to do joint ventures in China. This is the first part in a new series of posts in which we will explore the issues involved in forming a China joint venture, from beginning to end.

Our firm usually gets a China joint venture matter when a company calls or emails us, saying they are “looking to do a China joint venture” and asking us if we can help. Our immediate answer is to say yes we can, because we can.

Our first questions to this foreign company are usually geared to telling us whether a joint venture makes both business and legal sense foor the foreign company. We usually get at this by asking the foreign company why it is looking to do a China joint venture and what specifically its joint venture will do in China. We then listen to their explanations with an eye toward determining whether a joint venture is necessary on either legal or business grounds. China’s economy remains closed to foreign businesses in many industries and part of that closure involves requiring foreign companies enter into the Chinese market only via a joint venture.

If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. Oftentimes, we will at this point ask the foreign company about their prior experiences in and with China and their prior experiences in other countries around the world. The experience in China question is deployed to gage their knowledge of China. The question about their experiences around the world question are to gage how they typically enter foreign markets — more specifically, whether they use joint ventures or not.

Around half the time it quickly becomes apparent to us that a joint venture will likely be a bad idea. Generally (though not always), if you can go into China via a Wholly Foreign Owned Entity (WFOE), doing so is preferable to a Joint Venture. For the long (but not too long explanation) for why this is the case, I urge you to read this article I wrote for the Wall Street Journal about a decade ago, entitled, Joint Venture Jeopardy. Generally (though not always) if you can go into China via a manufacturing contract, a reseller agreement, a distribution agreement, or some sort of service agreement, doing so will also be preferable to a Joint Venture.

If our China corporate lawyers initially believe that some way of going into China other than via a joint venture would be preferable for the foreign company, we tell them that and we explain why we see things that way and we ask them whether they agree with our assessment. Roughly 50 percent of the time the foreign company will tell us that they did not realize they had other options and they would like to discuss those other options with us. Many times, these same companies tell us that their putative Chinese joint venture partner had claimed that doing a joint venture was legally necessary and they feel (rightly) deceived upon learning this was a lie.

Roughly 50 percent of the time the foreign company will reveal that they fully understand they have options other than a joint venture for going into China or for doing business in China, but doing a joint venture makes sense for them because of what their putative Chinese joint venture partner will be able to contribute. At that point, we usually tell them how they can secure those same contributions from that same Chinese company, but via a contract, and we ask them whether that might make sense for them. Much of the time their response to that will be something along the lines of how they understand all this but their potential Chinese joint venture partner is well-positioned to help them in China and it has made clear it will do so only via a joint venture. Other times the foreign company has never had a “joint venture versus no joint venture” discussion with its Chinese counter-party and it decides it should have such a discussion before moving forward in forming a joint venture.

At this point we move forward with the joint venture for those foreign companies that still wish to go into China as a joint venture and we move forward along other avenues for those who are now uncertain whether a joint venture makes sense or have determined that a joint venture is not for them.

In our next post, we will discuss what is usually our next step for those moving forward on the China joint venture track — how to determine whether the Chinese company with which they are looking to form a joint venture is the right Chinese company with which to form the joint venture.

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.