China Joint Ventures: The Long Version, Part 4

This is part 4 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 part 2, we assumed your Chinese counterpart is legitimate and wants to do a legitimate JV with your company and we discussed how to make sure you are truly on the same page with your China joint venture counterpart(s)  regarding what will go into the joint venture and how it will operate once formed. In part 3 we discussed some of the things you need in your joint venture agreement if you are to reap benefits from your China joint venture. In this part 4, we discuss why the China corporate attorneys at our firm both love and hate China joint ventures.

For better or worse, our law firm has developed quite a reputation for not liking joint ventures and so it is not uncommon for us to get calls from potential clients that start with them saying they know we don’t like joint ventures and then explaining why their doing a joint venture is either necessary or will be different from the ones we write about. Are we losing joint venture legal work because of this reputation or do we get more such work because people believe that if we give their joint venture the go-ahead it really is as good as they think it is. Though we will never know, we can at least try to clear the air. So just to be clear: we like appropriate or necessary China joint ventures but we think it a mistake to consider a joint venture as the default method for entering China.

Of all the China legal work my law firm does, setting up and dismantling joint ventures is probably my favorite. I like it because each joint venture is so different and yet all are intellectually challenging. I also like them because they tend to be one of our most lucrative corporate matters we do. We charge a flat fee for about half our China work, but we always charge hourly for joint ventures because setting up a China joint venture can range from fast and easy to difficult and contentious.

Few joint ventures are fast and easy. A joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. That alone ought to tell you how difficult they can be. The most difficult questions usually center around control. Which of the two companies will control what? What really needs to be done to ensure control? What can be done to ensure neither company goes out of control?

Just to be clear, we love forming joint ventures, but only when they truly do make sense and well over half the time we end up counseling our clients against doing the joint venture. Just today I had the following conversation with a potential client (modified ever so slightly for dramatic effect):

Me: I am not clear from your email about what exactly you want to do with your Chinese manufacturer but it sounds like you want to enter into a joint venture with them and that will almost certainly be a bad idea.

Potential Client: Well, we do want to further solidify our relationship with them and we have been thinking a joint venture might be one way to do that. So why do you think it is such a bad idea.

Me: Jokingly, did I say I thought it a bad idea? I think it’s a great idea and here’s why. You will pay us anywhere from $15,000 to $85,000 now to set it up — the more you pay us the less likely it is to actually happen. And then the odds are good that in 3-4 years you will pay us another $50,000 or so to shut it down.

I hope I am doing a good job pitching this to you. Do you want to move forward?

Potential Client: I’ll take two.

Our China lawyers also love taking apart China joint ventures that have gone wrong, and again, not for because it is in any way a good thing for our clients, who usually are in dire straits when they come to us with their joint venture problems, but because resolving joint venture disputes is like a championship chess game, but at our hourly rate.

The problem with China joint ventures is not China-specific; it is joint venture specific. Joint ventures simply tend too to be a bad way to conduct business. Our international lawyers have seen this up close and personal with Russian joint ventures, Vietnamese joint ventures, Mexican joint ventures, Korean joint ventures, Japanese joint ventures, even a Gambian joint venture. Marketing genius Seth Godin beautifully explains why this is the case in his post, “Why joint ventures fail so often“:

There are two reasons joint ventures fail. The joint part and the venture part.

All ventures are risky, because they involve change and the unknown. We set off on a venture in search of something, or to make something happen –- inherent in the idea of a venture is failure. It’s natural, then, for fearful people on both sides of a joint venture to back off when it gets scary. When given a choice between a risk and sure thing, many people pick the sure thing. So any venture begins with some question marks.

The joint part, though, is where the real problem arises. Pushing through the dip is the only way for a venture of any kind to succeed. The dip separates projects that begin from projects that finish. It’s easy and hopeful and exciting to start something, but challenging and often painful to finish it. When the project is a joint one, the pressure to push through the dip often dissipates. “Well, we only have a bit at stake here, so work on something else, something where we have to take all the blame.”

Because there isn’t one boss, one deliverable, one person pushing the project relentlessly, it stalls.

Every joint venture involves meetings, and meetings are the pressure relief valve. Meetings give us the ability to stall and to point fingers, to obfuscate and confuse. If a problem arises, if a difficulty needs to be overcome, it’s much easier to bury it at a meeting than it is to deal with it.

In my experience, you’re far better off with a licensing deal than a joint venture. One side buys the right to use an asset that belongs to the other. The initial transaction is more difficult (and apparently risky) at the start, but then the door is open to success. It’s a venture that belongs to one party, someone with a lot at stake and an incentive to make it work.

Only one person in charge at a time.

Godin is 100% right.