- - Title: The Re-Emergence of the Joint Venture (in China)?
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PRC regulatory restrictions in the 1980s and early 1990s limited the role foreign investors could play in many sectors of the economy. To overcome these hurdles and gain a foothold in China, many foreign companies invested through JVs.
Changing investment policies and market conditions mean that, in many sectors, a joint venture is the only way a foreign investor can gain a foothold in the China market. In markets driven by domestic demand rather than investment and exports, a JV partner can provide local business and cultural insights, established workforces, distribution channels, brand recognition, and a strong existing client base. Because local knowledge is so important in the China market, only firms with localized management are likely to succeed in the future.
Updated: 2008-05-02
PRC regulatory restrictions in the 1980s and early 1990s limited the role foreign investors could play in many sectors of the economy. For instance, wholly foreign-owned enterprises (WFOEs) were not permitted in many sectors, so foreign investors had to form JVs with local partners. Chinas business and cultural environments during this period also differed drastically from those of more developed markets. To overcome these hurdles and gain a foothold in China, many foreign companies invested through JVs.
Changing investment policies and market conditions mean that, in many sectors, a joint venture is the only way a foreign investor can gain a foothold in the China market.
Stronger Chinese companies, however, are not as eager to enter into partnerships with foreign investors as they once were.
In any joint venture, both sides must clearly define their goals, needs, and exit strategies.
The shift in the governments attitude toward foreign investment, increased focus on the domestic market, and vague references to national economic security in both the new mergers and acquisitions and antimonopoly laws indicate increased likelihood of economic nationalism. Direct government protection of strategic sectors such as auto and steel through regulation and legislation, and indirect protection in the form of local government preferential treatment for key companies, suggests that outright acquisition of domestic companies will not always be possible.
Nevertheless, in markets driven by domestic demand rather than investment and exports, a JV partner can provide local business and cultural insights, established workforces, distribution channels, brand recognition, and a strong existing client base. Because local knowledge is so important in the China market, only firms with localized management are likely to succeed in the future.
WFOEs are an increasingly untenable option in many sectors given the above trend.
Unfortunately for foreign companies hoping to set up JVs, finding suitable Chinese partners has not become easier over the years. In general, Chinese businesses are not as interested in forming JVs as they once were and have become more demanding. Because Chinese companies are stronger now, the need to team up with a foreign partner for management, technology, finance, personnel, marketing, and distribution has been greatly reduced. Chinese companies are optimistic about their prospects and less willing to share future profits with others. Thanks to higher profitability, private equity investments, and stock listings, they have ready access to capital. Local companies thus no longer blindly pursue foreign cooperation but evaluate cases objectively. Foreign parties are generally perceived as slow, inflexible, and lacking an understanding of local realities.
As a result of this paradigm shift, foreign investors that once relied on a Chinese partner to provide only land, fixed assets, and labor—and consequently had many partners to choose from—will discover that finding a Chinese partner can be extremely difficult now. Though plenty of successful Chinese companies exist, few are willing and able to establish successful JVs.
Further complicating the situation, the motivations of Chinese partners in forming JVs have changed and often contradict the interests and intentions of Western partners. For example, the Chinese side may want technology and overseas market access, while the foreign side may wish to protect its intellectual property and existing markets.
Keys to success
Clearly, forming a successful JV is not easy. In many cases, however, foreign investors will have no choice but to seek local partners. These investors should take into account the lessons learned by foreign-invested enterprises over the past 30 years. Most important, they must view a JV as a tool, rather than a strategy in itself.
First, foreign investors pursuing a JV need a clear and realistic idea about why they want such an alliance.
Second, foreign investors must determine what they intend to contribute to the JV, what must be protected (for example, overseas market access and intellectual property), and what they want to get out of the JV (for example, short-term learning or long-term market positioning).
Third, in terms of operations, investors should try to strike the right balance between Chinese and Western ways of doing things.
Finally, once a foreign company sets up a JV, it must assess the operation regularly to determine whether the JV requires restructuring or whether the foreign company should acquire the Chinese partner.
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