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Beware The China Joint Venture, But Do Not Ignore It Completely

International attorneys

The other day we did a post, entitled, Beware The China Joint Venture, where we again railed against doing joint ventures in China.  Kent Kedl, of Technomic Asia, which describes itself as “a strategic consultancy firm whose mission is to assist globally expanding companies to build their Asian businesses through high quality market strategy and implementation assistance,” left a great comment analogizing joint ventures to marriages. Kedl says that just as a high divorce rate does not mean all marriages are bad, so too the high rate of China joint venture failures does not mean all China joint ventures are bad. I completely agree, but note the rate of bad joint ventures seems to greatly exceed that of bad marriages.

Mr. Kedl really shines in pointing out the two most common ways companies fail in their joint ventures:

In 20 years of doing China market entry and growth strategy work, we have seen our shares of VERY bad JVs (and participated setting up a couple of them in the very early years) and have concluded that foreign companies most often fail in two ways:

1. They see a JV as their “China strategy.” A JV is NOT a strategy: it is a tool to realize your China strategy (which should be expressed as “We are going after China growth opportunities in Market X with Product Y through Distribution Channels A, B & C and defending ourselves against Competitors D, E & F”). The JV should be seen as only one option for realizing this strategy. China is becoming more open every year to creative structures so a potential JV should be compared to many other options…and chosen ONLY when it is the best way to realize your identified strategy.

2. The second way companies fail in China JVs is to “marry their first date.” Honestly, too many times have companies approached us saying “we want to do a JV with this company that we just met at a trade show.” One US company we know tried to force-fit a JV with a Chinese company like this and (thankfully) gave up after trying for two years. We started over with them again, confirming and validating their China strategy (see above) and, once we determined that our strategy required a JV of some kind, then looked at over 250 different companies before settling on 4 companies to do some serious due-diligence on and then, finally, one to begin negotiations with. By this time they were confident that a JV structure was for them, they knew EXACTLY what it needed to look like in order to work, and they had (as much as can be expected) confidence that they had found the right partner.

What Mr. Kedl describes is exactly what our international lawyers have seen as well in terms of failed joint ventures worldwide.

8 responses to “Beware The China Joint Venture, But Do Not Ignore It Completely”

  1. Ken as usual makes some superb points – both he and Jim McGregor always seem to be able to articulate brilliantly things that many of us know by instinct but often find it difficult to express pithily.
    That said, Ken’s qualified defense of the JV misses one important point – the structure is extremely difficult to manage. Every significant management decision is a negotiation and the process destroys any level of nimbleness that a company needs to survive in China’s increasingly hypercompetitive environment.
    If a JV partner agrees to step back from making HR decisions, leaving staffing and management structure decisions to the management team, the structure can work. But I’d say this sort of “hands-off” approach, one that treats the JV partner as a large shareholder, is extremely rare.
    David

  2. David —
    I think Ken’s qualified defense of the JV fails to comment on the ineherent problems with the structure itself is that I had already done that in spades.
    I agree that having the JV partner stepping back and leaving staffing and management decisions to the management team can be important, yet I have also seen many times where the local partner uses this to extract all profits from the JV. The local partner will charge people a percentage to work at the company for inflated wages and also hire all of his or her friends and relatives. The inflated payroll then saps all profits.

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