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) predates joint ventures — it applies to any sort of partnership without a meeting of the minds.
Far too often, foreign companies and Chinese companies rush into joint ventures without ever discussing their respective dreams.
Many years ago, a client about to fly to China to meet with a potential Chinese joint venture partner asked my law firm’s joint venture lawyers to help formulate questions to ask of the Chinese company to help determine whether to enter into the joint venture deal. We provided a list of issues to raise at that meeting, and have provided a similar list (honed a bit more each time) to subsequent clients facing the same situation. The goal of raising these issues is to determine whether the two companies share the same dreams, and whether the Chinese company is JV worthy.
Currently, this list includes the following questions:
- Why are you seeking to form a joint venture with us and what will be the goals of the joint venture?
- What will you do for, and with, the joint venture?
- What exactly do you plan for your company to be doing to advance the business of the joint venture and what exactly do you expect our company will be doing to advance the business of the joint venture?
- Who will make business decisions for the joint venture, and what will mechanisms will we use for reaching a decision?
- What will each of us be contributing to the joint venture? For instance: property, technology, intellectual property, money, know-how, and employees. If the joint venture loses money, who will be responsible for putting more money in?
- How will we resolve disputes? China lawyers like to include provisions saying that we will work out any issues among ourselves and if that fails, we will arbitrate. The tougher question is: how will we deal with day to day disputes in a way so that 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 out?
Posing these questions puts the dreams to the test.
For more on China joint ventures, check China Joint Ventures: The Information the Chinese Government does not Want you to Know and Joint Venture Jeopardy.