China Joint Ventures: We Love Them AND We Hate Them

This blog has developed quite a reputation for not liking China joint ventures and that is not really true. Wary would be a better word for how we feel about them.

I am always a bit bothered when a client or potential client calls about their proposed joint venture and starts out by saying “I know you don’t like joint ventures.” Are we losing business because of this reputation or are we getting more business because people believe that if we give the go-ahead to their China joint venture, it must be as good as they think it is? We will never know for certain, but we can at least try to clear the air.

We like the appropriate and necessary joint ventures; we just think it a mistake to consider a joint venture as the default method for entering China.

Of all the China legal work done by my law firm, our work setting up and dismantling joint ventures is actually my favorite and it is also certainly one of the most lucrative. We charge a flat fee for a large chunk of our China legal work, but we always charge hourly for forming joint ventures because setting up a China joint venture can range from fast and easy to difficult and contentious.

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 of the venture. Which of the two companies will control what and what really needs to be done to ensure control and to ensure that no one company gets out of control?
It is this complexity and its attendant fees that we love.

For more on what is involved in the forming of a joint venture in China and when China joint ventures make sense, check out the following:

Just to be clear, we love forming joint ventures, but only when they truly do make sense.

We also love taking apart China joint ventures that have gone wrong. And again, we love doing this 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 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 often to be a bad way to conduct business. My firm has seen this with Russian joint ventures, Vietnamese joint ventures, Mexican joint ventures, Korean joint ventures, Japanese joint ventures, even a Gambian joint venture. I was going to try to explain why this is the case, but I came across a Seth Godin post that does so better than I ever could. Godin posits the following 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.

He is, of course, absolutely right.

For more on the downside of entering into a joint venture in China, check out the following:

What do you think? China joint ventures, good, bad or indifferent?

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