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China Joint Ventures: We Love Them AND We Hate Them

China joint venture lawyers

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?

3 responses to “China Joint Ventures: We Love Them AND We Hate Them”

  1. I appreciate your honesty on this, as compared with so many out there who are always flogging joint ventures as the way to go just because there is so much money in forming them. It’s just like offshore companies. There are the fly by night people who make them sound essential because they will profit by them and then there are the real law firms that say “it depends.” I have been practicing law for 20 years and it just about always depends and there is no one size fits all.

  2. I am a business development manager for a medium sized US technology company. We are currently going through the dilemma of whether our company should change our current license agreement relationship with a local partner into a joint venture with this same partner.
    I feel more secure with the idea of forming a joint venture as it promises to be a more long-term partnership than our current license model. We have been working with our partner for 2 years now and after establishing a fair amount of trust, it feels like the logical next step. (I feel as if I am talking about getting married 🙂 )
    Also, as a small company with limited amount of capital the JV seems to be the best model for us because we do not have to invest anything more than our technology as our partner is willing to invest the capital.
    Am I wrong to think a JV would be better than using our current Licensing Agreement? I would love some feedback.
    Can someone provide more information, perhaps a website, on the Chinese government laws on forming joint ventures? I want to make sure there are no limitations of unreasonable laws with regards to investing only technology into a JV.

  3. I feel exactly the same way. Joint Ventures make sense in the few instances in which they make sense, but otherwise they don’t. The problem is that there are a large number of consulting companies and law firms who want us to believe they are nearly always a great idea and they want us to believe it for the reasons you hint at in your article: because they make a lot of money consulting on the front end and then they make a lot of money consulting on the back end. They also in some cases are getting slipped substantial extra cash by the Chinese joint venture partner to make the deal go through even though they are suppposed to be working for the foreign company. It is the money that goes to the consulting and law firms on these joint ventures that helps to better understand why it is that there have been so many of them that were clearly terrible for the foreign party from their very inception. You often write on how if someone is going to go into a joint venture they need to avoid certain common pitfalls and that is so true. It really is buyer beware in this.

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