My law firm’s China lawyers are not big fans of Chinese joint ventures. Yes, sometimes they are necessary. And yes, sometimes they even make sense. But most of the time, a strong contract can achieve the same thing with far less downside risk John Hjelset, executive director of consulting company Norse Dragon Co. Ltd., agrees. In an AmCham Daily post, aptly entitled, The Value of No Partnership, [link no longer exists] he touts “the virtues of going it alone in China.” Mr. Hjelset sees cultural conflicts inherent in joint ventures and is dubious about locking in with just one company:
“As a general rule, one Chinese partner cannot serve all your needs,” Mr. Hjelset said. “That was one of the weaknesses of the old system – the thought that, ‘If I have a local partner, they can take care of everything from A to Z.’ There is no such thing.”
Mr. Hjelset advocates using Wholly Foreign Owned Enterprises (WFOE) “whenever possible” and “contracting with service providers when necessary.” Mr. Hjelset rightly notes that “it remains very difficult for foreigners to build up sales and distribution networks in China. You can have a WFOE but very strong contract arrangement with sales and distribution.” I found this particularly interesting because twice within the just the last few weeks I have had a discussion with new clients that went something like this:
Client: I understand your firm can help me set up my China Joint Venture.
Me: Tell me about the Joint Venture.
Client: We are going to be manufacturing our product in China. We are already selling it in China but we can cut costs by manufacturing it there.
Me: Have you considered the IP risks in manufacturing in China, as opposed to just shipping your product over there?
Me: Okay, we will talk later about what we will need to do to protect your IP in China, but first, why a Joint Venture?
Client: Because we need help distributing and selling our product in China.
Me: Why do you need this help through a Joint Venture.
Client: [long pause]. What do you mean?
Me: Why do you believe you need to enter into a Joint Venture to get this sort of help?
Client: [long pause] Because we need help with distribution and sales.
Me: Will this be your first Joint Venture anywhere in the world?
Me: How do you distribute and sell your products right now?
Client: We have sales representatives all over the United States and in Europe.
Me: What is your arrangement with them?
Client: What do you mean?
Me: Well, you are not in a Joint Venture with them, so am I right in assuming you have some sort of contractual arrangement with them?
Client: Yes. That’s right.
Me: Unless you give me some good reasons otherwise, we are almost certainly going to recommend you do the same sort of thing in China. China Joint Ventures are expensive to set up and difficult to keep in good order. They typically lead to problems. Has your Chinese counterpart told you they will only work with you through a Joint Venture?
Me: Is there anything you want your Chinese counterpart to do that could not be covered by a contract similar to the ones you have with your sales and distribution people here in the United States?
Me: Well then, one of the things we will want to do is see if we cannot realize all of your China sales and distribution goals simply by getting your Chinese counterpart to sign a contract enumerating your relationship with them.
Bottom Line: There is usually no reason to do a China Joint Venture, though occasionally there is.
For more on the benefits of going into China as a Wholly Foreign Owned Entity instead of in a Joint Venture, check out the following: