In Who is up for Another Round of Joint Ventures, [link no longer exists] Richard Brubaker says China is getting tougher on foreigners and that is causing foreigners to reconsider a China Joint Venture which might allow them. to take advantage of their joint venture partner’s local connections.
Yes, but. . . .
Richard starts his post by relating a recent conversation he had with a friend in a large multinational about the “barriers foreign (industrial) firms face in realizing the ROI on for their investments in China” and how foreign companies react to these barriers:
Which opened up what I felt was the most interesting question. Would firms roll the clock back and start all over again? Would they open up their IP for access to the market? Or would firms begin to exit?
Questions that have no answers, but unlike 3-4 years ago when China was the only market providing positive growth figures for many firms, there are now questions about China’s short/ medium term trajectory.
Which is to say that China, even for all its promise, is perhaps not as compelling as it once was.
JV 2.0? Is it right for all firms?
Things that make you go hmmm.
First off, Joint Ventures are not right for all firms. In fact, they are wrong for most firms.
But Richard definitely makes some good points. China is getting tougher on foreign businesses, both in the way the government treats them and in terms of competition. But in determining how to go into China, there is absolutely no “one size fits all” solution and most companies have many options short of jumping into a joint venture bed with someone you barely know.
For those not familiar with the inherent risks of China joint ventures, I urge you to read Chinese Joint Ventures: The Information The Chinese Government Does Not Want You To Know and Joint Venture Jeopardy. To grossly summarize these two articles on China Joint Ventures, they are risky because you are not on an even playing field with your joint venture partner who may end up having a lot of incentive to kick you out of the joint venture just when the joint venture starts doing well.
Fortunately, there are all sorts of ways to dip one’s toe into China, without doing a Joint Venture.
China Representative Offices.
Opening a Rep Office is one of those ways. In the old days (say 5-7 years ago), Rep Offices were the traditional way to test the China market. Forming a Rep Office was considerably cheaper and easier than forming a Wholly Owned Foreign Entity (WOFE) or a Joint Venture, and yet by doing so, the foreign company could enter China on its own. The problem today with Rep Offices, however, is that the Chinese government has so limited their range of activities they now make sense for only a tiny subset of companies seeking to do business in China.
For more on what it takes to set up a Representative Office in China and the pros and cons of doing so, check out the following:
- The Slow Death Of The China Rep Office.
- The China Representative Office (RO). Got WFOE?
- China Representative Offices: Getting Started
But here’s the thing. For many companies seeking to do business with China, neither WFOEs nor Joint Ventures nor Rep Offices make sense. For many companies seeking to do business with China, avoiding going into China at all can be the best option. In fact, these days, in most instances when a company calls us wanting “to go into China,” our China lawyers‘ default position is to try to figure out how that company can achieve its China goals without going into China at all. I am always saying that running a company in the United States or in Europe is very difficult and time consuming and anyone planning to go into China must first realize that running a company in China is much more difficult and time consuming there, ignoring even the language and cultural difficulties.
China Distribution Relationships.
So if “going into China” via a WFOE a Joint Venture or a Rep Office does not make sense, what else is there? Many companies have no real desire to go into China at all. Rather, their real desire is to make money from China by selling their product or service or technology to China. Looking at it that way, there are three common additional options:
- Selling your product into China via a distributer or distributers based in China.
- Selling your product into China by exporting it from your own country.
- Licensing or selling your brand name or your technology to a company in China.
In Selling Your Product To China Through A Distributor we talked about how distributorships are a viable option for getting one’s product into China, without having to form any sort of China entity to do so:
I often get calls from companies that want to get their product into China or increase sales there. Many times, they are under the false impression they have but two choices: go it alone or form a joint venture with a Chinese company. Entering into a distributorship relationship with a Chinese company (or companies) is another option. From a strictly legal perspective, distribution relationships between foreign and Chinese companies are fairly straightforward and far easier and less risky than joint venture deals and typically far less costly and time consuming than going it alone.
From a business perspective, taking most products into China (be they industrial or consumer), marketing them, selling them, and then delivering them within China, is a massive task for any foreign company. I hate to trot out a cliche, but China is a big and diverse country and it should be viewed as many markets, not just one. Yet with China’s wealth rapidly increasing, it is the rare company that is not at least desirous of adding China to its list of markets. China is becoming a consumer/buyer nation.
For more on China distributorship relationships, check out the following:
China Licensing Contracts.
Licensing or Technology Transfer arrangements are another option for monetizing a product, name or technology in China and we have seen a number of foreign companies succeed with those. In a licensing or technology transfer deal, the foreign company can sell rights to a Chinese company for a limited geographic area (maybe just China) and/or for a limited time. Alternatively, the foreign company can just sell the rights outright to the Chinese company. This sale of rights too can be limited geographically or even by product. For instance, XYZ foreign company may make 20 different products but license or sell rights to use its name and product technology and product IP (such as patents) for only one product and limit that even further by limiting the geographical use to just Mainland China. For more on China licensing agreements, check China Technology Licensing and China Licensing Agreements: The Key Provisions.
Exporting Your Product to China.
Lastly, and certainly not least, is the option of simply export selling your product into China from your own country. We have clients that have done this successfully with industrial, commercial and even consumer products. For more on this straight selling and exporting method, check out What you Need to Know to Sell Your Product into China
So what is the best way to do business with China? It depends….
What do you think?