July 2016 | FEATURE | MERGERS & ACQUISITIONS. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner. In short, a Joint Venture in China is a limited liability company that is created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, rewards, and the management of the joint venture. That said, JVs can be risky endeavours for companies to pursue. Many China joint ventures fail because the foreign partner made the fundamental mistake of believing its 51% (or more) ownership of the joint venture gave it effective control over the joint venture. How can you avoid a bad joint venture marriage? Americans are feeling less optimistic about doing business in China. Intellectual property? When this happens, your best bet will usually be to either reduce your investment to a minority share or abandon it altogether. What can be done to ensure neither company goes out of control? Equity Joint Ventures provide a means by which foreign and Chinese companies can collaborate on projects within China with limited liability, where the foreign and Chinese partners contribute to the equity in the venture in alignment with their shareholdings. The Chinese company convinces a foreign company to do a joint venture and then gets the foreign company to contribute money, technology, or know-how to the joint venture. Our lawyers have earned international acclaim for providing cutting-edge legal solutions to US- and foreign-based companies doing business in or with China. A successful joint venture can present valuable opportunities while reducing costs and risks across the board. Pak-China joint ventures vital to face emerging geo-strategic challenges: COAS Air Exercise Shaheen-IX | Gen Qamar Javed Bajwa says what makes PAF second-to-none is the high morale. The dip separates projects that begin from projects that finish. The article then goes on to note how “thoroughly vetting your joint venture partner” will “dramatically increase your likelihood of success,” but states that most China joint ventures fail because the foreign partner made the “fundamental mistake” of believing its 51% ownership gave it effective control over the joint venture: Foreign investors too often assume Chinese joint venture companies are managed according to a common Western model, under which a board of directors has controlling power over the company. Once formed, the JV becomes a new legal entity in which the liability of the shareholders is limited to the assets they brought to the business. Eventually (usually many years later) the foreign company starts getting frustrated about never receiving any money or even news from the joint venture and contacts a China lawyer for help. To help our clients determine whether they have found their dream JV partner, we have compiled a list of questions they should ask their potential Chinese joint venture partner to determine whether there is sufficient commonality to press forward with their joint venture deal. The Chinese side will also often claim they cannot use their political connections unless their own people are the representative director and general manager. Our vast experience handling China-specific entity formation, contracts, intellectual property matters, and dispute resolution gives our clients the security of knowing they have a truly seasoned legal team behind them. Because there isn’t one boss, one deliverable, one person pushing the project relentlessly, it stalls. All ventures are risky, because they involve change and the unknown. Miscommunication between partners, conflicting management styles and cultural differences are just a few of the potential flashpoints which could arise during the course of a joint venture. Unintentionally, this concession cedes effective power. Once power over operations is out of your hands, it becomes very difficult to run a successful partnership in China. But this concession cedes effective power and effectively renders the foreign investor’s struggle for board control meaningless. Joint ventures in China: overview. AmCham Beijing did not have such constraints and it published the article Avoiding Mistakes in Chinese Joint Ventures. By putting your dreams to the test before you wed. China joint ventures are notorious for their high failure rate. Moreover, foreign partners must ensure that their objectives are continually aligned with those of their Chinese partner. Employees? If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice. Intellectual property? How to Whip Your China Employee Handbook into Shape, SMEs and China: Much Opportunity but Little Room for Error, How to Avoid China Employment Law Problems: Employer Audits, China Employment Contracts: Do Them in Chinese, China Expat Pay: Splitting with Hong Kong is Illegal and Dangerous, serve process on the defendants under the Hague Convention. It currently holds 51% in the venture. You need an answer that explains exactly how day to day disputes will be resolved so your joint venture does not collapse. For parties looking to enter the Chinese market, it is essential that they keep in mind the relative immaturity of the Chinese economy; not only are private businesses a fairly recent development, the country’s legal system is still underdeveloped compared to mature markets in the west. Way back in 2008, co-blogger Steve Dickinson was the legal columnist for one of China’s most prominent English language business publications. What will your company do to advance the business of our joint venture? There is a long, documented history of this seemingly minor consideration dooming EJVs. There is an old Chinese saying that applies to any sort of partnership without a meeting of the minds: “same bed, different dreams” (同床异梦). The joint venture was started in … Ceding control over it as a matter of convenience is a mistake. It is necessary to have control over the day-to-day management of the joint venture company. Foreign companies too often rush into China joint ventures without ever discussing their respective dreams with their China joint venture partner. Normally operation of a join… In this post, we are going to assume that your Chinese counterpart is legitimate and truly wants to do a legitimate JV with your company. In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc. Marketing genius Seth Godin beautifully explains why this is the case in his post, “Why joint ventures fail so often“: There are two reasons joint ventures fail. China Briefing looks at the experiences of Starbucks and McDonald’s to capture important lessons. Accordingly, companies must take their time and ensure that they get the deal right. Our China lawyers also love taking apart China joint ventures that have gone wrong, and again, not 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 championship chess game, but at our hourly rate. Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain. When given a choice between a risk and sure thing, many people pick the sure thing. The first thing you should know is that Chinese companies will often use the false promise of a joint venture to entice foreign companies to provide them with the foreign company’s technology. If you get too many answers you do not like to the above, you move on. What do you expect us to contribute to our joint venture, both now and in the future? Crafting a fair and equitable joint venture agreement is crucial, as is ensuring that you have the right Chinese partner. Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where … If our joint venture loses money, who will be responsible for putting more money in? Local partners, for their part, welcome this added sophistication in their domestic offerings. That Chinese documents state Ross was on the board of a Chinese joint venture until 2019 has not been previously reported. Just to be clear, we love forming joint ventures, but only when they truly do make sense and well over half the time we end up counseling our clients against doing the joint venture. Me: [Jokingly] Did I say I thought it a bad idea? Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. Organisations embarking on a joint venture in China, irrespective of the industry, should develop their own clear and well defined contracts, amended and adapted to account for commercial practices in China, as well as its legal landscape. Abstract. This new joint venture presents an exciting opportunity for GFI's further growth and development in China. The U.S.-China trade war started heating up in … 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. Our international lawyers have seen this up close and personal with Russian joint ventures, Vietnamese joint ventures, Mexican joint ventures, Korean joint ventures, Japanese joint ventures, even a Gambian joint venture. The case is a highly visible test of China’s commitment to rule of law in matters involving foreign business. Dan is licensed in Washington, Illinois, and Alaska. A joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. Though we will never know, we can at least try to clear the air. In 2017, the company ranked third in terms of output making 3.3 million vehicles. Takao Satow. by Chris Carr and Lotus Sun, Minter Ellison. Joint ventures in China – as elsewhere - are notoriously difficult to manage successfully. Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. This is part one in a series of posts intended to help you spot China joint venture risks and avoid them. Goldman Sachs is set to buy out its China joint venture partner, which will make it the most advanced foreign bank to take full ownership of a mainland securities business. Since the board is elected by a majority vote of company owners, most foreign investors strive to obtain a 51% ownership interest in their China joint venture. Tweet. What sorts of bad things? China can be a double edged sword. How will we resolve our disputes? How can this be achieved? The most difficult questions usually center around control. However, China's strict commercial laws mean that joint ventures often have to be entered into despite the risks. JPMorgan took 71% of … With control shared between often commercially competitive shareholders, the opportunities for conflict are rife. I hope I am doing a good job pitching this to you. Our deep knowledge of China’s legal system, culture, and business climate make our China practice one of the most sophisticated in the US. But when done wrong they actually increase the risk, but only for the non-Chinese company. However, many analysts argue that for a company looking to enter the Chinese market, a joint venture should be its last resort. Why do you think that is a bad idea? Share: Share. What mechanisms will we use for reaching JV decisions? In my experience, you’re far better off with a licensing deal than a joint venture. Restaurants, bars, building and construction, car production, and cosmetics are just a few of the industries in which foreign companies would need to seek a joint venture with a local partner. I think it’s a great idea and here’s why. For companies entering a new market, the risk of borrowing additional funding or seeking outside investors is diminished. Property? He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Tahir Niaz. “Well, we only have a bit at stake here, so work on something else, something where we have to take all the blame.”. Goldman Sachs moved Tuesday to acquire the remaining stake in a China securities joint venture as it eyes further growth in the world's second biggest economy. As such, strategic JVs can bring success and mutual benefit to both partners. One side buys the right to use an asset that belongs to the other. The Chinese company is put in charge of setting up the joint venture because that only makes sense, right? The good news is that this sort of thing never happens to foreign companies that use their own qualified China lawyer, as opposed to their joint venture partner’s lawyer or a lawyer not familiar with China. Money? While many companies are shying away the Joint Venture structure due to the large amounts of inherent risk, it still has several advantages. Joint ventures can be a risky proposition, but they can be a valuable tool for companies hoping to crack the Chinese market, if done properly. Allogene Therapeutics has started a joint venture with Overland Pharmaceuticals, a newly formed Chinese biotech, to bring allogeneic, or "off the shelf," cell therapies to greater China and other Asian countries. Journal of Managerial Psychology. What will you do for and with our joint venture? Most of the international banks in China own 51% of their securities businesses, which typically house investment banking operations, with a Chinese partner. Know-how? If you do not, you will not have control over the joint venture’s day-to-day management. This answer is meaningless. The automaker also runs China joint ventures with SAIC Motor and FAW Group. In order to exercise effective control over a joint venture in China, investors must avoid this mistake. 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