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Doing Business in China: Joint Ventures Show Signs of Aging, but Still Have Some Life

By Doug Young

This week’s column takes us back to the “Two to Tango” theme I’ve discussed before, and whether one really needs to waltz with a local partner when coming to China or might be better off dancing alone. More specifically, we’re zeroing in this week on a sacred cow called the “joint venture” — a staple in the lexicon for anyone who has done business here over the last few decades.

My discussion of joint ventures began in a recent meeting with Singaporean Lub Bun Chong, author of the book “Managing a Chinese Partner,” who had his own very specific ideas on choosing partners for such ventures, some of which I’ll describe shortly. But the more people I talked with, the more I realized that many consider this concept almost as obsolete as the collective farms that used to make up China’s agricultural landscape many years ago.

All that said, the joint-venture concept hasn’t been relegated to the history books just yet, and is still an important tool for certain kinds of businesses, which again I’ll describe shortly.

But first let’s take our own waltz back in history to the 1980s, when China was just beginning to open to the West and presented an alien-like world to the many companies that were enticed by its huge market but also daunted by its socialist landscape. Back then, there weren’t really many options for foreign companies anyhow, since the law required pretty much everyone to enter the country through a Sino-foreign joint venture.

Just about all my earliest memories of foreign companies in China involved joint ventures, starting with the earliest group of joint-venture hotels that were among the first to brave the local market. Those hotels were usually managed by the foreign partner, while the Chinese mostly provided the real estate and access to local resources like government officials and workers.

Those early days are filled with stories of joint ventures gone awry, usually due to unexpected behavior from the local partner. The textbook case that comes up time and again involves French food giant Danone, whose local partner set up its own competing business that ultimately undermined and killed the venture. One old-timer who worked at a smaller food venture in the 1990s described another horror story in which he got taken hostage in his own office by workers from his partner company when opinions started to diverge on their venture’s future direction.

But these horror stories do seem to get more ink than the more-successful joint ventures, such as ones involving General Motors and Volkswagen, which both mostly work in China with longtime Shanghai partner SAIC Motor.

Required by law

That leads nicely into one of the themes for the continued relevance of joint ventures, which lies in certain areas where China still won’t allow wholly foreign-owned enterprises, or WFOEs, pronounced something like “woofie.” It’s safe to say that these areas are mostly relegated to sensitive industries like cars, as well as education, culture and medical services.

But like everything else in China, the list seems to be constantly changing, including which industries are off-limits outright; which of them allow foreign partners to own a controlling stake; and which ones limit the foreign partner to a minority stake. The list is also open to interpretation in certain gray areas, and I strongly advise anyone considering a move into one of these areas to consult a China-based foreign lawyer for the latest on what is and isn’t allowable.

Legal requirements aside, the other place where people say joint venturing still makes sense is in areas where a Chinese partner might have resources or other capabilities that would be difficult for a foreigner to attain. Such capabilities could include things like market access for people who want to sell to local consumers, or access to certain materials for manufacturing that might not be readily available outside of circles dominated by big state-run companies.

That said, one of my contacts pointed out such requirements can often be bridged in other ways these days, such as through the outright purchase of a local company, or other forms of partnership short of an equity joint venture. Accordingly, he said, joint ventures are increasingly becoming a dinosaur for everyone outside the state-mandated sectors.

In cases where a joint venture partner is really needed, Chong described an interesting approach of co-dependency that he said often works best, even if it sounds a little negative. Others have put a slightly more-positive spin on the same approach, saying these ventures work best when the partners’ interests are aligned. Either way, the idea is to create a situation in which each party has something the other wants and can’t easily get on its own.

Chong described a joint venture that he helped to form more than a decade ago as a case in point, involving a China-based outdoor advertising joint venture for U.S. media giant Clear Channel, now known as iHeartMedia. In that case, the big poker chip that Clear Channel brought to the table was its access and expertise in global capital markets, since the local partner wanted to list the company overseas eventually, Chong said.

To cement the co-dependency, Clear Channel made sure the local partner received significant equity in the venture that would become stock in the eventual listed company, lessening any incentive to undermine it at a later date. The formula seems to have worked in that case, and the venture continues to survive to this date as a Hong Kong-listed company, despite a bumpier history for its U.S. parent over that period.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.

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