A Joint Venture (JV) is a business arrangement in which 2 or more parties agree to pool their resources for the purpose of accomplishing a specific task. Its success is directly connected to the continued cooperation of the parties involved. In a Joint Venture in China each participant is responsible for profits, losses and costs associated with the project.
As a foreign investor, there are two main reasons for creating such a structure:
- Need of a local partner, more likely to know the specificities of the host country, including administrative and policy
- Local partner is able to provide tangible benefits such as well-established distribution channels, public relations or a thorough knowledge of the local
It is necessary to have a strategic plan in place and both parties must be committed to focusing on the future of the partnership, rather than just in the immediate returns. In order to achieve success, honesty, integrity and communication within the Joint Venture are necessary.
Establishment Conditions & Procedures
The process of establishing a joint venture usually takes between 4-6 months. Foreign investors may wish to hire a consulting firm to represent their interests, while building JV, thus benefiting from their long-standing relationships with local authorities and procedural know-how.
All applications must be submitted in Chinese but can also be written in a foreign language, documents in both languages have the same validity. The structure of a joint venture can be either only contractual (cooperation agreement) or both contractual and company (cooperation agreement + joint venture).
Conclusion of a Cooperation Agreement
It is part of the joint operation and contains the following information:
- Defining the objectives of the joint operation: this entry will be very useful in case of a dispute over the interpretation of a clause.
- The modalities of setting up steering committees and their functioning.
- The withdrawal clauses for the terms and conditions for the departure of a partner.
- Hardship clauses: they include the revision of the terms of the contract in case of external events and unpredictable upsetting the balance of the contract.
- The contributions of each party to the agreement: commitment to meet the financial needs of the operation advances, loan guarantees, technology transfer and distribution of profits.
- The means of resolving conflicts: by processes of settlement (expertise, conciliation), or arbitration. A clause conferring jurisdiction on a court is desirable.
Creation of a Legal Structure
It may be considered by the partners in order to strengthen the cooperation agreement. The adopted form can be a structure with legal personality (Limited Liability, etc…) or without (joint venture, etc.).
You should choose a legal form under the laws of the host country and complete the formalities of incorporation required therein.
Before you can embark on a JV, the following documents must be obtained:
- The work permit and residence.
- Certificates of approvals obtained from the Office of Planning and Public Security Bureau (PSB see website) of the municipality or the province.
- The approval of the recording industry and trade Office for the right to use a company name.
- A report on the capital contributed by a Chinese accountant.
After obtaining all the documents, the application procedure can take effect.
1. Local Partner Establishment
A Joint Venture allows you to use the labor force and the existing facilities of the local partner. Moreover you may benefit from the existing sales and distribution channels.
2. Influence and “Guangxi”
Using a partner’s network may help you to establish good relations, avoid administrative issues and other bureaucratic complexities.
3. Shared Responsibility
A local partner allows to share the risks, workload and financial responsibilities.
4. Market Entry for Restricted Business Segments
Some activities in China are highly regulated. Partnering with a local organization may be the only way to access them.
1. Underline Strategic Goals
The two parties may not share same strategic or commercial interests. Chinese companies tend to priorities growth while multinationals emphasize profitability over growth.
2. Conflict of Interests
Due to unavoidable unequal contributions in knowledge, resources or investment it can be difficult to agree on how to share capital gains.
3. Protection of Intellectual Property
There are risks associated with the technology transfer and management of intellectual property.
4. Natural barriers
When 2 organizations with different cultures and values combine there will be obstacles, misunderstandings and difficulties.
Chinese law states in principle three legal forms for foreign investors seeking to settle in China: representation, Joint Venture (JV) and Wholly Foreign Owned Enterprise (WFOE). Among them, the Joint Venture has long been the first form of investment allowed and the favored operation by foreign companies in China for it is often the only one allowed.
Traditional markets are no longer sufficient for the development of firms that will seek growth in emerging markets. China has over the last decade become the new Eldorado for investors. With a growth of around 7%, China is a new market with extremely large possibilities.
To do this, they tend to forge cooperative strategies to control the risks associated with these (cultural distance, regulatory barriers, etc…)
Among the various models of cooperation, international joint ventures are considered the preferred mode of entry by firms. However, the rate of “end” of these organizational forms remains high, it varies between 30% and 70% depending on the context studied.
So let’s take an example here of a great fictional French company specialized in frozen products. Eager to expand its business, it decided to try its luck in China, but although its business is doing for the better in Europe, its knowledge of Asian markets remains extremely limited. To do this, it decided not to try alone, assessing cultural risk as too important, because many uncertainties remain about the success of such products; no guarantee that the Chinese public is used to this type of product consumption, exclusively designed for cold chain, thus making the project uncertain.
We are in 1996 and China is experiencing an unprecedented economic boom; the best time to try to penetrate this market altogether. To this end, the French company decides to partner with a Chinese company facing the food distribution. Both groups sign thus an agreement to create a joint venture, owned as to 51% by the French company and 49% by the Chinese partner.
Success was immediate and fashion of fresh product consumption that can be maintained for a long time, develops at high speed.
However, after nearly a decade of fruitful collaboration, the relationship deteriorates and conflicts break out from 2006 because the French company discovers that his partner has violated the non-compete clauses specified in the contract. Indeed, it appears that the Chinese group produces and markets similar to those sold by its French partner products.
This conflict will therefore result in the transfer in 2009 of shares in the French company in the joint venture to its Chinese partner entity.
This type of business purposes is unfortunately not uncommon and therefore deserves to be highlighted. Starting a business in a new market like China is an ambitious if not perilous when one’s knowledge of the Middle Kingdom is not large enough.
Partnering with a local seems therefore to be the wisest decision insofar as it will be aware of customs and usages of his country, the mode of economic operation, ways to trade, etc …
Some pitfalls are avoided, a fortiori, primarily those related to cultural divide, but then others will appear as was the case in this example.
Starting a business as a duo, or with more economic partners, is to be exposed to a variety of litigation or intellectual property, financing or profit, for example.
In such a situation, INS Global Consulting appears to be the best alternative. Specialized in consulting since 2006, we invite you to start your business freely in China independently while facilitating the implementation process.
We handle the paperwork associated with obtaining work visa, we provide space for your consultants, but we also offer a headhunting service to help you start your business in China, etc … This is only a sample of the different benefits that INS offers.
Keep in mind that operating in China without partner, JV or other format of a business and without being an expert in Chinese culture is possible through INS.