He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 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. While many companies are shying away the Joint Venture structure due to the large amounts of inherent risk, it still has several advantages. 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. Journal of Managerial Psychology. I like it because each joint venture is so different and yet all are intellectually challenging. Potential Client: Well, we do want to further solidify our relationship with them and we have been thinking a joint venture might be one way to do that. Joint ventures include Cummins, Dana, Honda, Nissan, Infiniti, PSA Peugeot Citroën, Renault, Kia and Yulon. Many joint ventures failed to endure, and as multinationals gained experience in China, and foreign investment restrictions loosened, multinationals found it easier in many sectors to start a business from scratch—or to acquire an existing one outright—than to negotiate, establish, and manage a joint venture … Employees? Their temporary nature can be appealing to companies operating in risky waters. Royal Dutch Shell Plc has acquired full control of one of its gas station joint ventures in China as the oil major doubles down on the fuel retailing market in the world’s second-largest economy. JVs help businesses achieve their common objectives and gain insights and entry in unknown markets. This is part one in a series of posts intended to help you spot China joint venture risks and avoid them. It’s easy and hopeful and exciting to start something, but challenging and often painful to finish it. For you to maintain control over your Chinese joint venture you need the following: The Chinese side to a joint venture will usually refuse to agree to these three measures by claiming it is more efficient to have the Chinese side control day-to-day management of the company. 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. The Chinese company will then either go silent or — if it still needs the foreign company — it will provide it with fake documents showing the joint venture was in fact formed with the foreign company having ownership in it. ● The power to appoint and remove the general manager of the joint venture company. When drafting their joint venture agreement, parties should ensure that there is a clear and workable agreement governing the JV structure, with management roles plainly defined. December 19, 2020. The automaker also runs China joint ventures with SAIC Motor and FAW Group. Though we will never know, we can at least try to clear the air. I also like them because they tend to be one of our most lucrative corporate matters we do. AmCham Beijing did not have such constraints and it published the article Avoiding Mistakes in Chinese Joint Ventures. In order to exercise effective control over a joint venture in China, investors must avoid this mistake. If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. Dan is licensed in Washington, Illinois, and Alaska. Crafting a fair and equitable joint venture agreement is crucial, as is ensuring that you have the right Chinese partner. As certain Chinese markets liberalise and allow foreign investors, the local expertise offered by Chinese joint venture partners could prove invaluable. Related Content. As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. This is particularly important given China’s ‘first-to-file’ approach to IP management. 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. Aligning management structures inside the framework of the JV will help to create a unified culture for the operation. All this combines to mean that in most instances the duped party has no good recourse. Foreign companies too often rush into China joint ventures without ever discussing their respective dreams with their China joint venture partner. You need an answer that explains exactly how day to day disputes will be resolved so your joint venture does not collapse. These include (but are not limited to) access to land, distribution channels, business licenses, labor, networks, and Communist-party support. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Employees? 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. 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. I think it’s a great idea and here’s why. Ever. 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. Accordingly, companies must take their time and ensure that they get the deal right. 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. 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. Foreign courts generally will deny jurisdiction in a case involving ownership of a Chinese company and even if they did, Chinese courts are not likely to enforce whatever judgment that foreign court renders. As a result, the investor’s struggle for board control is rendered meaningless. With China’s economy in a downturn and so much uncertainty regarding the future of US/China (and even EU/China) relations, our China business lawyers have of late been seeing a massive uptick in companies looking to do China joint ventures “to share in the risk.” When done right, China joint ventures do share risk. In 2017, the company ranked third in terms of output making 3.3 million vehicles. When given a choice between a risk and sure thing, many people pick the sure thing. Now suppose your JV should have 200 employees but your JV partner hires 350 employees, thereby wiping out any profit for the JV. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy. What do you want our company to do to advance the business of our joint venture? China Briefing looks at the experiences of Starbucks and McDonald’s to capture important lessons. Our deep knowledge of China’s legal system, culture, and business climate make our China practice one of the most sophisticated in the US. The joint venture was started in … Goldman Sachs will buy out its China joint venture partner to make it the most advanced foreign bank to take full ownership of a mainland securities business. Just today I had the following conversation with a potential client (modified ever so slightly for dramatic effect): Me: I am not clear from your email about what exactly you want to do with your Chinese manufacturer but it sounds like you want to enter into a joint venture with them and that will almost certainly be a bad idea. Once these three control mechanisms are under the control of your Chinese joint venture partner, you will likely quickly learn that you have relinquished power to run the JV and bad things will likely result. Meetings give us the ability to stall and to point fingers, to obfuscate and confuse. Moreover, foreign partners must ensure that their objectives are continually aligned with those of their Chinese partner. Chinese requited Joint Ventures are a mechanism for forced technology transfer. After winning the struggle for percentage ownership, as a concession, the foreign investor will frequently allow the local side to appoint the representative director and the company general manager. It’s a venture that belongs to one party, someone with a lot at stake and an incentive to make it work. So just to be clear: we like appropriate or necessary China joint ventures but we think it a mistake to consider a joint venture as the default method for entering China. China has long been an attractive investment destination for Western companies, and given the country’s growth in recent years, valuations of Chinese companies have grown considerably. Publication date: 1 July 1994. Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain. Because there isn’t one boss, one deliverable, one person pushing the project relentlessly, it stalls. Technology? The most difficult questions usually center around control. 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. This new joint venture presents an exciting opportunity for GFI's further growth and development in China. 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. China can be a double edged sword. It provides a roadmap for avoiding what is probably the biggest and most common mistake that gives Chinese joint ventures such a bad name. The common practice of appointing the same person as both representative director and general manager is a mistake. Property? Few joint ventures are fast and easy. The case is a highly visible test of China’s commitment to rule of law in matters involving foreign business. The initial transaction is more difficult (and apparently risky) at the start, but then the door is open to success. The joint part, though, is where the real problem arises. 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. 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. You will pay us anywhere from $15,000 to $85,000 now to set it up — the more you pay us the less likely it is to actually happen. The foreign company believes it owns part of the China joint venture even though it does not. When the project is a joint one, the pressure to push through the dip often dissipates. For companies entering a new market, the risk of borrowing additional funding or seeking outside investors is diminished. It must be made clear that the general manager is an employee of the joint venture company who is employed entirely at the discretion of the representative director. Just as a quick aside: there is a 99.99% chance you will never see a dollar from your joint venture if you use your joint venture partner’s attorney or even any attorney chosen for you by your joint venture partner or you use no attorney at all. Fake and Exploitive China Joint Ventures 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. We often see this done by using one of the following two tactics: For better or worse, our law firm has developed quite a reputation for not liking joint ventures and so it is not uncommon for us to get calls from potential clients that start with them saying they know we don’t like joint ventures and then explaining why their doing a joint venture is either necessary or will be different from the ones we write about. By putting your dreams to the test before you wed. China joint ventures are notorious for their high failure rate. Our China lawyers have seen countless exploitive “joint ventures” but most of them start in the same way. Key takeaways: This will allow the US bank to expand its presence across the country’s booming financial industry. Furthermore, the flexible nature of joint ventures makes them popular in volatile emerging markets. Not only are joint ventures popular with companies embarking on investment into the Chinese market, they are also popular with the Chinese authorities. But this concession cedes effective power and effectively renders the foreign investor’s struggle for board control meaningless. The Chinese side will also often claim they cannot use their political connections unless their own people are the representative director and general manager. Goldman plans to rename the joint venture, Goldman Sachs (China) Securities Company, when it takes full ownership. 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. ISLAMABAD - Chief of Army Staff (COAS) General Qamar Javed Bajwa on Friday lauded the professionalism and dedication of Pakistan Air Force (PAF) and … What is that going to look like? 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. What will you contribute to our joint venture, both now and in the future? Who will make business decisions for our joint venture? The process to boost its stake in the Goldman Sachs Gao Hua venture from 51% to 100% has also been initiated with the local regulators, … With control shared between often commercially competitive shareholders, the opportunities for conflict are rife. HONG KONG: Goldman Sachs Group Inc has signed a pact with its China joint venture partner to wholly own the business, becoming the latest foreign bank to take advantage of the opening up of the financial sector in the world's second-largest economy. As the majority owner, the foreign investor just assumes it has the right to elect the entire board, and thus effectively control the joint venture company. We will be discussing the practical aspects of Chinese law and how it impacts business there. ), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions. A joint venture or JV is a limited liability company structure formed by two foreign investors or a foreign individual and a Chinese company. What can be done to ensure neither company goes out of control? The Chinese company is put in charge of setting up the joint venture because that only makes sense, right? Furthermore, given the importance attached to intellectual property in today’s business world, it is vital that foreign investors take adequate steps to protect their IP from appropriation. Joint ventures simply tend too to be a bad way to conduct business. He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. If you get too many answers you do not like to the above, you move on. 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. How will we resolve our disputes? FAW Group Corporation (第一汽车集团, abbreviated to 一汽) is a Chinese state-owned automotive manufacturing company headquartered in Changchun. Can our own businesses do business with the JV? Intellectual property? I applied this saying to China Joint Ventures (I was certainly not the first to do so) in a Wall Street Journal article I wrote back in 2007, titled, Joint Venture Jeopardy: The much-publicized legal fight between French beverage maker Groupe Danone and its Chinese partner, Wahaha, calls to mind an ancient Chinese proverb often used to describe a bad marriage: “Same bed, different dreams.” Danone accuses Wahaha of breaking contracts and setting up competitor companies; Wahaha denies the allegations. The Chinese side will also often claim they cannot bring their political connections, or their guanxi, into play unless their own people act as the joint venture’s Representative Director and General Manager. What really needs to be done to ensure control? Why though would your JV partner do this and how does your JV partner benefit from doing so? 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 joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. 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. The structure can be very complex, particularly in a jurisdiction like China. 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. The Chinese side to a joint venture usually will refuse to agree to any of the above three control measures by claiming it is more efficient to have them control day-to-day management of the company. A change in leadership styles is a key characteristic of joint ventures. The sooner you seek to discern whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether it makes sense for you to keep spending time and money trying to do the joint venture deal. 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