chinese joint ventures
It’s a venture that belongs to one party, someone with a lot at stake and an incentive to make it work. 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. Today, newly-formed WFOE’s outnumber new JV’s in China. But when done wrong they actually increase the risk, but only for the non-Chinese company. Since the board is elected by a majority vote of company owners, most foreign investors will strive to obtain a 51% ownership interest in the EJV. If our joint venture loses money, who will be responsible for putting more money in? 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. 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. In many cases, technology transfers are effectively required by China's Foreign direct investment (FDI) regime, which closes off important sectors of the economy to foreign firms. Know-how? Americans are feeling less optimistic about doing business in China. Ceding control over it as a matter of convenience is a mistake. The Chinese company is put in charge of setting up the joint venture because that only makes sense, right? Instead of actually setting up a joint venture that gives the foreign company an actual ownership stake in the joint venture company, the Chinese side takes the assets from the foreign company but never forms a joint venture. What will you contribute to our joint venture, both now and in the future? The contract must comply with the Law and Regulations of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures. Our deep knowledge of China’s legal system, culture, and business climate make our China practice one of the most sophisticated in the US. Joint ventures in China – as elsewhere - are notoriously difficult to manage successfully. In order to exercise effective control over a joint venture in China, investors must avoid this mistake. 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. Ever. This is part one in a series of posts intended to help you spot China joint venture risks and avoid them. The process to … Drafting a joint venture agreement anywhere is a difficult and potentially problematic process – and that is very much the case in China. How will we resolve our disputes? AmCham Beijing did not have such constraints and it published the article Avoiding Mistakes in Chinese Joint Ventures. The size of the market in China and the speed at which the national economy has developed over the last 20 years makes it an obvious destination for investment. The common practice of appointing the same person as both representative director and general manager is a mistake. Now suppose your JV should have 200 employees but your JV partner hires 350 employees, thereby wiping out any profit for the JV. A joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. Most of the international banks in China own 51% of their securities businesses, which typically house investment banking operations, with a Chinese partner. Depending on the sector in question, a JV may be only way to register in China if a certain business activity is still controlled by the government. Though we will never know, we can at least try to clear the air. What will your company do to advance the business of our joint venture? All ventures are risky, because they involve change and the unknown. 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. 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. 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. Leadership Styles and Organizational Effectiveness in Chinese‐Japanese Joint Ventures. Wrong. Suppose your Chinese JV partner can make the JV hiring and firing decisions. 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. By forming a joint venture, companies gain access to new markets and distribution networks, along with new (and often greater) resources – both human and non-human. And then the odds are good that in 3-4 years you will pay us another $50,000 or so to shut it down. Do you want to move forward? As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. 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). 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. “Well, we only have a bit at stake here, so work on something else, something where we have to take all the blame.”. But this concession cedes effective power and effectively renders the foreign investor’s struggle for board control meaningless. Pushing through the dip is the only way for a venture of any kind to succeed. These claims usually are used to disguise the Chinese company’s efforts to gain operational control over the company and your relinquishing these three control mechanisms to your Chinese counterpart will likely be problematic for you. There are a number of risks associated with conducting business in China. As majority owner, the investor then assumes he has the right to elect the entire board, and thus effectively control the company. 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. That said, JVs can be risky endeavours for companies to pursue. Since joint ventures became feasible in China in the 1980s, many overseas companies chose their joint venture partners poorly. What do you want our company to do to advance the business of our joint venture? Our law firm has handled at least a dozen of these matters where our ten minute search revealed there never was a joint venture. If you don’t realize this after reading the below, I don’t even know what more to say. As such, strategic JVs can bring success and mutual benefit to both partners. So any venture begins with some question marks. Before you do a joint venture with anyone you should make sure the two (or more) of you are truly on the same page regarding what will go into the joint venture and how it will operate once formed. Your Chinese JV counterpart chooses to buy (possibly inferior) products and services at inflated prices from his or her own companies, including from the company that is your JV partner. Joint ventures in China: overview. Why do you think that is a bad idea? It provides a roadmap for avoiding what is probably the biggest and most common mistake that gives Chinese joint ventures such a bad name. If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. A change in leadership styles is a key characteristic of joint ventures. 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, … We will be discussing the practical aspects of Chinese law and how it impacts business there. 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. 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 censors rejected it and we have always assumed they did so because it would have been detrimental to Chinese companies seeking joint ventures that would greatly favor them. December 19, 2020. If you get too many answers you do not like to the above, you move on. 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. He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. Know-how? Moreover, foreign partners must ensure that their objectives are continually aligned with those of their Chinese partner. Can our own businesses do business with the JV? Unintentionally, this concession cedes effective power. That alone ought to tell you how difficult they can be. Employees? Way back in 2008, co-blogger Steve Dickinson was the legal columnist for one of China’s most prominent English language business publications. Joint ventures simply tend too to be a bad way to conduct business. In many respects, the country is an attractive proposition for investors and acquirers, yet misjudging the landscape can be disastrous for an outsider. 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. What really needs to be done to ensure control? When given a choice between a risk and sure thing, many people pick the sure thing. As a result, the investor’s struggle for board control is rendered meaningless. The joint venture was started in … 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. China can be a double edged sword. Concept of Joint Ventures (JVs) in China Joint Ventures or JVs are business structures where two or more entities combine their capital, know-how, assets, and other resources. JPMorgan took 71% of … The joint part, though, is where the real problem arises. That Chinese documents state Ross was on the board of a Chinese joint venture until 2019 has not been previously reported. The article then sets out the following basics for maintaining control over your Chinese Joint Venture: ● The power to appoint and remove the JV’s representative. 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. When the project is a joint one, the pressure to push through the dip often dissipates. This is particularly important given China’s ‘first-to-file’ approach to IP management. Furthermore, the flexible nature of joint ventures makes them popular in volatile emerging markets. The Chinese side will also often claim they cannot use their political connections unless their own people are the representative director and general manager. What can be done to ensure neither company goes out of control? What is that going to look like? In 2017, the company ranked third in terms of output making 3.3 million vehicles. Technology? A list of “key domestic contacts” for a joint venture involving Jim and Hunter Biden and now-bankrupt CEFC China Energy Co. included former Vice President Joe Biden’s current running mate Sen. Kamala Harris, among other prominent Democrats, Fox News has learned. Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where … 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. The article starts out by noting that with “the exception of some market sectors, China is remarkably open to foreign investment, and in the past several years WFOEs [Wholly Foreign Owned Entities] have become the most common vehicle for foreign investment, partly due to investor skittishness as stories about past problems with Chinese EJV [Equity Joint Venture] partners made the rounds.”. Many reasons. 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. FAW Group Corporation (第一汽车集团, abbreviated to 一汽) is a Chinese state-owned automotive manufacturing company headquartered in Changchun. Foreign investors too often assume Chinese joint venture companies are managed according to the common Western corporate model under which a board of directors has controlling power over the company. 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. The common Chinese company response will be something like “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything. After winning the struggle for percentage ownership the foreign investor will frequently give the Chinese side the authority to appoint the joint venture’s Representative Director and the company General Manager. Accordingly, companies must take their time and ensure that they get the deal right. These include (but are not limited to) access to land, distribution channels, business licenses, labor, networks, and Communist-party support. A joint venture in China is a legal entity with limited liability established on the basis of a joint venture contract between Chinese and foreign parties. Firms choosing to partner with a local firm in a joint venture can get a competitive advantage, but determining who your partner should be is a task which must not be taken lightly. With control shared between often commercially competitive shareholders, the opportunities for conflict are rife. 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. By putting your dreams to the test before you wed. China joint ventures are notorious for their high failure rate. 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. by Chris Carr and Lotus Sun, Minter Ellison. While many companies are shying away the Joint Venture structure due to the large amounts of inherent risk, it still has several advantages. This new joint venture presents an exciting opportunity for GFI's further growth and development in China. This can assist both parties to the agreement to stay onside and work within defined parameters. Why though would your JV partner do this and how does your JV partner benefit from doing so? Avoiding Mistakes in Chinese Joint Ventures. Which of the two companies will control what? 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. Dan is licensed in Washington, Illinois, and Alaska. I hope I am doing a good job pitching this to you. The foreign company believes it owns part of the China joint venture even though it does not. 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. Journal of Managerial Psychology. However, many analysts argue that for a company looking to enter the Chinese market, a joint venture should be its last resort. If you do not, you will not have control over the joint venture’s day-to-day management. Whatever the outcome, China’s joint ventures increasingly look like unfruitful unions. This occurs because with its control over your Joint Venture your Chinese counterpart can always make sure the joint venture never makes a profit, but his or her company always does. 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. What if one of us wants to buy the other one out? The extra 150 employees can be some combination of 1) relatives who do or do not kick back a good portion of their grossly inflated earnings to your JV partner, 2) strangers who do kick back a substantial portion of their grossly inflated earnings, and 3) friends and relatives of Chinese government officials who are hired to increase your Chinese JV counterpart’s standing and thereby benefit your JV counterpart and its own companies, 4) friends and relatives of whomever else your Chinese JV counterpart wishes to increase his or her or its standing. Property? 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. Relinquishing these three control mechanisms to your Chinese joint venture partner will almost invariably cause you long-term problems because once your Chinese JV partner has these controls you will essentially have relinquished all power to influence your own joint venture. What mechanisms will we use for reaching JV decisions? Local partners, for their part, welcome this added sophistication in their domestic offerings. It currently holds 51% in the venture. Once power over operations is out of your hands, it becomes very difficult to run a successful partnership in China. Intellectual property? Publication date: 1 July 1994. It’s easy and hopeful and exciting to start something, but challenging and often painful to finish it. They must utilise legal advice, both domestic and Chinese, to protect their interests. How can you avoid a bad joint venture marriage? Chinese requited Joint Ventures are a mechanism for forced technology transfer. ● The power to appoint and remove the general manager of the joint venture company. However, with competition for assets growing, and with many Chinese sellers unwilling to sell 100 percent stakes in their organisation, a joint venture may be the only viable option. Related Content. Few joint ventures are fast and easy. Overseas managers often use an adaptation of their home culture. China’s government mandates that foreign investors in certain industries form joint ventures with a domestic Chinese partner. 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. Are we losing joint venture legal work because of this reputation or do we get more such work because people believe that if we give their joint venture the go-ahead it really is as good as they think it is. Intellectual property? The most common is that you will never see any money from the joint venture. JVs help businesses achieve their common objectives and gain insights and entry in unknown markets. Ideally, multinationals should pair with local companies that explicitly share their strategic goals. 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. 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. 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. 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. We charge a flat fee for about half our China work, but we always charge hourly for joint ventures because setting up a China joint venture can range from fast and easy to difficult and contentious. In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and you need to be able to serve process on the defendants under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. We use a dataset that accounts for all joint ventures in China from 1998 to 2007 to show that this policy is successful in its aim of encouraging technology transfers from foreign investors to domestic operations. To understand its effects on global investment, Deloitte China's Financial Advisory team has published its latest report: Sino-Foreign Joint Ventures after COVID-19: what to expect? Their temporary nature can be appealing to companies operating in risky waters. But just because there is good potential for a profitable China Joint Venture and you are working with a putative China joint venture partner that is sincere and honest does not mean doing the joint venture will make sense. 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. 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. Lao Petroleum & Chemical Co. Ltd (Laopec), a China-Laos joint venture, has launched first phase production of its three million tons/year refinery project in Lao capital Vientiane on Monday. I think it’s a great idea and here’s why. 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. 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. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. The dip separates projects that begin from projects that finish. Care must be taken, however, to tailor the joint venture processes to the local context, to avoid running afoul of local rules and regulations. GFI looks forward to a long and successful … Tahir Niaz. Not only are joint ventures popular with companies embarking on investment into the Chinese market, they are also popular with the Chinese authorities. For companies entering a new market, the risk of borrowing additional funding or seeking outside investors is diminished. The power over that seal should be carefully guarded. 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. Can either of us use confidential JV information for our own business? Money? With competition for outright acquisitions of Chinese companies increasing, many businesses have turned to joint ventures to gain an inroad. Our China lawyers have seen countless exploitive “joint ventures” but most of them start in the same way. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake. ISLAMABAD - Chief of Army Staff (COAS) General Qamar Javed Bajwa on Friday lauded the professionalism and dedication of Pakistan Air Force (PAF) and … 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. 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. A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Chinese investors, who together share the profits, losses and management of … In its latest survey, the American Chamber of Commerce in China found that more than three-quarters of US-based … ● Control over the company seal, or “chop.” The person who controls the registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers. July 2016 | FEATURE | MERGERS & ACQUISITIONS. What sorts of bad things? This disruption will have a profound influence on the International Joint Venture (IJV) market in both China and abroad. 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. Our lawyers have earned international acclaim for providing cutting-edge legal solutions to US- and foreign-based companies doing business in or with China. How To Increase Your Product Sales TO China, It’s Perfectly Legal for Your Chinese Manufacturer to Copy Your Products, Global Law and Business Podcast – Dominique Tolbert (Hospitality Business and Liberia), Understanding Doing Business in China: Why It’s Not Going to Change Soon But Why It Might Change You, Check Your International Registrations: Like Now. Frequently the Chinese side intentionally angles to ensure this outcome. China’s economy remains closed to foreign businesses in many industries and part of that closure involves requiring foreign companies enter into the Chinese market only via a joint venture. Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. How can this be achieved? He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 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. Technology? We know of cases where an EJV partner concedes on the percentage ownership issue in return for control over the two key management positions in the company. Meetings give us the ability to stall and to point fingers, to obfuscate and confuse. What will you do for and with our joint venture? Such, strategic JVs can bring success and mutual benefit to both partners less optimistic about business... Do not like to the test before you wed. China joint ventures is not China-specific ; it is joint does! For fearful people on both sides of a Chinese state-owned automotive manufacturing company headquartered in Changchun best. 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