Go Alone or Do a Joint Venture?

By John Freivalds,
Managing Director,
JFA Marketing

jfa@direcway.com

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Although I have been involved in setting up and getting out of a number of international joint ventures, I thought I would do some research on what was said about Chinese-Western joint ventures. And although I have a Master’s Degree and come from a tribal society, I didn’t know what “exogamic” meant until I read it in an egghead (ok, I’ll be polite), academic heading to an article. One definition has something to do with marrying outside of one’s clan and another has to do with cross pollination among flowers of different plants.

Then, there is a phrase I have learned from years of personal experience, “joint ventures are not an end in themselves, but a strategy to get into a business.” In China there have been thousands of joint ventures between Chinese and Western firms, partly because the Western firms wanted to enter China with a kinder and gentler face. The Chinese still have a chip on their shoulders from years of colonist rule. It also seemed like a quick way to get going and leave the tough decisions until later. Needless to say the failures of Western-Chinese joint ventures are also in the thousands.

Jennifer Greene, (aka Fan Ching), is a Chinese born and raised international business consultant and now president of Pegasus Consultants Limited in Houston, Texas. Just back from yet another trip to China, she explained in a recent telephone interview that 70% of joint ventures in China fail.

In the globalization business, Smith Yewell CEO of Welocalize put it this way:

“A joint venture structure is required for certain industries in China. This is the way the Chinese government protects/restricts foreign ownership of key industries. Translation is not one of these industries. Thus, Welocalize was able to acquire Transco outright without the use or requirement of a joint venture. Given the fact the JVs can be complex,this made our deal quite a bit easier.”

No kidding. You can thus avoid having to look up things like “Letter of the Ministry of Commerce Asking for Interpretations on the Concrete Applications of Relevant Clauses of Administrative Regulations Concerning Capital Contribution of each Party to the Sino-Foreign Joint Venture Enterprises and the Liquidation of Foreign Funded Enterprises.” That’s bad enough in English, but it’s the Chinese which is the operative language requirement of a joint venture. Given the fact the JVs can be complex,this made our deal quite a bit easier.” in any agreement. Whatever you think the English or FIGS says it doesn’t matter- it’s the Chinese version, stupid!

Ron Bosrock who had done a number of joint ventures with the Chinese when he was VP of the multinational H.B. Fuller and now the Executive Director of the Global Institute based in Minnesota, says that in negotiating joint ventures with the Chinese keep the following points in mind:

• If it’s a good deal it has to be a good deal for both parties. The Chinese are always suspicious that they are not being treated fairly.
• Know what can or can’t be done because of cultural difference. If the Chinese say “we can’t do that because of our culture” be sure you know whether or not it’s true.
• You must not only have enormous patience but you must show it. If the Chinese want to negotiate for 6 or 8 hours you counter by saying you are willing to negotiate for 10 hours.
• You must be willing to “walk”. Have a plan for how much you are willing to take before you call it quits.

Jennifer Green adds that in your dealings with the Chinese, “You have to take face away and then give it back.” Americans are too wimpy she notes, as they too often immediately agree to the terms put forth by the Chinese. She states the best strategy is to be really tough (take face away,) and then concede something later on (giving face back).

Jonathan Woetzel with McKinsey, a well-known management consultancy, put an exclamation point to the latter sentence when he comments in a recent (April 19, 2007) issue of the Economist “For a joint venture to be successful, you have to have a plan for it to die.” Or to put it in terms of how they speak here in rural Virginia “Don’t get into something unless you know how you plan to get your butt out of it.”

And once you start doing all of that, it becomes very complicated to get a business underway and the way things have been going in China it may not matter. In theory, the case for joint ventures with the Chinese is compelling. The foreign partner brought capital, knowledge, access to international markets and jobs. The Chinese partner brought access to cheap labor, local regulatory knowledge (or whatever it took to get things done) and access to the local Chinese market.

But this old paradigm seems to have died for three main reasons. For one, Chinese firms were happy to obtain money and technology, but didn’t want to be an extension of a foreign firm. Remember, Chinese civilization is much older than Western civilization. Secondly, the Chinese firms had international ambitions of their own. But more importantly China has grown up; there is tons of capital in China and the increased purchasing power of the Chinese has made the domestic market an attractive one. One Chinese business man confided to me “why do we need them, they need us.”

It worked the other way too. Sensing a growing market for translation in China, a US firm initially thought it should do a joint venture with a Chinese firm to get into the local market. After interviewing a number of companies and their employees, they found that their knowledge of western language wasn’t good enough. Not to mention, the main market were multinationals based in China. So they went at it alone. McCormick & Company, whose spices we all buy at the grocery store, had a similar approach. In the early stages of their Chinese involvement they targeted Western fast food chains like McDonald’s that were already customers of theirs in the US and Europe. This meant they had a ready made market with low risk. Then they used this customer base as a platform to broaden their sales into other Chinese markets.

Then there is the joint venture story from hell- at least from the Western point of view. Group Danone SA, which produces Evian water and Dannon yogurt, accuses its joint venture partner of setting up a separate company to sell products that the joint venture is making: Their Chinese partner, Zong Qinqhou, is selling Dannon products under the Whaha brand. Mr. Zong counters that it’s unfair that Dannon has separate joint ventures in China (from him) making juice and milk under other brand names that compete with the Wahaha branded products. So these terms have to be revised. It is time to begin thinking that negotiations just begin after you sign a contract not that they are concluded with its signing.

Western firms have not been forth right with some of their dealings with the Chinese either. In one case a Western company made a big point of offering a Chinese company 60% of the equity in a venture and they would retain only 40%. But then, their well known Washington DC, international lawyers put in a significant action clause, which in effect said that the minority partner could veto just about any action that the company took. In another case a Western firm proposed a 50-50 joint venture, but there was a stipulation. The joint venture company had to buy all the machinery for the proposed factory from the Western joint venture partner. This machinery had been raised substantially in price. In effect, that western company got 50% of the joint venture by having the Chinese putting up 100% of the capital.

I frequently pick up James McGregor’s seminal book, One Million Customers: Lessons from the Front Lines of Doing Business in China. This is how he ends his book and how we will end this article, “If you ever get depressed by Chinese ill-treatment of foreigners, or foreigners’ ill treatment of Chinese, take solace in the knowledge that the Chinese are treating one another even worse.”

Jennifer Greene (Fan Jing) is Chinese born and raised. Educated as a teacher and international business manager, she has worked for and now lives in the United States. She has consulted US firms and governmental agencies on doing business with China for more than 12 years. Beginning by working for an American company in China as the Chief Representative Officer. An understanding of both cultures helped her to successfully facilitate Sino-American joint ventures and negotiate multimillion-dollar business transactions while managing a Chinese staff. Since her move to the United States in 1998, with her American husband, she has consulted US governmental agencies and corporations on cultural and language issues as well as China business development and implementation issues.

She has developed a Cross Cultural Training course, “Doing Business in China”. Pegasus Consultants Limited, of which she is President, provides a range of services to growing companies seeking to be successful in Chinese markets. Motorola, BNSF, Schlumbeger, US Immigration, Department of State, have been among her clients.

ClientSide News Magazine - www.clientsidenews.com

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