By: Peter N. Rasmussen
Uploaded January 2020
Asia Base Law & Projects (Suzhou) Co. Ltd.
Is it possible to set up a successful joint venture in China? First, how can one define a “successful joint venture”? Is success measured in numbers? Can success be measured in contrast to local competitors? Or rather, is success the emergence of a new and unexpected, yet drastically improved, opportunity created as a result of an original plan?
My personal view dictates that it is better to start a business undertaking in China, and then change directions, rather than not start at all. As we all know, to get your feet wet, you need to start somewhere. Piercing into the Chinese market and operating a business in China require skill, determination and know-how. An experienced Chinese partner can help accelerate the learning curve.
Joint ventures in China can provide undeniable advantages to foreign companies. They should be embraced, not feared. One caveat: Proceed with caution to ensure you are not firmly cemented into an indefinite partnership.
A joint venture can be established for a specific project, complete with a start and end date. This approach is strategic and allows for learning opportunities and gaining traction on a mid-term horizon. The duration is stated in the joint venture contract and the joint venture’s company articles of association. These documents also contain provisions describing how the venture may be dissolved at any time by a party or mutually by the parties.
A fixed-term joint venture does not constitute a lifelong commitment or two parties chained to each other for an unlimited time. It can be considered a medium term “market entry vehicle”, providing a stepping-stone to golden opportunities for both parties to learn and become more competitive. In this sense, partners in a joint venture may one day become competitors.
If a Chinese company is in dire need of knowhow, special skills, technology or international market access, a joint venture may allow it the needed upgrades. A foreign partner may find it beneficial to enter into a joint venture to gain invaluable experience related to operating in China, at Chinese cost level, and adapting products to the Chinese market. Very important stuff - as it is expected that China will grow even more competitive internationally in the future.
Once the parties create a purpose and duration for the joint venture, they can have frank discussions. They can set clear goals, realistic expectations, plan for the termination of the joint venture and the aftermath. There is no reason to avoid discussing these topics. It is in both parties’ best interests to ensure these considerations have been acknowledged and addressed up-front.
Please feel free to get in touch if you want to discuss the above or if you are ready to negotiate the terms of a joint venture agreement with a Chinese partner.