A change in leadership styles is a key characteristic of joint ventures. Know-how? 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. What can be done to ensure neither company goes out of control? ), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions. 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 … By entering into a joint venture, overseas investors may benefit from marrying the expertise and knowledge of local conditions from the Chinese side, with the advanced technical knowledge and management expertise they bring to the table. 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. What do you want our company to do to advance the business of our joint venture? But  this concession cedes effective power and effectively renders the foreign investor’s struggle for board control meaningless. One side buys the right to use an asset that belongs to the other. 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. But when done wrong they actually increase the risk, but only for the non-Chinese company. Once power over operations is out of your hands, it becomes very difficult to run a successful partnership in China. I like it because each joint venture is so different and yet all are intellectually challenging. Ideally, multinationals should pair with local companies that explicitly share their strategic goals. This is particularly important given China’s ‘first-to-file’ approach to IP management. 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. Joint ventures in China: overview. 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. If our joint venture loses money, who will be responsible for putting more money in? A successful joint venture can present valuable opportunities while reducing costs and risks across the board. Money? As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. Because there isn’t one boss, one deliverable, one person pushing the project relentlessly, it stalls. By putting your dreams to the test before you wed. China joint ventures are notorious for their high failure rate. 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. Our law firm has handled at least a dozen of these matters where our ten minute search revealed there never was a joint venture. 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.”. ISSN: 0268-3946. 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. Abstract. Of all the China legal work my law firm does, setting up and dismantling joint ventures is probably my favorite. With competition for outright acquisitions of Chinese companies increasing, many businesses have turned to joint ventures to gain an inroad. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. The bad news is that there is usually nothing that can economically be done to help a foreign company in this sort of situation. If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. 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. Intellectual property? Intellectual property? Our vast experience handling China-specific entity formation, contracts, intellectual property matters, and dispute resolution gives our clients the security of knowing they have a truly seasoned legal team behind them. 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. The joint part, though, is where the real problem arises. Furthermore, the flexible nature of joint ventures makes them popular in volatile emerging markets. Why though would your JV partner do this and how does your JV partner benefit from doing so? If you don’t realize this after reading the below, I don’t even know what more to say. When given a choice between a risk and sure thing, many people pick the sure thing. 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. 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. The U.S.-China trade war started heating up in … Can our own businesses compete with our JV? There are a number of risks associated with conducting business in China. If you do not, you will not have control over the joint venture’s day-to-day management. We set off on a venture in search of something, or to make something happen –- inherent in the idea of a venture is failure. You should see these justifications for exactly what they are: red herrings used to disguise the Chinese company’s efforts to gain operational control over the joint venture company. Equity Joint Ventures provide a means by which foreign and Chinese companies can collaborate on projects within China with limited liability, where the foreign and Chinese partners contribute to the equity in the venture in alignment with their shareholdings. These include (but are not limited to) access to land, distribution channels, business licenses, labor, networks, and Communist-party support. Tahir Niaz. 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. Way back in 2008, co-blogger Steve Dickinson was the legal columnist for one of China’s most prominent English language business publications. The Chinese side will intentionally angle to ensure this outcome, often by offering to concede majority ownership to the foreign investor in return for control over these two key management positions in the joint venture company. Avoiding Mistakes in Chinese Joint Ventures. Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain. 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. 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. The joint part and the venture part. JPMorgan took 71% of … Our deep knowledge of China’s legal system, culture, and business climate make our China practice one of the most sophisticated in the US. It is necessary to have control over the day-to-day management of the joint venture company. However, China's strict commercial laws mean that joint ventures often have to be entered into despite the risks. China’s government mandates that foreign investors in certain industries form joint ventures with a domestic Chinese partner. 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. 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. Americans are feeling less optimistic about doing business in China. 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. They must utilise legal advice, both domestic and Chinese, to protect their interests. 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