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Latest Blog: Joint Ventures for Distributing Consumer Products
Lately, some China watchers have been blogging about joint ventures and immediately I thought of Bob Dylan’s song of which the second verse is as follows:
“Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won’t come again
And don’t speak too soon
For the wheel’s still in spin
And there’s no tellin’ who
That it’s namin’
For the loser now
Will be later to win
For the times they are a-changin”.
This certainly seems to apply to writers about foreign joint ventures in China. When the west first entered the Chinese markets, joint ventures were the only way. Regulatory, cultural and traditional business reasons for entering in joint ventures combined to lead the wannabee China business to the joint venture.
Bad experiences with joint ventures have since dominated the blogosphere. At the same time dring the last few years, regulatory restrictions have been relaxed, cultural impediments have lost some of their significance, or threat of you will, and traditional business reasons have turned out to be less relevant in the Chinese context. Accordingly, lawyers and consultants generally recommended the WFOE as the corporate form of choice for establishing a foreign business in China.
However, as economies are withering and businesses’ resources dwindling, sino-foreign joint ventures seem to have regained some of the lost appeal. Moreover, the nature of foreign business is also changing. Where previously, foreign technology driven MNC’s were dominant among foreign investors in China, during the last number of years, service corporations and consumer good companies have become much more prevalent. The latter have different objectives and therefore require different strategies to be successful. In fact, the number one problem that those companies face is distribution. They have the product, they know demand will be strong but they don’t have the infrastructure to link their product with the consumer. A local or domestic distribution network is missing.
Contracting with Chinese distributors is one way of dealing with this problem but joint ventures between foreign suppliers and Chinese distributors may be the best way to achieve this result as the foreign supplies will retain much more control over product and profits. However to be successful as a business model, foreign joint venturists must be aware of some major requirements to prevent problems that have led to the failure of many earlier sino-foreign joint ventures in China.
Here are a few general pointers:
Firstly, more than anywhere else, the foundations for your success must be laid before the deal is signed. Preliminary work, i.e. due diligence, is essential.
Secondly, have an exit agreement incorporated in the joint venture entry agreement. Later on, you may have million dollars in China but you may not be able to get them out unless you exit the joint venture properly.
Thirdly, make sure you have an experienced consultant if you are going to deal with a local partner. A foreign business lawyer with extensive Chinese experience and a strong local network may be a good choice.
Lastly, keep the scope of the venture limited to your core objective. If it is distribution, carefully analyze what is essential to its success and what is not. Anything that is not essential should be left out of the agreement. Joint ventures are not mergers. Joint ventures are not forever. Like any other business agreement, they have two or more partners (preferably 2), mutual promises and they should have a time limit. Joint ventures are limited companies not only in terms of liability but also in terms of business scope. The less that is included, the less that is lost in case of premature break-up.