Amit Discusses The Recent Revival Of Interest In China Joint Ventures

Jonathan Pecaut-Dupy: Foreign companies seem to have regained some interest in setting up joint ventures in China over the past few years. How do you explain it?

Amit Ben-Yehoshua: Let me start by saying that going in China as a joint venture has never been easy. A joint venture takes a lot of time and preparation to negociate and establish. And managing such a partnership in the long run might be a bit of a hassle. I am not saying that joint ventures should always be kept off the table but that there might be better options to consider. One could be, for instance, to set up a wholly foreign owned enterprise (WFOE) first and then enter into a contractual relationship with a Chinese distributor, a supplier or any kind of commercial partner you need.

However, we have to keep in mind that the investment landscape has changed since the financial crisis of 2008. Foreign companies now often lack the financial ressources to start a business on their own. They are therefore looking for a partner they could share the costs with. Whereas six or seven years ago a company would borrow money from the bank to, let’s say, build its own factory or set up a new R&D center, now getting that kind of funding is very difficult so it needs a partner that would provide it with such facilities or that would have enough cash to make those investments. That is where the Chinese investors enter the picture.

After more than 30 years of fast economic growth, China went from being a third world country to be the second largest economy in the world right behind the United States.  There are now close to a million millionaires and six hundred billionaires living in China. And those numbers are going up. Which means that there is no better country in the world if you are now looking for investors to expand your business. I don’t think that joint ventures have become more attractive or much safer than in the past. It is in fact a very risky way to get the financing some foreign companies lack.

JP: From your experience as a China practitioner, what are the things foreign companies should really focus on before entering into a joint venture here?

AB: Any company that is willing to take that road must be aware of the fact that going in as a joint venture requires careful consideration and judgement. And that is especially true here in China. The first thing is to find the right Chinese partner, one that can make tangible contributions to the joint venture. You also want to collaborate with a partner that shares your strategic goals and commercial interests. In that matter, no promises should be taken for granted and every statement must be checked. That is the purpose of the due diligence. At the dating stage, you  really want to make sure that you and your Chinese partner are on the same track. Of course, all the terms of your agreement must be laid out in a contract. And I insist on the fact that this contract has to be properly drafted or carefully reviewed by a China practitioner as many legal concepts might be misunderstood by foreign lawyers who are not fully acquainted to Chinese laws.

JP: Which bring me to my next question. Would you say that those concerns are specific to Chinese ventures?

AB: Well, there are cultural differences between East and West which cannot be ignored. As a lawyer who has been working in the United States, China and Israel, I can assure you that Western companies and Chinese companies conduct their business in a very different way.  That is why aligning business strategies and priorities is so important here. Differences of opinion between the partners might undermine the joint venture’s performance and eventually lead to its failure. In my opinion, companies spend too little time aligning their strategic goals, outlining the extent of their cooperation and discussing the potential evolution of their partnership. Like I said, going in as a joint venture needs careful preparation. And the existence of cultural differences between the partners makes the task more complicated. That means that building a successful joint venture here requires even more time and attention.

JP: Most companies still reckon that being the majority shareholder will give them effective control of the partnership. What do you think really matters in terms of control of a joint venture?

AB: Foreign companies are used to thinking that holding 51% of the stock will give them control of the joint entity. This is, however, clearly proving to be insufficient to ensure adequate control of your joint venture in China. There are certain key positions to consider when entering into a joint venture here. One of the things that do matter in practice is the power to appoint and remove the joint venture’s legal representative. He is the person who is really in charge of the joint venture’s operations. Of course, one cannot expect to have people assigned to such positions without going through tough negociations with his Chinese partner. In that matter, it mainly depends on how much bargaining power you have.

What foreign companies also have to understand is that China’s Corporate Law is not as flexible as it is in Europe or in the United States. There are statutory restrictions that limit the partners’ power of decision. In other terms, what could be agreed between two partners in the US might be illegal with regards to Chinese law. Any transfer of shares, for instance, requires the unanimous consent of all the shareholders. That means that no matter how much bargaining power you have, your control of the partnership will always be subject to some important limitations.

By Amit Ben-Yehoshua and Jonathan Pecaut-Dupy

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