To JV or not to JV

CEIBS Knowledge, World Business, 17 July 2006, 03:17PM

The great rush to China has prompted many companies with the existential question of whether to operate in China as a joint venture or as a wholly foreign-owned enterprise (WFOE).

Several factors enter the equation such as the industry and area of activities, the scale and complexity of operations, regulatory requirements etc. One thing is certain: companies should research their market thoroughly before making their mind. Spending time up-front could save no end of troubles down the line.

For those who do decide to JV – great for large-scale complex operations which require extensive work with Chinese authorities and multiple local partners – there are several considerations to bear in mind when choosing a partner.

Again, this takes time. Researching potential partners is crucial, particularly their expertise and what they could bring to the JV. Some companies will prefer to opt for a passive partner who will just provide an operating advantage. Carrefour's Jean-Luc Chereau for instance says: "In China, when we establish a new JV, we share the investment but never the management."

Others will want a proactive, value-added team player. Gary Dirks, from BP China, speaks from experience: he leads 22 joint ventures. "No matter where you go in the world, the key to success for partnerships is the alignment of your strategic interests," he says. "If both parties are perceived to be contributing as well as expected, then it can go very well."

Setting out the 'terms and conditions' right at the onset of the venture will also prevent misunderstandings and unrealistic expectations. Microsoft China's Jun Tang also recommends 'starting from scratch' and ensuring that there are no feelings of insiders/outsiders. "With a new entity, you can create a new culture, a new business model, a new atmosphere," he says. Lawyer Norman Givant of Freshfields Bruckhaus Deringer also advises against 50/50 JVs, which can lead to gridlocks.

Finally companies should consider alternative partnerships to JVs. As regulations ease, mergers and acquisitions will become real possibilities as will joint stock companies.

Source: To JV or not to JV - How MNCs choose local partners?
Juan A Fernandez and Laurie Underwood
CEIBS Knowledge, June 2006

Review by Emilie Filou

This article was first published on World Business