The case is a highly visible test of China’s commitment to rule of law in matters involving foreign business. In short, a Joint Venture in China is a limited liability company that is created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, rewards, and the management of the joint venture. In my experience, you’re far better off with a licensing deal than a joint venture. To understand its effects on global investment, Deloitte China's Financial Advisory team has published its latest report: Sino-Foreign Joint Ventures after COVID-19: what to expect? And then the odds are good that in 3-4 years you will pay us another $50,000 or so to shut it down. Foreign companies too often rush into China joint ventures without ever discussing their respective dreams with their China joint venture partner. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner. It’s easy and hopeful and exciting to start something, but challenging and often painful to finish it. Goldman Sachs moved Tuesday to acquire the remaining stake in a China securities joint venture as it eyes further growth in the world's second biggest economy. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake. If you want effective control over a China joint venture, you must avoid this mistake. Ideally, multinationals should pair with local companies that explicitly share their strategic goals. Unintentionally, this concession cedes effective power. Abstract. By forming a joint venture, companies gain access to new markets and distribution networks, along with new (and often greater) resources – both human and non-human. The Chinese side will also often claim they cannot use their political connections unless their own people are the representative director and general manager. Our China lawyers also love taking apart China joint ventures that have gone wrong, and again, not because it is in any way a good thing for our clients (who usually are in dire straits when they come to us with their joint venture problems) but because resolving joint venture disputes is like a championship chess game, but at our hourly rate. That alone ought to tell you how difficult they can be. We charge a flat fee for about half our China work, but we always charge hourly for joint ventures because setting up a China joint venture can range from fast and easy to difficult and contentious. It provides a roadmap for avoiding what is probably the biggest and most common mistake that gives Chinese joint ventures such a bad name. Once formed, the JV becomes a new legal entity in which the liability of the shareholders is limited to the assets they brought to the business. 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. 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. Many China joint ventures fail because the foreign partner made the fundamental mistake of believing its 51% (or more) ownership of the joint venture gave it effective control over the joint venture. For you to maintain control over your Chinese joint venture you need the following: The Chinese side to a joint venture will usually refuse to agree to these three measures by claiming it is more efficient to have the Chinese side control day-to-day management of the company. 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. Our lawyers have earned international acclaim for providing cutting-edge legal solutions to US- and foreign-based companies doing business in or with China. Lao Petroleum & Chemical Co. Ltd (Laopec), a China-Laos joint venture, has launched first phase production of its three million tons/year refinery project in Lao capital Vientiane on Monday. What sorts of bad things? China Briefing looks at the experiences of Starbucks and McDonald’s to capture important lessons. 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. For parties looking to enter the Chinese market, it is essential that they keep in mind the relative immaturity of the Chinese economy; not only are private businesses a fairly recent development, the country’s legal system is still underdeveloped compared to mature markets in the west. It is necessary to have control over the day-to-day management of the joint venture company. As a result, the investor’s struggle for board control is rendered meaningless. Money? GFI looks forward to a long and successful … The sooner you seek to discern whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether it makes sense for you to keep spending time and money trying to do the joint venture deal. Technology? After winning the struggle for percentage ownership the foreign investor will frequently give the Chinese side the authority to appoint the joint venture’s Representative Director and the company General Manager. So any venture begins with some question marks. Who will make business decisions for our joint venture? What will your company do to advance the business of our joint venture? 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. Tweet. Moreover, foreign partners must ensure that their objectives are continually aligned with those of their Chinese partner. With control shared between often commercially competitive shareholders, the opportunities for conflict are rife. All ventures are risky, because they involve change and the unknown. Why do you think that is a bad idea? One side buys the right to use an asset that belongs to the other. This is particularly important given China’s ‘first-to-file’ approach to IP management. Your Chinese JV counterpart chooses to buy (possibly inferior) products and services at inflated prices from his or her own companies, including from the company that is your JV partner. I applied this saying to China Joint Ventures (I was certainly not the first to do so) in a Wall Street Journal article I wrote back in 2007, titled, Joint Venture Jeopardy: The much-publicized legal fight between French beverage maker Groupe Danone and its Chinese partner, Wahaha, calls to mind an ancient Chinese proverb often used to describe a bad marriage: “Same bed, different dreams.” Danone accuses Wahaha of breaking contracts and setting up competitor companies; Wahaha denies the allegations. Today, newly-formed WFOE’s outnumber new JV’s in China. Dan is licensed in Washington, Illinois, and Alaska. 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. The Chinese side will also often claim they cannot bring their political connections, or their guanxi, into play unless their own people act as the joint venture’s Representative Director and General Manager. The joint venture was started in … But  this concession cedes effective power and effectively renders the foreign investor’s struggle for board control meaningless. HONG KONG: Goldman Sachs Group Inc has signed a pact with its China joint venture partner to wholly own the business, becoming the latest foreign bank to take advantage of the opening up of the financial sector in the world's second-largest economy. The structure can be very complex, particularly in a jurisdiction like China. Property? It’s natural, then, for fearful people on both sides of a joint venture to back off when it gets scary. Depending on the sector in question, a JV may be only way to register in China if a certain business activity is still controlled by the government. Now suppose your JV should have 200 employees but your JV partner hires 350 employees, thereby wiping out any profit for the JV. ISLAMABAD - Chief of Army Staff (COAS) General Qamar Javed Bajwa on Friday lauded the professionalism and dedication of Pakistan Air Force (PAF) and … They must utilise legal advice, both domestic and Chinese, to protect their interests. All this combines to mean that in most instances the duped party has no good recourse. As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. The dip separates projects that begin from projects that finish. Before you do a joint venture with anyone you should make sure the two (or more) of you are truly on the same page regarding what will go into the joint venture and how it will operate once formed. Local partners, for their part, welcome this added sophistication in their domestic offerings. How can you avoid a bad joint venture marriage? In its latest survey, the American Chamber of Commerce in China found that more than three-quarters of US-based … 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. Eventually (usually many years later) the foreign company starts getting frustrated about never receiving any money or even news from the joint venture and contacts a China lawyer for help. Instead of actually setting up a joint venture that gives the foreign company an actual ownership stake in the joint venture company, the Chinese side takes the assets from the foreign company but never forms a joint venture. 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. The foreign company believes it owns part of the China joint venture even though it does not. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice. Aligning management structures inside the framework of the JV will help to create a unified culture for the operation. China’s economy remains closed to foreign businesses in many industries and part of that closure involves requiring foreign companies enter into the Chinese market only via a joint venture. How to Whip Your China Employee Handbook into Shape, SMEs and China: Much Opportunity but Little Room for Error, How to Avoid China Employment Law Problems: Employer Audits, China Employment Contracts: Do Them in Chinese, China Expat Pay: Splitting with Hong Kong is Illegal and Dangerous, serve process on the defendants under the Hague Convention. 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. What will you contribute to our joint venture, both now and in the future? ISSN: 0268-3946. The first thing you should know is that Chinese companies will often use the false promise of a joint venture to entice foreign companies to provide them with the foreign company’s technology. In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc. Property? The side that appoints the representative director will have significant control over operations. Our law firm has handled at least a dozen of these matters where our ten minute search revealed there never was a joint venture. Money? Are we losing joint venture legal work because of this reputation or do we get more such work because people believe that if we give their joint venture the go-ahead it really is as good as they think it is. What are you seeking to accomplish with our joint venture? If a problem arises, if a difficulty needs to be overcome, it’s much easier to bury it at a meeting than it is to deal with it. This disruption will have a profound influence on the International Joint Venture (IJV) market in both China and abroad. ● The power to appoint and remove the general manager of the joint venture company. Takao Satow. FAW Group Corporation (第一汽车集团, abbreviated to 一汽) is a Chinese state-owned automotive manufacturing company headquartered in Changchun. We use a dataset that accounts for all joint ventures in China from 1998 to 2007 to show that this policy is successful in its aim of encouraging technology transfers from foreign investors to domestic operations. A joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. Know-how? The automaker also runs China joint ventures with SAIC Motor and FAW Group. Key takeaways: This will allow the US bank to expand its presence across the country’s booming financial industry. A change in leadership styles is a key characteristic of joint ventures. I hope I am doing a good job pitching this to you. In 2017, the company ranked third in terms of output making 3.3 million vehicles. I also like them because they tend to be one of our most lucrative corporate matters we do. With China’s economy in a downturn and so much uncertainty regarding the future of US/China (and even EU/China) relations, our China business lawyers have of late been seeing a massive uptick in companies looking to do China joint ventures “to share in the risk.” When done right, China joint ventures do share risk. Crafting a fair and equitable joint venture agreement is crucial, as is ensuring that you have the right Chinese partner. 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. 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. 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