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The Advantages of Joint Ventures in China

by William R. Dodson

1 February 2004 

Recently I talked with a Fortune 500 division President who wanted to continue on with the discussions for a possible joint venture (JV) with a Chinese company in China. I was sure after his last face-to-face conversation in China with the Chinese company President he was going to tell me otherwise. I believed he would feel the Chinese company was too small and had too little to offer the American company, the Chinese management was roundabout in their communications – if they communicated at all – and lacked the sophistication of management approaches Western companies take for granted.

The question for the American executive was not a matter of choosing one joint venture partner over another, but of whether to have a JV at all with the company or to start a new business from zero, a “green field” venture.

Instead, I was quite surprised when the President told me the Chinese company did have some things to offer the American company that bolstered the case for a JV: the Chinese company had customers it would be difficult for the Americans to capture on their own; the Chinese company already had a staff of several hundred to devote to the joint venture that already knew about the basic processes and materials involved in the manufacture of the product line.

It’s not that I’m a fan of joint ventures per se. In fact, I’m typically the first in a room of American managers to say, “Go it alone.” In the last five years many of the regulatory and bureaucratic obstacles to joint ventures in China have been dropped or streamlined. It’s now far easier to start your own “green field” than ever before. Indeed, in my talks with scores of government officials around China, not a one encouraged the idea of a joint venture with a Chinese company. A Chinese government official once said excitedly to me, “Joint Ventures with Chinese companies are too much trouble: too many differences – culture, language. And Chinese people are too complicated!” By that he meant that in lieu of knowing what to do or what to say directly Chinese tend to take a roundabout approach to communications and problem solving.

Still, as the American Division President astutely pointed out, there can be gold nuggets found in the stream of international business babble that just may be precious enough to enjoin a Chinese company in an enterprise. Some of those advantages can be:

• Ready-made access to customers;
• Staff already familiar with production approaches;
• A product the Chinese make that the Americans do not but would like to;
• Tie up Chinese competition;
• Reduce start-up costs;
• Reduce the steepness of the learning curve.

One of the most expensive aspects of starting any new business is finding customers to buy one’s products or services. Healthy, viable Chinese customers should already have a customer base and a sales force in place to increase sales. The JV should capitalize on the extant sales force to give the new venture a boost at start-up.

As the Division President had already said, the current staff of his target JV at least had some idea of the product they were producing and the processes involved. A JV can dramatically reduce startup costs by not having to comb China for qualified staff a greenfield enterprise would have to. Further cost reductions occur by not having to train the staff – at least, the costs would not be as high as having to train novices hired off the street or from other industries.

It’s always less expensive to buy a product line than to develop one from scratch. R&D costs are the majority component in the cost of production. Companies must invest in new product lines and new quality standards to stay ahead of the competition. The Chinese marketplace does not make the challenge any easier. The reality is that culturally and geographically China is many countries – not one country. The likes, dislikes, consumer requirements and even languages between, say, the Chinese of Guangzhou (Canton) in the south are quite different from those in the northern city of Tianjin.

Hence, it is naïve to believe that an American one-size-fits-all approach to product development is appropriate in China, as well. Many times potential Chinese JV partners will be ahead of the curve in developing, marketing and selling products in niches Westerners could never have dreamed of, leave alone exploited. A JV with just such a Chinese partner could reduce R&D costs, bolster the prospects for successful niche marketing campaigns and see earlier sales than would have been the case if the company had gone it alone.

One American firm that produced healthcare aids for the hearing impaired partnered with a Chinese company that was on the horizon as a major competitor in the international arena. The American company formed a joint venture with the Chinese specifically to ensure that any rise in profits the Chinese had was not at the expense of the Americans. The joint venture carved out its sales and marketing territory, while each of the parents defined their own sacrosanct domains.

Few things are more expensive than starting a venture. Typically, equipment and facilities are all brand new. It may take years to realize the payback on the investments of a new development. If companies are able to find the right JV partner for them -- a company that already has invested in and amortized its investments -- the foreign investor will have a springboard from which to launch into the China market.

The China market is far less rationalized than any Western market. Everything from government approvals through equipment acquisition through staffing, training, sales and marketing are inconsistent and fragmentary across China. The conditions provide a steep learning curve for the novice. As the old song goes, “You gotta have friends,” when it comes to investing in China. Without a foothold in China – even if it was made by someone else’s foot – a Western company can go around in circles for months before getting their facilities built or their permits approved or their staff assembled. A Chinese JV partner with experience and connections in getting a business up and running could be extremely valuable to an American company intent on conquering a China market.

Despite all the horror stories that the Press enjoys printing about JVs in China, companies should still give careful consideration to finding a JV partner at the outset of their China venture. If an American company does its homework on the potential partner, finds a partner with whom it can build trust on a personal level, and finds an area of China supportive of joint ventures, there are few reasons why the JV shouldn’t be a success.