China Joint Venture Partner Investigations

 An American client was interested in forming a joint venture with a Chinese supplier. The American side had been working with the Chinese company for nearly two years. The Chinese company at the time of the American business’s interest was supplying nearly $2 million worth of products to the Americans. The American company was a premier manufacturer of rubber automobile parts.

The Client asked Silk Road Advisors (SRA) to investigate the Chinese supplier. The Client had just entered into discussions with the Chinese side about forming a joint venture enterprise in the Chinese supplier’s home city, located in Anhui province. Anhui is located a short-distance by car and train from Nanjing, the capitol of Jiangsu province. The supplier’s city was small, even by Anhui standards, and relatively remote, making investigations difficult. It was a roughed six hour drive from Shanghai to the Anhui facility. Still, the allure for the American company – first in its industry in the United States – joining a Chinese company that was first in its industry in China, was too much to ignore.

The Chinese side was keen to gain access to the capital and the patented technologies the American side had to offer. The American company was interested in easing its access to the automotive industry in China, both financially and in terms of the amount of time it would take to develop its China-market customers. Further, the Chinese Supplier offered the Americans a huge, newly-built factory building on its company compound. The building was still unoccupied.

However, the Client knew it needed to get beyond the business newspaper headlines about the Supplier’s skyrocketing growth to understand the nature of the business and, especially, to investigate the background of the owner of the Chinese company.

SRA set about the investigation of the company and its ownership by tapping into its local network of contacts throughout China, and specifically, in the automotive industry. SRA’s rule of thumb is that if information during an investigation in China comes from three individual and independent sources, it can be considered as close to fact as anyone will get in China.

SRA talked to industry contacts, interviewed industry competitors, and researched Chinese media coverage over the past five years to unearth the true history of the company and the owner. The investigation pointed to disturbing and provocative information about the owner of the Supplier company and how the company itself was established. More discomfiting was the fact that the Client had been working with the Supplier for two years and had no idea of what SRA had uncovered.

The Chinese party had five years before snuck product out the back door of a joint venture factory partly owned by an American holding company! The Chinese party had set up a competing factory on the other side of the city in Anhui province in which the joint venture had been formed. When the Americans moved to displace the Chinese partner, the Chinese manager shut down the plant from the power station (he had VERY good relationships with local city officials), sent the employees home and barred the Americans from the factory. Eventually, the Americans were able to regain control of the factory -- and the investment -- but by then the damage to the business had been done. The Americans bought out the joint venture, and of course fired the Chinese manager.

The Chinese manager in the story was none other than the current owner of the company that had been supplying SRA’s Client for the past two years; the very same Chinese company that had gone on to beat out its parent in the Chinese marketplace to become number one in the industry.

SRA reported the revelation to the executives of the American company. The Americans were still interested in pursuing discussions with the Chinese supplier. However, the Americans felt more confident and informed about dealing with the Supplier in a way they never had before. The Chinese side never in all its discussions with the Client divulged its history; and the Americans never pressed. However, as discussions progressed, it became clear that the revelation was merely a cautionary tale about the lack of transparency with which the Supplier operated: ownership structures were hyper-complex, requests for financial statements politely rebuffed, and the past never ever touched on.

Joint Venture discussions gradually wound down, with the American company’s Board of Directors voting against a joint venture, and American executives at a loss as to how to protect corporate interests in light of the Chinese side’s bandit-history.

For more information about this case or to contact Silk Road Advisors, email us at sradvisors@gmail.com .