Seeking Profitable Joint Ventures in China’s Rust Belt

 

Silk Road Advisors’ Fortune 500 client’s requirement involved a strategy to develop a presence throughout the China market. To that end, it would create a wholly-owned enterprise (WOE) near Shanghai, and develop joint ventures with Chinese companies in the North and South of China. It was up to Silk Road Advisors (SRA) to help the client identify potential joint venture partners for the American company and to open communications between the parties so they could learn about each other and make informed decisions about possible partnership.

 

The challenge, however, was that Chinese companies in the North of China are not well developed. The Central Government in Beijing has placed emphasis on making the South the engine of China’s economic growth. Companies from Guangdong to Shanghai have had a head-start of at least ten years in funding their companies, gaining market share in their respective industries, developing relationships with officials in the central government and in rationalizing their business practices.

 

Private companies in the North of China, however, from Shanghai to Heilongjiang and westward to Xinjiang, have had to bootstrap their operations due to neglect from the Central Government; Beijing has not infused much capital into the Northern regions beyond propping up the most cherished State-Owned Enterprises (SOEs) and dismantling those that are no longer defensible.

 

Still, the Client had found near the northern Chinese city of Tianjian a small private company with a product line that matched its own and customers in the North. Tianjin is just south of Beijing by an hour’s drive. Sixty years ago out-stripped Shanghai’s GDP; and twenty years ago was on par with Shanghai economic growth. Now, the city is a tarnished reflection of an industrial powerhouse that has lost its pre-eminence. Its outlying areas in particular are poverty-stricken, ramshackle.

 

The Client believed that if it could develop a joint venture with the company, it could gain the leverage it was looking for in the North China market. The Client sent the Tianjin company a lengthy email extolling the advantages the Client saw in the Tianjin business. The email entertained the idea of a joint venture between the Client and Tianjin business. The Tianjin company politely rebuffed the suggestion.

 

Some weeks later the Client was still interested in forming a joint venture with the Tianjin company. It asked Silk Road Advisors (SRA) to open up talks with the Tianjin company and find out through back-channels, using Chinese “signals,” to learn just what the Tianjin company was looking for in a relationship with a foreign company.

 

Chinese staff at SRA quickly established a rapport with the President of the Tianjin company. SRA learned the Tianjin company was indeed interested in a joint venture with the American firm. However, as is the case with many Chinese companies, it didn’t know how to frame its desires in a way that Americans would understand and appreciate.

 

SRA then shifted its role from exploratory activities to serving as an adviser in Western business practices for the Tianjin company. The Tianjin company had never before worked with a Western company, and so was unfamiliar with the financial and management reporting tools taken for granted in America and Europe. SRA helped the Tianjin company craft a proposal to present to the American firm, and worked with the North Chinese to put together and translate into English a package of operational and financial information that would educate the American company about the interests and potential of the Tianjin company.

 

The American company sent several rounds of representatives to the Tianjin company to discuss future cooperation between the two businesses. SRA maintained the continuity of the talks by always being present during discussions between the two parties. SRA provided Chinese interpreters so the two sides could communicate. SRA produced meeting summaries and to-do lists, and with each new session prepared both sides for the talks so no time would be wasted picking up the threads of the previous talk. SRA served as a conduit and sounding board for the Tianjin company, helping them to clarify their thoughts and to ask sensitive questions of the Americans “through the back door.” SRA helped the American side understand the Chinese Way of doing business, and helped the Americans maintain their focus on the discussions, lest other issues distract them from their goal of forming a joint venture with the Chinese.

 

In time, the American company and the Tianjin company came to agreement on the shape and apportionment of a joint venture. Through SRA’s efforts as a bridge-builder between East and West, the two companies had found a successful and profitable way to expand their businesses in North China and beyond.

 

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