Doing a joint venture in China is not easy given the business conditions. Some China business lawyers take it up as a challenge while others leave the business midway. Making a China joint venture work is a tall task which if you can do once, you can get over anything. However, it fails many of the times as well.
What Differentiates a Successful Joint Venture from an Unsuccessful One?
The most important thing which makes a huge difference is recognizing and avoiding a blind spot. If the venture lacks cross-process discipline in planning and execution, it will fail. Even following the best practices can fail sometimes. The ratio between successful and unsuccessful ratios is 40-60% as disclosed by experienced Chinese business lawyers. To be able to succeed in a joint venture or JV the rule of the thumb is to have a sound plan and proper implementation of that plan with strong internal alignment, meticulous selection of partners, balanced and equitable organization and anticipation of contingencies combined with strong governance and decision making process.
The biggest reason behind the failure of a JV even after following best practices is that the foreign party often rush to complete the business. Even experienced managers commit this mistake of rushing with the process. In most cases the process does not involve discipline in end-to-end solution as well as between the stages. The 5 stages of development include:
- Creating the business case and aligning it internally
- Developing the business model
- Negotiating terms
- Operating the model and launch of business
- Supervising operations
Moreover, majority of the joint ventures suffer from inadequate risk management planning. This is a loophole which creates hindrances in successful completion of the project and its ongoing operations. Different companies are taking different approaches to deal with the problem.
The rush to complete the process is due to getting the deal done quickly. There is actually no remedy to this, but still the companies should try to maintain a balance between demands and supply. An effective joint agreement should be drawn without any compromise. They must align their efforts with impact and value for the business.
This is agreed upon by lawyers. Majority of the parties face problems regarding the time and planning and these are the reasons why there is so much difficulty in reaching a fulfilled joint venture. To be precise, according to lawyers from Chinese law firms the joint ventures which took long to set up exists more than the ones which took less time to be established.
What is the Reason behind Such a Result
Joint ventures are extremely complex. The first question that confuses people is who is going to be in charge of hiring? Is it the Chinese company or the foreign partner? The answer is Chinese company because obviously they know the market better than the foreigner. But what stops the Chinese company from practicing nepotism and where does the profit go? Now that you have realized the importance of having a say in hiring, you will still not want to hire, but do you want veto rights? Do you really have the right to decline and are there any restrictions on hiring the number of employees? Can you fire employees? Well, certainly your position will be different on seniors than juniors.
There are several such issues and limiting control over business. These are just a couple of issues that arise every time in doing business in the form of joint ventures. You have to think of all these before you can really establish a deal with the Chinese parties. If you are capable of addressing majority of these issues at some point then you will have fewer arguments, disputes after the establishment of the JV. So, from next time onwards do not be impatient during the delay of drafting a JV deal between Chinese company and foreign company. The more time it takes, the less are the chances of the business falling apart.