The risk of a JV is being tied in to an ailing Chinese company promoted by a government official, and Chinese organisations may want to dominate local markets then take out profits, rather than reinvest. The advantages a Chinese partner can bring are however many such as knowledge of local conditions, rules and regulations.
China Business Review – Paul H Folta
“Since China ‘s World Trade Organization (WTO) entry and the PRC government’s relaxation of investment regulations, foreign investors have been choosing to establish more wholly foreign-owned enterprises (WFOEs), which in the first three quarters of 2004 made up nearly 67 percent of the value of new foreign direct investment projects in China . WFOEs cannot be used in every sector, however, because the PRC government requires Chinese company participation or control in some sectors. In such cases, foreign companies must consider a joint venture structure. Even when they are not required, joint ventures can benefit foreign investors when a Chinese partner has certain strengths—such as central or local government support, brand reputation, land, licenses, distribution, and access to suppliers—that reduce start up costs and improve the foreign investor’s chances of success.
In China , most joint ventures are equity joint ventures (EJVs), though some investors establish cooperative (or contractual) joint ventures (CJVs). CJVs and EJVs are similar in many respects. The PRC government approval process, approval authorities, format of agreements, tax breaks, legal standing, and the means, laws, and authorities for dispute resolution are identical. The general management structure and governance procedures are also virtually the same.
But CJVs and EJVs differ in two important ways. First, unlike an EJV, a CJV does not need to be a separate legal person under PRC law. (A CJV that is not a separate legal person may benefit from lower costs, but also may expose the parties to greater liability than if they were legal persons, because CJVs with legal person status confer limited liability on parties to the joint venture.) Second, the CJV parties’ profit, control, and risks are divided according to negotiated contract terms. In contrast, an EJV’s profit, control, and risk are divided in proportion to the equity shares invested by the parties.”
Future of Chinese-Foreign Joint Ventures
Chinese Embassy in London report
“Since the founding of the Beijing Aviation Food Company, China ‘s first joint venture in 1980, the country has seen the registration of 150,000 Chinese-foreign joint ventures. Before 1998, over 70 percent of foreign investment in China took the form of joint ventures. The growth of Chinese-foreign joint ventures, however, has been slowing down in recent years. In 2000, growth of wholly foreign-owned businesses exceeded that of Chinese-foreign joint ventures, for the first time.
According to figures from the Ministry of Foreign Trade and Economic Co-operation (MOFTEC), wholly foreign-owned enterprises accounted for 45 percent of total foreign investment in China in 2000. Meanwhile, actualised foreign investment in joint ventures recorded the first ever-negative growth, despite a 21 percent rise in the number of joint ventures last year.
More and more foreign partners have shown a strong interest to increase their stake in joint ventures.
Beijing Jeep, the first joint venture in China ‘s automobile industry, announced its foreign partner, DaimlerChrysler, would increase its equity share in the joint venture and the new management would be headed by a foreigner.
Procter & Gamble ( Guangzhou ) Ltd., a Sino-U.S. joint venture, also reported drastic changes in the equity structure of many of its subsidiaries. In one of them, the stake of the Chinese side dropped from the original 50% to 1%.
Ma Yu, a senior researcher with MOFTEC, attributed the change to new trends in China ‘s economic environment. With sellers’ market being replaced by buyers market in China , market competition has intensified, forcing joint ventures to expand their production scale and upgrade their technologies. In this situation, it is natural for the foreign side to seek a controlling stake to avoid potential conflicts with the Chinese partner, who may harbour a different business philosophy and have a different operational style and a different goal, Ma said.
It is crucial for China to establish a modern corporate system in its state-owned enterprises and improve its investment environment, including the establishment of a judicial system based on a market economy, if it is to reverse the situation of decreasing foreign investment in joint ventures.
China’s draft outline of the 10th five-year plan has provided for giving national treatment to foreign-funded enterprises, unified and transparent market accession policies and the removal of equity structure restrictions in joint ventures, except for those related to national and economic security.
Analysts said this is surely a move in the right direction. As the biggest potential market in the world, China ‘s accession to the WTO is expected to trigger off a new round of foreign investment.
“As long as China is not obsessed with having controlling stakes, Chinese-foreign joint ventures will remain the most important form of foreign investment in China , and will continue to contribute to the upgrading of China ‘s state-owned enterprises and its traditional industries,” Ma said.
