What is it about joint ventures in China? They’re hard to set up, difficult to manage, and almost impossible to unwind if things go wrong. Just ask Emmanuel Faber, the former CFO of French yogurt and water company Danone, which has been running dozens of JVs with China’s largest beverage company, Wahaha, in recent years. At the moment, as Danone’s president of Asia-Pacific operations, Faber is in Shanghai sorting out a very public JV bust-up that erupted earlier this year.
As Danone and Wahaha accuse one another of breaching agreements, the tit-for-tat spat is playing out in courts in China, the US and Sweden, providing CFOs of other companies with yet more cautionary tales about the perils of running JVs in China. Ever since the Chinese government began letting foreign companies invest in the country through JVs in the late 1970s, these alliances have faced all kinds of problems, from lax governance and protracted decision-making to wrangles over intellectual property and excessive government interference. “The whole life of a JV [in China] can be blighted by a continuous negotiation of its terms,” says James Burdett, a partner at law firm Baker & McKenzie.
There is growing evidence that the more experience foreign companies gather in China, the more they are eschewing JVs in favour of other structures, such as wholly foreign-owned enterprises (WFOEs). More than half (53%) of the respondents to an annual members survey run by the American Chamber of Commerce said that they have WFOEs in China today compared with 33% in 1999, while 27% said they have JVs compared with nearly 80% eight years ago. (See “Wish You Were Here” at the end of this article.)
For sure, more and more CFOs of companies will be reassessing their JVs and other business relationships in China in the months ahead. One reason is the heightened risk issues following the recent spate of made-in-China product recalls. (See “Chinese Checking,” CFO Europe, September 2007.) Another is the new anti-monopoly legislation passed in China this summer, which could restrict M&A of local industries. It’s clear that for any company that decides to continue down the JV route in China, more hard work lies ahead.
Amid all this, it might be easy to forget that JVs do indeed have a lot going for them. In sectors that exclude non-Chinese ownership, such as car manufacturing, JVs are the only way a foreign company can tap China’s vast, growing economy. And particularly since China’s entry into the World Trade Organisation in 2001, JVs allow companies in other sectors to build market share and brand awareness, and manage red tape, far faster than if they were going it alone. For Chinese companies, JVs promise access to new industry know-how, technology and more international networks.
The myriad problems that JVs in China encounter are largely “self-inflicted,” asserts Patrick Powers, currently China vice president of a Canadian mining firm and a former vice president of the non-profit US-China Business Council in Beijing . “Many people come to China thinking they have to do things differently and that they can take short cuts. That’s wrong,” he says.