China remains a robust destination for a gamut of businesses. The country offers a particular wealth of advantages for manufacturing companies. Often solely regarded as a region for inexpensive labor, China also offers an increasingly sophisticated range of manufacturers and workers. Today, China accommodates the entire span between high quality manufacturing needs and orders for manufactured commodity goods. For most global companies, perhaps the most important benefit of establishing a presence in China is the fuller access into the Chinese market that this provides. But what is the best way to navigate business operations in China?
Joint ventures were conventionally the only way in which a foreign company could legally expand to China. After China’s President Deng Xiaoping implemented open trade economics in 1979, foreign companies were allowed to conduct business in China through joint ventures. By 1986, wholly foreign owned enterprises (WFOEs) were officially allowed to be established in China. Today, WFOEs and joint ventures in which the foreign company has a majority share are becoming more common in China. Joint ventures remain a very strategic way to carry out an initial entrance into the Chinese market.
Here are some tips to help your company in your first steps towards a joint venture in China.
Companies considering a joint venture should refer to the “Law of the People's Republic of China on Chinese-Foreign Joint Ventures,” which details many important fundamentals and logistics. For example, in a Chinese-Foreign joint venture, the foreign company must contribute at least 25% of the financial capital. Also, a board of directors must be established. The chairman and the vice chairman of this board cannot be from the same party. Moreover, a joint venture is legally considered a Chinese entity. Thus, locals can be hired to staff and construct facilities. Other articles in the law cover issues such as the government’s role in managing Chinese-Foreign joint ventures, the role of trade unions, and more.
Many multinational corporations have found great success through joint ventures in China. Coca Cola, Philips, and others have made extensive use of this strategy. However, it is still important to perform due diligence since problems may arise. Common setbacks include intellectual property rights infringement, diverging goals between the foreign and local party, bureaucratic red tape, etc.
Many developments have occurred since the initial introduction of joint ventures in China. Perhaps the most significant trend is that ownership ratios are now increasingly distributed approximately 70% or 80% to the foreign company and only 30% or 20% to the local company. Despite the local companies’ comparatively lower ownership shares, local companies are now seen much more as full-fledged partners. Global companies depend a great deal on local companies for consumer networks and other local partners to connect with. Local companies often also provide invaluable negotiation skills.
Dealing with Chinese Competitors
For some companies that are just starting to consider establishing themselves in the Chinese market, a common concern is that there are already too many local Chinese competitors. These three simple tips will help most companies overcome this hurdle:
1) Innovate - As in most markets, the key to success is to have innovative products. Setting up in China may seem like an overwhelming task in and of itself. Yet, successful companies are capable of putting effort into expanding in China and simultaneously developing new and useful products.
2) Don’t over-engineer - China’s market should eventually be the goal of any foreign company in China. Many regional markets within China have demand for products with fewer features compared to products in Western Europe or the United States. So, in some ways as a caveat to the rule above, foreign companies should not waste too much time and money on engineering for a minor niche market.
3) Merge and acquire - Mergers and acquisitions are also increasingly common in China. With this method, a company gains all of the distribution networks of the merged or acquired entity. Furthermore, a merger or acquisition in effect eliminates competition.
China continues to offer plenty of opportunities. Companies looking for growth in China should consider joint ventures as a longstanding strategy that still offers high rates of success.
By Andrew Connor and Arthur Chyan
Founded in 1988, Pacific Bridge, Inc. (PBI) has been recruiting qualified candidates for top-notch firms for over 20 years and offers one of the most comprehensive international executive search and human resources consulting programs for Asia. PBI also offers general business consulting and publishes reports on business and HR issues in Asia. For more details, please visit our website at www.pacificbridge.com.