china law

What are the key elements to setting up a successful Joint Venture in China and maintaining a good relationship with your Chinese partner?

In helping our clients set up Joint Ventures (JVs) in China, we have found that foreign investors usually find it extremely difficult dealing with the numerous types and levels of Chinese authorities while also maintaining a stable and positive relationship with their Chinese partner. Though difficult it is, some clients still managed to do so and achieved great success in this respect. According to them, understanding and patience plays an important role in their highly rewarding business ventures in China.

Understanding is definitely a recurrent theme in a successful JV in China. Understanding the way PRC bureaucracy works is a pre-requisite. It is very important that an investor understands where authority is vested at central, provincial, and municipal levels, so that they can obtain the requisite approvals and chops (official seals) to set up a JV. You should also know the level of any particular individual with whom you are dealing so you will not embarrass him or her by asking questions that are beyond their responsibility or control that may lead your request being subsequently refused.

Understanding between the foreign investor and the Chinese party is of equal importance. In establishing or managing a JV, you can never make assumptions or expect something will happen. Sometimes, Chinese partners complain about the price of technology, expatriates etc. and at other times, they will question your motivation in retaining or injecting funds as working capital into the JV. On these occasions, you must make every effort to enhance the understanding between each other and to show them that what you are doing can add value to the business, therefore make them realize that long-term commitments and cooperation is the only way to make the business grow.

An understanding of the business environment will also enable foreign investors to focus on the introduction into the JV of such things as reward systems, for example, offering production bonuses or provide training program for both locals and expatriates employees to further develop their work skills. Where foreign investors manage to convince workers from the state-owned factories system to be loyal to the JV has generally been the first large step to a successful JV.

After understanding but of no lesser importance is patience. Chinese bureaucracy is similar to many other bureaucracies in the world. It takes time. It takes time to deal with them and in getting the required approvals from the different authorities at different levels. It also takes time for a foreign investor to communicate with the Chinese partner especially when the Chinese partner is a state-owned enterprise. But it is necessary. Great patience is required to build up the necessary level of trust and you mustn't rush it, particularly when you are trying to acquire a substantial interest in a state-controlled industry. Remember the more patient you are, the more understanding you can achieve in the end.

We were told by one of our client's that it took them three years of negotiation with the Chinese authorities and the Chinese partner before they established their JV. After three years of negotiation they got to be known each other quite well. As a result, the JV they established turned out to be a great success. To date, our client still maintains an excellent relationship with their Chinese partner.