VideoWhat 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.
Out of Sight, Out of Mind
Like any new business partnership, extensive due diligence is required, including onsite visits, background checks into the other business relationships that a potential partner has, and a mapping out of the partner's current governance and decision-making structures. Introducing air-tight processes once a JV gets the green light is also critical, Powers says.
Indeed, keeping day-to-day management sharp is the area that foreign companies new to JVs in China often underestimate. According to Dane Chamorro, regional general manager of China and North Asia of consultancy Control Risks, "JVs require hands-on management, something not always easy in a country the size of China. If you think you can manage a JV by just sitting in Beijing, I can guarantee you that somewhere, somehow, someone is trying to pull the wool over your eyes. That would also happen in Nigeria; that would happen in the US."
This might seem obvious today, but it certainly wasn't back in the 1990s when China felt like the Wild West to many foreign companies. For the pioneering JV partners that are still around today, it's been a slow, steady learning process.
SABMiller, the Anglo-South African brewer, first entered China in 1994, with a 49% stake in a JV — the maximum shareholding allowed to foreign brewers at the time — with China Resources Enterprise. Although the result, China Resources Snow Breweries (CR Snow), is now the largest brewer in China, there have been plenty of setbacks along the way. Over the years, SABMiller and CRE's relationship, has, fortunately, "evolved" for the better, reckons Wayne Hall, SABMiller's China finance director, who is a senior consultant to the JV's CFO, with a dotted line to SABMiller's CFO for Africa and Asia. "What we have managed to achieve is a business model that delivers autonomy and accountability for operational management and an independent 'share holder' structure," he says. "This is an area of interaction that has left many JVs in China lacking in terms of delivering on...business goals."
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