Joint Ventures used to be the most common foreign investment structure in China. A lot of things have changed since China's accession to the WTO in 2001. In this presentation, Shanghai-based law firm R&P discusses the Joint Venture types and highlights the reasons for and against JV's.
The Coffee Bean & Tea Leaf(CBTL), Business strategy case study
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Partnering up in a China Joint Venture - A whise decision?
1. Partnering up in a China
Joint Venture – A wise
decision?
An R&P Publication on Chinese Law
and Legal Practice
C R&P China Lawyers Shanghai, 2012
T +86 21 6173 8270
E info@rplawyers.com www.rplawyers.com
2. INTRODUCTION
• Restrictions on FDI / slow opening of China’s economy
ïƒ JV was the compulsory structure especially in the 80’s/90’s
• China accession to WTO in 2001: gradual lifting of foreign
direct investment (FDI) restrictions
• Today, new WFOE’s (wholly-owned subsidiaries)
outnumber new JV’s (Chinese-foreign joint ventures)
and the ratio shifts rapidly:
2008: 30% of all German companies in China were JV’s
ïƒ 2011: only 11% of German operations fall into JV’s
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3. INTRODUCTION
WFOE
Joint
Venture
Importance of Joint Ventures is sharply
decreasing: When are JVs the right strategy?
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4. JV Structure: Key Points
• The basic idea: 2+ investors invest in and hold a third entity
i.e. the JV is NOT a merger of two existing companies!
A: B:
Foreign Chinese
Investor Company
C:
Joint
Venture
• Both entities (A + B) continue to exist independently from JV
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5. JV Structure: Key Points (2)
• Two different Joint Venture types:
Equity Joint Venture / Cooperative Joint Venture
• Joint Investment: mutual capital contribution (cash, assets)
• Shared benefits – and shared risks
 Principle for development of Chinese economy:
Foreign partner benefits from local knowledge and resources
Chinese partner acquires new technologies, know-how, insight
in foreign management style and markets, cash contribution
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6. Reasons for Joint Venture Structure
• Benefits: local • Minimizing costs:
market knowledge, Benefit Cost shared capital
local resources, contribution, help with
contacts, partner’s setting up cost-effective
familiarity with facilities under local
Legal conditions
culture and language
• Legal restrictions: Partnering with Chinese company is still
mandatory for certain industries determined in the Foreign
Investment Catalogue:
 E.g. car manufacturing, finance + insurance,
telecommunications, media publishing, mining activities <6 of 18>
7. Equity Joint Venture
• Limited Liability Company + Chinese legal entity
 Foreign Investor: Companies, individuals
 Chinese Investor: Companies only
• Profits/dividends and risks proportionally shared
• Partners appoint legal representative/board of directors
• Capital contribution: cash, assets (e.g. machinery), intellectual
property, land-use rights
• JV ends upon:
 Expiration of agreed term (if not extended)
 Mutual agreement between partners
 Other reasons specified in JV contract (ïƒ exit strategies!)
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8. Cooperative/Contractual Joint Venture
• Can be established as Ltd. Co. OR as cooperation between
separate legal entities with independent liabilities
• Capital contribution does not have to be of monetary value:
resources, services, licenses, market-access rights
• Investment return negotiable (dividend payment schedules,
ownership of assets during and after the project)
ïƒ not strictly linked to the party’s share (e.g. BOT projects)
• No binding system for voting rights (Board of Directors)
 High flexibility in the JV organization, but complex, lengthy
negotiations: suitable for certain projects
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9. The Advantages
• Shared risks and costs when expanding to Chinese market
• Market access: only way to invest in closed industries
• JV is a Chinese Ltd. Co.: higher chance in government
procurement biddings
• Simplifies dealing with government authorities
• Benefits from Chinese partner’s network and local business
practices (cost control)
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10. The Disadvantages
• Equity transfer requires government approval
• Difficult to control: Chinese partner may be involved in active
management – who controls daily operations?
• High risk of dispute:
 Different goals and expectations for the future direction?
 Culture: different business/management mentalities
• Exposure of IPR and confidential information:
 Who is the owner of the IPR when JV is closed?
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11. When Joint Ventures Fail…
• Common dangers for the foreign party:
Conflicts of  Chinese partner may share land, machinery and
interest employees where JV is located nearby Chinese
investor
Favoritism  Contracts with relatives in unfavorable conditions
 Secret (e.g. night shifts) manufacturing of own or
Secret
competitive products to generate higher margins
Manufacturing
 Supplying relatives with IP and know-how to
produce counterfeits
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12. Minimizing Risks, Maximizing Chances
Establishment JV Agreement
Intellectual
Partnering
Property
Due Diligence Confidentiality
Influence Dispute
Control Settlement
Exit Strategy
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13. Minimizing Risks, Maximizing Chances (2)
• Partnering: What are the roles of each partner in the JV?
 Are individual interests/goals understood?
ïƒ Focus on best-fitting partner, not the most obvious one!
• Due Diligence: check on partner’s finances, assets, business
license, reputation, internal structure/decision-makers
• Influence Control: Not just a matter of majority share –
optimal balance when appointing decision-makers
ïƒ Key personnel like legal representative/GM important to
control daily business operations
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14. Minimizing Risks, Maximizing Chances (3)
• Detailed Agreements (Articles of Association and JV Contract):
 Intellectual Property: contractual rules regarding
ownership, use, transfers and licensing of IPR
 Confidentiality and anti-competition agreements
ïƒ avoid exploitation of sensible information and IP
 Dispute Settlement: how are disputes solved? Mediation?
 Exit Strategy: rules on fair evaluation and sale of equity
share in case the partners disagree on future direction
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15. When are JVs the Right Strategy?
Legal • Foreign investor seeks entrance in
Restrictions restricted industry
• Chinese partner’s market knowledge,
Resources capital contribution or other resources
crucial to success
 If not, WFOE may be more suitable:
 Easy set up without complex negotiations
 100% Control over corporate management and operations
 Control over IPR and confidential information
 Straightforward exit: easy to close
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