Joint Ventures (JVs) are one of the four main options that new and existing foreign businesses have when they are looking to establish a presence in China. These four options (the others being the Wholly Foreign-Owned Enterprise (WFOE), the Representative Office (RO), and the Foreign Invested Partnership Enterprise (FIPE)) all have their benefits and drawbacks, which should be fundamental considerations for any business owner or executive considering entering the Chinese market. JVs are certainly not the most common legal structure adopted among foreign investors – JVs account for only 2% of the new structures created – but they nonetheless have some key features and benefits that make them suitable for some investors.
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What is a Joint Venture and what are some of the core benefits?
At its core, a Joint Venture is a business agreement, not necessarily a separate legal entity. JVs are agreements that enable foreign companies to partner with a local Chinese company (or more than one, if necessary) in order to establish a formal presence in China. Usually, these partnerships involve the companies pooling their resources to meet mutually beneficial business goals.
For example, General Motors achieved incredibly early growth in the Chinese automotive market when it joined with SAIC Motor, SAIC-GM-Wuling Automobile to create Baojun, a new line of budget automobiles in 2010. Similarly, Morgan Stanley was able to enter the highly-regulated securities market in 2011 when it joined with Huaxin Securities Co Ltd (known also as China Fortune Securities Co Ltd) to create Morgan Stanley Huaxin Securities.
But it not just large multinationals that create JVs in China. Indeed, the possibility of rapid market entry (it takes on average four to six months to establish a JV in China) and other core benefits mean they are attractive to a range of foreign investors. Some of those benefits include:
- Both commercial capacity and hiring autonomy are usually very high, which has clear advantages over, say, ROs, where it is not possible even to issue invoices or take payments
- JVs enable a foreign company to use the partners’ existing facilities, workforce, and networks
- JVs open up ‘Negative List’ markets that are (for now, at least) otherwise closed to foreign investors, such as the financial markets
- Sales and distribution channels are likely already established by the partners, reducing the potential start-up costs of operating in China
Are there any drawbacks to using a JV?
JVs entail some significant drawbacks compared to other means of establishing a presence in China. Some of the main drawbacks include:
- Compared to ROs, the cost of establishing a JV is relatively high
Administratively, JVs are complex and delays in registration are common
- Merging different cultures can create conflicts in management
- Foreign companies in a partnership must jointly assume the liabilities of local employment and other potentially high-risk aspects of the business
- Complex laws around data management and privacy can raise compliance concerns
How are JVs established in China?
For companies that have decided to establish a JV despite the potential drawbacks, the process is relatively straightforward to understand, but complex in practice:
- Deciding on an Equity Joint Venture (EJV) or a Cooperative Joint Venture (CJV): EJVs are limited liability companies (LLCs) that share profits and losses in proportion to their respective equity interest. CJVs, on the other hand, offer greater flexibility as they can operate as an LLC or a non-legal entity. With CJVs, profit, risk, and control are not divided in proportion to their equity interests; they can be negotiated as needed in the constitutive contract.
- Finding one or more local partners: Due diligence is critical at this stage, and in addition to finding a compatible company, the foreign investor should check the prospective partner’s financial reports, licenses, operational status, and any applicable land rights.
- Pre-licensing: Once the partners are chosen, a number of documents must be drafted or obtained, including: a memorandum of understanding signed by all parties, Administration for Industry and Commerce (AIC) name approval, the JV contract and articles of association (in Chinese and any other relevant languages), and a certificate of approval from the Municipal Commission of Commerce (MOC).
- Licensing: Upon receipt of the relevant paperwork, the AIC may issue a business licence.
- Post-licensing: Once the business licence is issued, the JV must complete a number of requirements including: obtaining tax and other mandated certificates, registering with the Administration of Foreign Exchange to create a foreign currency account, setting up local bank accounts, obtaining relevant licenses (e.g. import-export license), and registering with the local Finance Bureau.
There are a number of options that foreign investors are presented with when considering doing business in China. Of them, the JV may be suitable for some businesses, especially those that are able to find a ‘good match’ in the partnership to further mutual