HIGH MAINTENANCE
Joint ventures remain an option in China, but require as much care and attention as ever.
By Tom Leander and Avital Louria-Hahn

Joint ventures can be an arduous way of doing business in China: they’re hard to set up, tricky to manage, and sometimes nearly impossible to unwind. And they don’t seem to be getting easier. Just ask Emmanuel Faber, the former CFO of French food group Danone, about his company’s ten years spent running dozens of JVs with China’s largest beverage company, Wahaha. 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 United States, and Sweden, providing CFOs of other companies yet more cautionary tales about the perils of running JVs in China. Ever since the Chinese government began allowing foreign companies to set up 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 become a protracted negotiation,” says James Burdett, a partner at Baker & McKenzie.

No wonder, then, that multinationals are increasingly eschewing JVs in favor of other structures, such as wholly foreign-owned enterprises (WFOEs). For example, according to the American Chamber of Commerce, 53 percent of respondents to a recent survey said that they now run WFOEs, compared with 33 percent in 1999. Meanwhile, 27 percent of respondents said they now participate in JVs compared with nearly 80 percent eight years ago.

Out of sight, out of mind

But it’s too soon to pen the epitaph of the foreign-local JV. In sectors that bar non-Chinese ownership, such as car manufacturing, JVs are the only way a foreign company can tap China’s vast, growing economy. In numerous other sectors—particularly since China’s entry into the World Trade Organization in 2001—JVs allow companies 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, former vice president (China operations) of the non-profit U.S.-China Business Council in Beijing and currently vice president for China at Mundoro Mining, a Vancouver-based firm running a gold mine in China’s Liaoning province. “Many people come to China thinking they have to do things differently and that they can take short cuts. That’s wrong,” he says.

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. Maintenance of 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. “JVs require hands-on management, something not always easy in the size of a country like China,” says Dane Chamorro, regional general manager of China and North Asia for consultancy Control Risks. “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.”

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 percent stake in a JV—the maximum shareholding allowed foreign brewers at the time—with China Resources Enterprise (CRE). Though the JV, 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, fortunately, has “evolved” for the better, reckons Wayne Hall, SABMiller’s China finance director. “What we have managed to achieve is a business model that delivers autonomy and accountability for operational management and an independent ‘shareholder’ structure,” he says.

Good governance has been pivotal, says Hall. For example, CR Snow’s board consists of 10 members, five each from SABMiller and CRE, with the chairman rotating between the partners every two years. Equally important are the crystal-clear processes and procedures in place— some of which come directly from SABMiller’s London headquarters (such as budgeting and planning), while others are adjusted to take local practices into account (such as productivity and performance management). And there are clear reporting structures that prevent either parent from excessive meddling in the JV’s day-to-day management, something that’s been the downfall of many other JVs. “This is important because accountability is then clear,” Hall explains.

Another company that’s been honing its JV strategy is Philips Electronics, which has been investing heavily in JVs in China since 1985. Philips now has seven majority-owned and nine minority-owned JVs, alongside 14 WFOEs, according to Kiam-Kong Ho, senior vice president and CFO for Asia Pacific, and CFO for China, for the Dutch electronics firm.

The key for Philips is integration. These days, all new Philips JVs undergo a nine-step program covering due diligence and performance management, while also plugging into Philips China’s shared services for accounting, HR, and other functions. The JVs also have access to Philips’ pool of young staff, many having been snapped up straight out of business school. In a country suffering from shortages of skilled managers, that’s a big bonus. More recently, Ho moved from Philips’ Hong Kong office to Shanghai. “Moving to Shanghai has definitely given me a lot more involvement in local issues,” he says.

In time, Ho reckons the balance of businesses within Philips China will tip towards WFOEs. “From a strategic point of view, we’re constantly evaluating the efficiency of our JVs,” he says. And because of that, “there’s now a tendency to go out and buy back shares from JV partners, especially if the value-added role is not there because the joint venture has changed over time. By streamlining your legal entities, and by even dissolving them, and moving across into a holding structure, you’re basically unlocking a lot of the equity that’s been tied up in the JV.”

Happy endings

But sometimes “streamlining” JV arrangements is easier said than done. As Baker & McKenzie’s Burdett notes: “When it comes to unraveling a JV, it’s not as if you can go back to the original terms set out, which are essentially irrelevant if things have moved on. It could mean big, if not bigger, negotiations than when it was set up, and could quite easily involve lawsuits.”

Such a quagmire nearly ensnared Jim Xue Jianmin of Shanghai Tire & Rubber. The year after he joined as CFO in 2000, the firm took a 30 percent stake in a JV with French tire concern Michelin, which very quickly began stumbling over one hurdle after another. Rather than the cooperation that Xue expected at the JV known as Shanghai Michelin Warrior Tyre Company, he sensed rivalry and growing suspicion that Michelin wanted to dilute his firm’s shares in the venture. Disagreements, including about how much capital the partners should inject in the JV and whether the JV needed to undergo an independent audit, were frequent.

He grew increasingly concerned when financial information was not forthcoming, fueling his unease as sales at the new venture dipped to levels lower than when Shanghai Tire ran the unit on its own.

Since then, the JV has turned the corner. “Both sides are upbeat about China’s tire market prospects and expressed wishes to expand cooperation to create a win-win situation,” says Xue. In particular, he says, communication between parents and the JV has been vastly improved—largely because of the appointment of a new CEO at the JV.

But Xue is not entirely happy. The JV has yet to turn a profit, losing 75m renminbi (US$10 million) last year alone. And while rival tire makers in China have been scaling up capacity, the JV has been standing still—its annual capacity is still the same, 5 million tires, as seven years ago.

Xue doesn’t see that changing any time soon, though he admits that there are some promising plans on the drawing board. Whether they will be enough to rescue the JV remains to be seen. There are some CFOs in China who would argue that it’s not worth the effort.