Sino-Foreign Joint Ventures after COVID-19: what to expect? 

The world is currently facing a unique crisis due to the devastating effects of the COVID-19 virus. In these uncertain times companies face a number of difficulties, such as keeping cash flow up, dealing with excess labour, disruption of international supply chains and ever-changing government regulations and policies. 

This disruption will have a profound influence on the International Joint Venture (IJV) market in both China and abroad. To understand its effects on global investment, Deloitte China's Financial Advisory team has published its latest report: Sino-Foreign Joint Ventures after COVID-19: what to expect? The paper presents four key view:

• The crisis will fundamentally reshape global economic and business practices. One impact is that there will likely be increased political and economic constraints on investment between Western countries and China.
  
  Politically, the crisis will potentially create some degree of backlash against Chinese investment. For example, the Australian Government has lowered the threshold for government review of foreign investment to $0, in a move widely perceived to be aimed at restricting Chinese investment. There may be increased economic and political pressure for industries deemed strategically important to reduce their reliance on just-in-time-models and complex global supply chains. The solution may be for countries to ensure that strategically important goods and services are able to be sourced from a variety of supply chains and not just one country.
  
  
• The post-downturn conditions will encourage Joint Ventures as a vehicle for international investment. Joint venture activity is often strongest during economic recovery.
  
  Following COVID-19's disruption, there will be considerable pent up demand in the economy. Joint venture formations are cyclical: falling during economic downturns but growing during growth periods. In fact, joint venture activity is highest immediately following a major economic trough.
  
  Following the COVID-19 crisis, capital markets will be highly risk averse, making raising funds for large scale M&A difficult; joint ventures can be a less capital-intensive alternative form of international investment. The downturn has also created a high degree of market uncertainty. When uncertainty is high joint ventures become more attractive since they can be set up with clear exit mechanism in mind. COVID-19 is, therefore, creating conditions that increasingly favour JVs. 
  
  
• IJVs in China will still be attractive for western firms after COVID-19: they allow western companies to make use of the local know-how, access to capital, business relationships and talent of their local Chinese partner.
  
  Western companies entering into the Chinese market need to take the effort to understand the local business culture. Assuming that businesses are run in the same manner as in the West will lead to strife. Additionally, finding the right partner is paramount. It is vitally important for both sides to clearly understand the strategic goals of both parties: a joint venture can only succeed where interests coincide. Finally, it is important to establish before the venture begins that both sides have a strong strategic and financial incentive to treat the venture with appropriate seriousness, including a willingness to invest in top management talent.
  
  
• Chinese firms will increasingly invest in the west (particularly Europe) in the form of IJVs, in response to increased regulatory pressures on foreign investment. 
  
  For a number of years now there has been a trend of increased scrutiny of foreign investment in Western economies; the pandemic has only accelerated that trend. As cultural and regulatory barriers rise, so to do likelihood of Chinese firms adapting IJVs as the means of outbound investment. IJVs generally face lower regulatory burdens than M&A or investing alone.
  
  Western firms will have an economic incentive to partner with Chinese firms. Many firms in the west will be cash-strapped after months of depressed economic activity. Western firms will therefore be seeking new sources of capital to fund investments and increase revenue growth. IJVs will provide western firms with access to Chinese capital and allow them to share the costs of their new investments with their partner. 

Beyond these key finds, the report sets out a step-by-step guide to best practice when it comes to forming an IJV in China or the West. It also examines joint venture myths, such as their unwarranted academic reputation for often being short-lived.    

The crisis is having a profound impact on businesses across the global. Currently many companies are in a survival mode. But once COVID-19 has past, businesses that are able to bounce back quickly will enjoy a first mover advantage. With prudent due diligence, the right partner and a robust governance framework and JV structure, IJVs can be a powerful tool for businesses in both China and abroad in times of global uncertainty.