Deloitte in the News
Taking Advantage of Partnerships in post-COVID China
Joint ventures are the most effective way of investing in China right now.
While the second wave of coronavirus and a new recession sweeps across the world, China’s economy grew in the both second and third quarters of 2020. The country's GDP bucked the global trend by growing 4.9% year-on-year in the third quarter. Despite a multitude of challenges, global demand for Chinese goods and interest in the Chinese market remain buoyant: exports and imports grew by 9.9% and 13.2% respectively year-on-year.
Nonetheless, China faces a host of challenges: political and economic pressure from abroad, tense trading relationships (especially with the United States), a downturn in global and domestic demand, growing debt and sporadic quarantines in several Chinese cities. This is forcing both the government and businesses to pursue proactive policies. China’s main focus is currently on supporting exports, domestic consumption and infrastructure development.
How can foreign businesses enter the relatively prosperous Chinese market in the current climate? Should they invest directly in creating a new business, buy up local companies or enter into partnerships? Both greenfield investment and M&As are capital and labor intensive in China. M&As also present the danger of inheriting a company’s pre-existing problems and costs, just as risks are increasing during the crisis. Establishing a joint venture (JV) means that risks and costs can be shared. Moreover, JVs are often the best way of doing business in China due to the sheer number of challenges foreign investors face, including vastly different mentalities, fierce competition, regulatory minefields and even the possibility of countermeasures against foreign nationals living in the country.
Another consideration for foreign companies entering the Chinese market is whether they should make an effort to understand the local business culture. The answer is unambiguous—yes, of course they should. The assumption that a business should be managed in the same way as in other countries often leads to poor results. This is one more argument in favor of a JV.
Anecdotal evidence suggests that major business projects with foreign ownership in China perform better when a JV is established. All the best known and most successful business alliances have borne this out over the years, especially when it comes to partnerships in the automotive, electronics, consumer goods and manufacturing industries, as well as fast food and hotel chains.
On the one hand, political and economic restrictions on investment between the West and China may provoke a backlash and create difficulties both in China and abroad. On the other hand, the post-crisis environment will encourage the establishment of JVs: historically, the number of JVs increases during periods of economic recovery immediately following a crisis. JV activity is at its highest right after major economic downturns, and China will remain attractive to foreign companies after the coronavirus crisis, which appears to be coming to an end in the country.
JVs enable foreign companies to use the labor resources, local know-how, access to capital and business contacts of their local partner (which may well be a Chinese state-owned company) while benefitting from faster access to markets, assistance when dealing with government agencies, and access to local supply and distribution channels.
The reality of establishing a JV is, of course, complicated, and negotiating a joint venture agreement (an agreement between the founders of a JV) can take an extremely long time. Moreover, the challenges of corporate governance, internal disputes, cultural differences, and the fact that a JV’s business may overlap with the partner’s other interests must be taken into consideration. Intellectual property should be a top priority. Do not forget that a foreign investor cannot hold more than a 50% stake in a number of industries in China.
Despite all these challenges, more than 90% of the largest JVs established in the last 15 years are still operating in China today. Remarkably, almost 70% of JVs that have been on the market for over 25 years are still increasing their turnover and making a profit.
Establishing a JV venture is a multi-stage process that involves the assessment of strategic potential, partner selection, project structuring, negotiations, corporate governance harmonization, implementation, ongoing evaluation of the JV’s performance, and the development of an exit strategy. Each stage itself comprises several steps, and a consultant can help an investor develop a sound approach for each of them, including a range of due diligence procedures. At the same time, selecting the right partner is essential. The strategic objectives of partners may not always fully align, but should be clear and transparent: a JV can be only successful if the interests of the partners are in sync with each other.
By the same token, all this can be applied to establishing a JV with Chinese companies abroad. Chinese companies will now need more assistance from local partners than ever. As in China, a foreign investor sometimes needs a lot more time and effort to deal with challenges than a local partner.
Many companies are in survival mode at the moment. However, companies that are able to bounce back faster will be at an advantage. With a sensible approach, the right partner, and a robust management system and structure, JVs can be a powerful tool for doing business in China.
Deloitte China’s Financial Advisory team has published its latest report, Sino-Foreign Joint Ventures after COVID-19: What to Expect? The report mainly focuses on JVs in China, but also covers foreign-Chinese JVs outside of China.
Команда финансовых консультантов "Делойта" в Китае опубликовала отчет: "Иностранно-китайские совместные предприятия (СП) после COVID-19: что ожидать?". Отчет фокусируется в основом на СП в Китае, но затрагивает и иностранно-китайские СП вне Китая.