What to Ask before Forming a China Joint Venture
Before you finalize a partner to form a Joint Venture (JV), take one step back to evaluate if a JV is the best option for you. While many well-known companies, such as McDonald’s and Starbucks have adopted this approach, think carefully about your reasons to do so. There are two main scenarios for which a joint venture is your best bet:
You are looking to invest in a sector categorized as ‘restricted’ under China’s Negative List
You need help with the local know-how, initial setup, networks, sales channels, distribution networks, and eventually, expansion.
In the process of shortlisting a potential partner, here are some factors to consider:
Past record in business: Past performance is a good indicator of future performance. Find out if you know someone who has worked with them in the past
Business license, operation status, financial reports: This can help you understand the key decision-makers, the registered capital, the duration of the business license, etc. It is also important to analyze the financial hat the financial information in the company books is an accurate representation of the company’s financial position
Land use rights: If land or real estate is a part of the business and/or its operations, check if the partner actually holds the title to that land. Illegal land acquisition is a common problem in China, hence this is particularly important to consider.
Open communication and transparency are crucial to the success of any business venture, so, make sure you are prepared to establish and maintain open lines of communication. Once you have finalized a prospective partner, here are 9 questions you must discuss with your partner.
The Objective of the Joint Venture:
The first thing for you to understand and define what you are looking to accomplish with the joint venture. Both parties should agree on the objective of the JV and their respective roles before starting any work on the JV itself. Here are a few things to discuss and define:
The outcome of the venture with timelines
Your Company’s Core Contribution:
Identify the core offerings of your business and gaps that a partner can help fill. Identify the verticals and discuss ownership and responsibilities. The primary verticals to consider include:
Capital: Who will raise or invest capital? Who will contribute to operational costs?
Human resources: Who will handle hiring and employees?
Infrastructure: Who will provide the property or land for the business? Will this land be purchased or leased? Who will procure office infrastructure?
Finance and administration: Who will handle finance, payroll, and accounting? Who will handle facility maintenance?
Technology: Who will build and handle technology?
Intellectual property: Will there be separate areas of research and development? Who will the IP rest with?
The Partner’s Contribution to the Business
Clearly discuss and define primary managerial roles and responsibilities for each of the verticals discussed above. This includes expansion roles (content creation and marketing), intellectual property (copyrights, trademarks), or services (speaking at an event). Clearly
define who does what.
Roles and responsibilities: A good start is to list the tasks/responsibilities that need to be completed throughout the development process. You could assign a lead role and a review role - one each from each of the parties for joint areas of operation.
Performance indicators and reporting: Identify timeline-linked performance indicators and discuss ways to measure, track, and report these.
Board constitution: With the increased scrutiny on JVs, good and transparent governance is critical. A factor that could be key to governance is the setting up of the board.
Another aspect to consider is ownership. If one entity does 90 percent of the work, you need to decide if they’re going to own 90 percent of the product or devise an appropriate measurement. Also, make sure to deeply study the scope of the business and territory of
the JV to carve-out areas or exclusions that any individual party may retain for themselves
Excerpt from Market Entry 10x Series (2020), co-published by Brainsfeed and TCP Growth