The Asianist

Regarding my earlier entry about China business, a reader responds:

I just read your blog post on “Doing Business in China without Partners,” and it reminded me of the sentiment expressed by one of my colleagues, Kent Kedl. Kent is the host of the China Business Podcast, and he’s recently done a couple of podcasts on partnerships in China.

As the executive director of Technomic Asia, a strategy consulting firm that helps Western businesses find successful ways to operate in China, Kent has seen just about everything. I think he’d probably disagree with your expat friends who say that “You often get screwed when you get a partner/joint venture.” Kent would argue that the “six Ds” – due diligence, due diligence, due diligence – would eliminate just about all the risk involved in forming a partnership or joint venture. Generally, though, I think you’re right on with this post, and your insight is appreciated.

You might be interested in a brand new article from the most recent issue of IndustryWeek. Kent’s colleague from Technomic Asia, Steve Ganster, was featured in a big article on small and midsize companies expanding into China. This particular article doesn’t get into the angle of partnerships, per se, but it does stress the importance of research and preparation before entering China.

Mike

Michael Keliher
St. Paul, MN

Thank you, Mike.

Of course, due diligence would do much to reduce the risk of partnerships in China. But in my experience, due diligence has limits in places like China where transparency is still weak, and true players behind businesses are at times murky. I certainly wouldn't want to be the investigator who conducts in-country due diligence either, for that matter (outsourcing to local investigator would incur the problem of reliability on the other hand).

This isn't just limited to China, per se, but one of the main problems in creating joint-ventures, especially for low profile, politically-unconnected, mid- to small-sized expatriate firms, is the lack of rule of law in many countries, especially in minority owner/shareholder rights.

First of all, governments in these countries often force foreign investor to be the minority owner (usually 49%) with the local owner holding the minimum majority of 51%. At first, everything goes well. The foreign investor brings in capital and know-how. The local partner finds labor, location and connections. They start making money. Just when things start to take off, the local partner suddenly becomes more "assertive" and starts making unilateral decisions, with the tacit approval if not support of the local regulatory officials/courts. In essence, he takes over the business.

Now, I am not suggesting that this scenario is "automatic" or common in China. What I am suggesting is that there are benefits and risks to partnerships, and the betrayal by a local partner and the indifference of the local legal system to such betrayal are common problems in countries with a weak rule of law and low transparency (especially if the betrayer is well-connected).

One usually enters into partnerships with local players because of 1) regulatory requirements and/or 2) for bypassing high barrier to entry, legal or otherwise (e.g. language, market knowledge, supplier network, etc.).

I think the expatriate businesses are finding in China that the regulatory requirements are loosening (allowing for more totally foreign-owned operations) and paying the costs of high barrier to entry upfront is well worth it in the long run, because the profit and control are higher and more secure as the business takes off.