As you decide to establish your company in China, you will consider three main options: WFOE, Representative Office, Joint Venture. Partnering up with a Chinese domestic organization or an individual may be the best choice for your business. The right local partner may have a great contribution in the future success of your company. This article will be helpful if you are looking to expand your business to one of the biggest markets in the world.
First, let’s have a look at the two different types of Joint Ventures: EJV and CJV.
- The Equity Joint Venture (“EJV”)limited liability enterprise is an enterprise where the foreign partner has at least 25% ownership share, with up to 20% of the total registered capital. The EJV is typically self-managed and the top level of management is represented by the board of directors. The percentage of investors’ equity shares defines the number of board members accordingly and the distribution of the profits and losses. Profits may only be distributed in cash.
- The Cooperative joint venture (“CJV”), may be represented by one of the two types:
- A limited liability company when a board of directors is appointed for three years to manage the company
- A contract for a separate project, without setting up a legal entity. The board of directors can be called to manage the specific project.
In both cases, profits are paid to the investors according to the contractual agreement, not according to the percentage of investment shares. Profits may be distributed in cash or products. The setup procedures are similar for both CJV and EJV.
Much like any relationship worth having, a joint venture involves a great amount of give and take from both parties. Finding the right local partner with the right amount of resources and expertise is obviously the biggest factor to consider when partnering up, and if done successfully presents the following advantages for an enterprise undertaking China company setup:
- You can learn how to do business in China from the Chinese partner’s experience.
- Chinese partners might have important connections “guanxi” vital for your business.
- There procedure for registration and deregistration of the JV is simpler to handle than in WFOE.
- You can get an access to Chinese partner’s local resources and facilities.
- A partnership can help you strengthen a company's position and win even more market share.
- A JV in China can open up new business opportunities outside of your company's core business.
Although there are many obvious advantages for certain businesses to set up a JV in China, entering a partnership without prior preparation and consideration may lead to the following disadvantages for an enterprise:
- The process of finding the right Chinese partner can take a long time and money.
- Your company’s Intellectual Property may be vulnerable.
- Certain Chinese partners may have deals without the foreign partner’s knowledge.
- Business technology or information provided by the foreign investors are not well-protected.
- Conflicting management styles may lead to miscommunication between partners and costly business decisions.
- Culture and language barriers might lead to misunderstandings within the company.
How to mitigate the risks
Prior preparation might help foreign investors to mitigate risks:
- The contract should have an official version of in Chinese, so that it can be easier enforced by Chinese arbitrators and courts.
- It should be stated in the agreement that the General Manager is an employee of the joint venture–not of the Chinese partner.
- All the necessary information about the Chinese partner’s company, like finance statements, licenses etc. should be collected and checked in advance.
- The majority owner of the JV has to have the right to appoint and remove the Legal Representative.
Setting up a JV in China is risky for companies that are entering the market without enough experience, information or connections. At the same time a JV can turn into a great mutually beneficial partnership if you get to know your future partner well and take the necessary precautions beforehand. Taking into consideration all the pros and cons will help you make the right decision and succeed in your business expansion into China.