Finding the Best Business Structure for China
The simple answer is, of course, the one that makes money. Let’s delve a little deeper, though, examining the historically popular structures, current trends and varying levels of risk and commitment.
Having negotiated several joint ventures, acquisitions and business
deals in China over the past eight or nine years, I can recall when
nearly every foreign company entering the Chinese market was going the
joint venture route. In those days, most industries were considered
sensitive and the PRC wanted to avoid 100% foreign ownership of
anything.
While certain industries are still sensitive, a clear trend towards
the establishment of Wholly Owned Foreign Enterprises (or WOFI’s) has
emerged. In fact, many foreign companies that set up JV’s years
ago are now faced with the challenge of buying out their Chinese
partners (often at a premium) and converting their businesses to
WOFI’s. Given this new environment, decision makers should
consider carefully how they want to set up shop in China.
After a trip or two to China, some become convinced that the complexity
of doing business in the PRC necessitates a Chinese equity
partner. All too often, apprehension about dealing in China leads
Western decision makers to forgo the normal commercial due diligence
that would determine the viability of a similar JV proposal in a
not-so-foreign environment.
Of course, the number one question that business leaders should ask
when considering a JV is: what am I getting in return for my
equity stake? If the answer is "good will" or "I'm not sure",
then Bailey & Wong would advise clients to evaluate other options,
listed (generally speaking) in order of increasing risk and commitment:
-
Work with local Chinese representatives and distributors remotely from your home country and travel to China frequently for “buddy calls” with these partners (consider hiring a company like Bailey & Wong to help recruit and manage your network).
-
Set up a representative office (to manage distributors and promote products to end customers).
-
Establish a WOFI.
-
Acquire, outright, an existing Chinese business.
Of course, the number one question that business leaders should ask
when considering a JV is: what am I getting in return for my
equity
stake? If the answer is "good will" or "I'm not sure", then
Bailey
& Wong would advise clients to evaluate other options, listed
(generally speaking) in order of increasing risk and commitment.
Significantly, none of the above options need imply “going it alone.” You’ll still have a team with Chinese staff to guide you through all the intricacies of doing business in a foreign culture and in all but a few cases, you can hire people with just as much, and usually more, “guanxi” than the potential JV partner may have (incidently it is a bit mistake to think that guanxi means only unethical relationships). Most importantly, though, you’ll be free to make the business decisions that affect your company’s future without having to consult and educate shareholders that may know very little about your business model, product or services.
Business practices in China are now very modern and foreign direct investment is welcomed. In the end, a joint venture may be the best solution for your business needs. Nevertheless, Bailey & Wong has seen more than one instance in which a 10% partner creates 90% of the headaches. Bailey & Wong therefore advises clients to be sure to get a clear understanding of what a JV partner is to provide and to carefully evaluate his or her ability and motivation to deliver on promises. In the end, it may be wise to consider one of the alternatives above.
About Bailey & Wong
Bailey & Wong is a
boutique, Asia-focused, business development consulting firm based in
Singapore with partners in China and Malaysia. We provide clients
with services that reduce the costs and learning curves associated with
doing business in Asia, thus leading to faster returns. Some of
our most popular services include custom market research, strategic
business planning, representative and distributor recruitment, channel
management as well as M&A and other partner negotiation assistance.