Everyone knows that creating a joint venture (in any market) is a time consuming and complex effort, and China is no exception. That said, the most difficult part of a China joint venture is not the structure or getting regulatory approval, it’s finding the right partner to work effectively with to execute a shared vision.
Let’s take a look at what each side usually expects out of a China joint venture, some of the challenges, and ADG’s recommendations on the role a China joint venture can play in your overall China entry strategy (please note that we’re only discussing JVs here, meaning each side takes a stake in a new entity – there are many other kinds of strategic partnership types such as distribution, licensing deals, etc., that are less committing for both sides).
What are the chances?
Western technology companies often are looking at China with an eye towards finding the perfect joint venture partner. Usually, they have a wish list of a handful of well-known tech giants that could offer huge benefits to them. Unfortunately, for various reasons, the general likelihood of any China joint venture making it to the finish line is very low. So, when the target is a massive, fast growth tech company… think of it this way – what would be the chances of a mid-sized Chinese tech company forming a US-based joint venture with Facebook or Google? That said, we know firsthand that such JVs are possible, having engineered the extraordinarily successful partnership that led to the Ant Financial’s acquisition of EyeVerify. But, much more often than not – and especially without help from a local expert like us – it usually goes nowhere or worse.
Winning or losing comes down to execution
A lot has changed over the last 20 years that we have been helping companies find strategic partners in China, particularly around the rationale behind setting up a joint venture in the first place. Today, most China joint ventures are no longer about market access and regulatory hurdles, but about how to win a market and move much more quickly than one company can on its own. There are now great management teams in China, and the cultural gaps and value systems are no longer as wide as they were in the past. However, what has not changed is that success comes down to execution and operations.
Once the deal is inked and the money is in the bank, the project moves to the execution stage – and this is where problems often arise. The China side is expected to bring value and its networks to the partnership. However, unless the Western company’s product, technology or brand is already very well-known inside of China (and few Western technology companies’ brands are), the China side has a lot of work ahead of them. While the Western side can contribute experts to join the JV, the reality is that beyond consulting on technology, without meaningful China operating experience it will be almost impossible to contribute additional value, let alone build an effective go-to-market plan to deliver on a strategy.
Who will run the China joint venture?
It’s critical to point out that there is often less middle ground in China than in most other markets. In other words, if there is a business to be run, whatever the business plan says, the Western company needs to be prepared to take a meaningful hands-on role. Too often we see companies assume that their well-funded and experienced China partner is the best equipped side to run the business.
In practice, it is very difficult for a local company to run a China joint venture. The giant technology companies in China are already in a race against each other, and like in Silicon Valley, there is a talent war. As they are already struggling to hire high-level operational staff to run their own core internal initiatives, there’s little chance that they will have the right kind of people on board to also run a joint venture. Simply put, the skills it takes to build a Western business in China are not the same skills it takes to run a local China business. So, if a business needs to be built in order to make the China entry successful, don’t count on the partner to have the skills to run it unless they already operate a similar business and have proven they know what they are doing.
To maximize your chances for success we have two recommendations:
Widen your search parameters to find the companies that are specialists and operators within your industry – they can still be very large and are often already strategically aligned with the giants you were hoping to reach in the first place.
Unfortunately, most Western companies simply do not have the resources or connections to conduct an extensive search, so unless they solicit help, they might be forced to give up the idea of a China joint venture for lack of available partners.
Assume that the JV agreement will never close – and do what it takes to build success in China.
At ADG we believe that a China joint venture and other strategic partnerships can be great supplemental entry options to consider. However, JVs should be looked at as growth accelerators in parallel to building, or once you have already built, a basic China market presence – not as a standalone market entry strategy. There are some exceptions to this but as a general rule it holds.
Companies that have been operating in China for a few years (and have amassed enough experience), will be better positioned to know who are the right partners for them. Rest assured, when the time is right to pursue a China joint venture, if you have meaningful success on the ground, you will be approached regularly by local companies looking to join forces with you. Most importantly, you will be able to negotiate from a position of strength.
So, if China is on your roadmap, your first order of business should be to execute a plan to tackle many of the fundamental building blocks needed to create a high-growth China business. This allows you to aggressively create broader market awareness and ensures that the market sees you as a serious player in China. These basics can help unlock growth opportunities and get you on the right path towards attracting a great China joint venture partner. If you’re a technology company that doesn’t have the team or expertise on China and are looking for market entry help, please reach out to us.
Western companies do not succeed in China based on their technology alone. For enterprise customers, business case, fit, commitment to the market, and relationships are also important aspects to getting a deal over the finish line. For consumers, it’s all about the brand and its associated social validity. In both segments, pricing is often a secondary, and flexible, consideration. Western technology companies that attempt to create a China business entity alone, or through hiring a single person on the ground, cannot reasonably expect to make substantial headway on any of these fronts in less than 18 months at a minimum. There are two main reasons why:
Forming a go to market strategy
After a company makes their first China-related hire, it will usually take a company around 6 months to form a go-to-market strategy and evaluate the competition and opportunity. Even if this timetable is acceptable to a company, it still needs to validate this strategy, which can only truly be done through real business conversations and research with multiple, trusted connections that are already involved in the market. However, this type of engagement with Chinese companies and partners can’t happen yet, because…
You need China business entity in place
Serious conversations – and virtually nothing else – can’t happen without a China business entity and the associated licenses, IT infrastructure, payment systems and a multitude of other operational necessities required to conduct business in China. This includes an in-country website, social media accounts and any other brand-related activities. Companies new to China have to navigate numerous fundamental tasks – not to mention the more complicated and/or unknown obstacles – of setting up a China business entity before they can even begin to implement a strategy. Constructing a China business entity can easily take another 6 months to complete, meaning that – at best – any company entering China on its own won’t even be “in-market” for at least a year. This brings us back to the first point…
Building trust and relationships
As we’ve said, Chinese partners and potential customers won’t begin serious discussions with a Western company until its entity is in place. There are many reasons for this, but foremost is that trust hasn’t yet been built and they won’t be assured that the Western company is serious about China. However, the real business issue for a Western company in this situation is the lack of having – or even being able to build – corporate, brand and personal relationships and trust. Further, there is no predictable timetable for building these connections, so when we say “18 months at a minimum” this is factored into that timetable. While heavy spending can somewhat alleviate barriers to cooperation and acceptance (as in any market), Chinese customers are mainly swayed by social proof and relationships, which can be hard to buy and take time (often years if done from scratch) to generate.
The above scenario is not only likely to be extremely costly, but is also slow and fraught with pitfalls, not the least of which is attracting, hiring and especially retaining qualified and experienced Chinese staff. Many Western companies that have tried this route have bowed out of the market after as little as 1 to 2 years, because their high costs, lack of momentum and competition have all made China unsustainable for them.
Get the right kind of help
Some companies that have set up a China business entity on their own and have encountered inevitable obstacles end up leaning on global management consulting firms to try to help them through. However, these firms – at best – can only offer strategic direction at 30,000 foot level, and not the kind of daily actionable advice that running a business in China requires. Further, these firms do not carry out these directions, instead leaving companies to try to implement them on their own, which again, just slows things down.
What’s more, even companies that have knowledgeable advisors on China – for instance VC investors that have supported other portfolio companies with their China GTM plans – often make the decision to go forward on their own, even knowing all of the above. Why? Because they are generally against the idea of “handing the keys” over to a third party and not completely owning the business, especially when a local Chinese partner is hired. While this is a fair consideration, with a trusted partner and contractual safeguards, companies shouldn’t let this stand in their way of getting needed help to launch their China business entity.
Well developed China channels can be a great go-to-market strategy for global technology solutions companies. On a regular basis, we are approached by companies that want to use a China channels strategy to expand into the market. Typically, the conversation, goes something like this:
“We want to find a few key China channels to invest in our business and take the lead on developing the market. We have been very successful with this strategy in [insert country] and want to replicate this in Asia.”
We wanted to touch on some of the reasons why global technology solutions companies need to be clear about what they want, and take a hands-on approach to China channels building.
China channels expect you to do the heavy lifting, at least at first
China channels have been working with Western companies for over 40 years and they know firsthand that the key to success in China is not in their hands, but in how the Western company approaches and invests in the China market. Generally speaking, the largest difference between China channels and other markets is comparatively extra workload that Chinese channels put on Western tech companies.
While Chinese channels will often seem excited when approached, in our experience they will not commit to or follow through on what your company is hoping for when first approaching the market. There are legitimate reasons why they cannot take the role you envision; and you don’t really want them to either, as it often creates more problems than solutions.
Simply put, China channels have different motivations. While they do know the local market, for most solutions they are not equipped to take the lead on building proper messaging and sales strategies.
Trust needs to be built
China channels expect and need you take the lead on driving your business in a new market. Surprisingly, they may even expect you to be equally focused on bringing them deals. They are also evaluating your credibility as a partner, and need to choose partners that show commitment to China.
In the early stages, China channels prefer the process of going after projects to be a collective activity with the provider. Generally, they will start by conservatively reaching out to a select group of internal business development staff, who will then reach out and have discussions with their internal sales teams. Often, they will be reluctant to let providers speak directly to their sales teams – or bring you to customers – until they are familiar with your team personally, understand your products, and have confirmed the value proposition with their sales teams. As trust develops, they will start bringing you more deeply into the process, including joint sales calls with select customers.
Know what you want from your partner
Many companies approach partners with an attitude of: “here is my technology, what can you do for me?” Western executives often walk out of meetings with potential China channels partners disappointed because they felt the partner didn’t grasp their technology or ask the right questions to demonstrate their level of seriousness. The reality is, however, that many resellers or distributors don’t need to learn the ins-and-outs of your product and technology: they see that as your job. What they see as their job is to deliver a product that is “good enough” to get the deal over the finish line. Ultimate success will rely on many more aspects than simply your technology and price.
While potential China channels partners are happy to discuss all the ways in the world that you can cooperate, in an ideal world it is best to be clear on your expectations in advance. Do you expect them to bring you opportunities? Host your infrastructure? Provide technical support? Co-market or independently market your products? The more you can share with them, the better. We recommend using a straw man model or proposal whenever possible so both parties have a clear starting point to discuss what is possible and realistic. Open ended discussions almost never go anywhere useful.
Like many companies in the first half of 2020, ADG China has gone through a period of adjustment in the face of the pandemic. Our great team in Beijing has worked tirelessly over the past seven months, starting with the shutdown in China and through the waves of disruption globally, which has led to severe travel restrictions for foreign business visitors to China, among other hurdles.
While these new restrictions have made doing business in China even more complex, our clients have seen continued demand from Chinese partners and markets. Our Western technology clients in enterprise software, connected devices, and consumer solutions are all actively engaging in China.
Although they currently can’t jump on a plane and meet with potential partners and prospects, we are facilitating virtual meetings between our clients and key Chinese decision makers multiple times per week, in addition to our daily contact throughout our partner and service provider ecosystem. (To handle the shift in operations, we’ve purchased three additional video conferencing systems and tripled our broadband capacity in our Beijing office).
Some of the tech sectors that we’ve been helping our Western clients to grow during 2020 include SaaS, data analytics, smartphones, IoT, AI/ML, and life sciences/bioinformatics, among others. Our deep, long-standing connections within each of these industries (as well as many others) has allowed us to continue working at full capacity throughout the year. So whether we’re doing China market validation, business development, building/running operations, or any of the other multiple services we provide, we have been able to both adjust and continue to drive our clients’ business.
Despite pandemic, global companies should look at China closely
For many reasons, we believe that the second half of 2020 is a smart time to begin exploring or committing to the China market. We suggest that tech companies currently weighing their China exploration/entry/expansion strategy for the remainder of 2020, even with the pandemic ongoing, should at a high level consider these and other factors:
China’s economy may end up growing at a rate of up to 3% this year (even including the 6.8% drop in the first quarter), while many other countries (including the US) are forecast to have negative growth for the year
Many tech sectors have risen to the challenge of fighting COVID-19, with SaaS, AI, life sciences and big data applications used in both private and government entities, and these sectors are expected to continue to see strong growth (the SCMP video below, released this week)
China’s largest tech companies are still actively expanding globally, and engaging with the China market now gives Western companies a leg up towards providing their tech solutions worldwide to those mega-companies
Even if a specific market in China is slow right now from a sales prospective, this is a great time to validate the market / establish channels and/or take care of the hundreds of operational tasks that are required to establish a China presence
So, whether the impetus is to sell to one of the only growing markets of 2020, or to take advantage of a relatively “slow year” (for China at least) to explore and validate the opportunity China affords, Western tech companies should be thinking hard about China right now.
The China market for technology companies is huge and Chinese technology companies are getting stronger and going global at an accelerated pace. While China shouldn’t be ignored, most Western technology executives have heard the many stories of failed or loss making China efforts or have experienced it themselves, making them hesitate on making a large China investment. Even in China today, it is still easy to be fooled by the lure of huge numbers and opportunities. Attractive deals and partnerships do exist but they often come at a cost.
We typically don’t recommend entering China unless you are committed and have the resources or need to be in the market. However, for those that have made the decision to address China or cooperate with Chinese companies going global, there are ways to de-risk the program and significantly increases your chances of success.
Consider many of the strategies often used to engage with China. Many companies start with a China “fly-in-fly-out” strategy trying to develop China from afar by leveraging their investors or relationship network for introductions to start having conversations in the market. Many others start their China investment by setting up a legal entity and hiring staff and beginning the process to see how and with who they can monetize China.
In practice, we see many cases where after 6 to 12 to 18 months of trying the “fly-in-fly-out” strategy to develop China partners – executives find they are having lots of discussions but not making much real progress or transparency and not meeting their expectations. This often leads to a conclusion that China is not a good fit or just too hard and they give up. In many cases this could be true – China is hard. But is it a solution-partner fit problem, poor strategic positioning, lack of understanding the market or are they just not finding the right partners or right path?
Another model executives pursue is the strategy of “if we are going to China, let’s just jump in” and they begin setting up a China legal entity and trying to build their team. After several quarters of going through the administrative processes, finding office space, hiring a legal representative and going through all of the statutory steps required, they realize they are just at stage one of building an effective local team. Most companies end up going through several county managers or GMs before they get it right. They discover mismatches in capabilities, expectations and understandings. Often their sales teams end up leaving after they realize the product may not be ready for China and the company may not be as responsive as a local company. Sometimes, the team doesn’t fit the eventual strategy (you don’t need a sales guy to manage a JV or a country manager to manage a master licensee), turnover can be a big problem, or the partner or business model selected was incorrect requiring a restart.
We have seen these examples happen over and over. Some eventually get it right but have wasted precious time and money along the way while others have exited completely becoming another China story for the books. But yet there are also lots of real success cases.
So what is the answer? Before investing your time and energy, you need to answer several questions:
Should you be in China? Is there demand for your current product/solution? Are you looking for commercial sales or strategic relationships? If commercial, will the market accept the price to justify the investment? If strategic, do you understand what the China partner really values? Too often people get this wrong.
Are you ready to make your China investment in time? Are you willing to respond quickly and localize your product, if needed? What are your strategic options and what is the right strategy that meets your objectives?
Who are the right partners? Have you find the partners that are trustworthy, share your vision and aligned to protect your interests? Are they strong and influential enough to influence the regulatory and political regime if needed?
After engaging the China ecosystem and a completing a initial assessment, honing the right China go-to-market strategies and confirming the qualified partners to pursue, companies can start to gain real partner and market traction. That’s when you know where and how to invest for growth. What type of entity is required and what location; what type of team and resources to deploy; what level of investment to make or what the other China parties can contribute to the investment or venture.
The good news is for those that have made the decision, finding opportunities is not the most challenging part considering the growth in China compared to other markets. The challenge is to stay focused and find the right opportunities and the best partners to meet your objectives and ROI. Too many companies are willing to give away the house for the perceived strategic value of the deal which may or may not really be there.
Getting on the right path in China – with the right strategy and right partners – prior to making a larger China investment can help you avoid significant time and money lost and greatly accelerate meeting your China growth goals.