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.