Joint Venture Management in China

1
Joint Venture Management in China

• Howard Davies

2
What Is A Joint Venture?

• Two basic types
• equity JV - two or more firms work together to
  form a new separate firm which they jointly own
  and control

3
What Is A Joint Venture?

• Two basic types
• equity JV - two or more firms work together to
  form a new separate firm which they jointly own
  and control
• contractual JV - two or more firms agree to carry
  out some activity jointly e.g. HK firms provide
  components, Chinese firm assembles and transfers
  back to HK firm for sale

4
Objectives for the Lecture?

• Understand the role of JVs in international
  business

5
Objectives for the Lecture?

• Understand the role of JVs in international
  business
• Overview the situation of JVs in China

6
Objectives for the Lecture?

• Understand the role of JVs in international
  business
• Overview the situation of JVs in China
• Evaluate the major issues facing JV managers in
  1999

7
What is the Role of JVs in International Business?

• A difficult form of venture - globally JVs have
  very high failure rates

8
What is the Role of JVs in International Business?

• A difficult form of venture - globally JVs have
  very high failure rates
• WHY? Because managing something jointly is
  inherently difficult - JVs are hybrid
  organizational forms
• asset specificity
• uncertainty
• opportunism

9
What is the Role of JVs in International Business?

• Typical reasons for forming JVs voluntarily are
• to speed up entry

10
What is the Role of JVs in International Business?

• Typical reasons for forming JVs voluntarily are
• to speed up entry
• to learn from the partner

11
What is the Role of JVs in International Business?

• Typical reasons for forming JVs voluntarily are
• to speed up entry
• to learn from the partner
• to carry out activities which would be too
  expensive for one firms alone -e.g. RD

12
What is the Role of JVs in International Business?

• Typical reasons for forming JVs voluntarily are
• to speed up entry
• to learn from the partner
• to carry out activities which would be too
  expensive for one firm alone -e.g. RD
• to access resources which are not available to
  the firm through markets e.g. information, local
  knowledge, guanxi

13
Overview of JVs in China

• In 1997 China had 235,681 foreign-funded
  enterprises
• around 60 of those were equity JVs
• around 60 were from Hong Kong, Macau and Taiwan
• THERE ARE MAJOR DIFFERENCES BETWEEN OVERSEAS
  CHINESE JVs AND WESTERN/JAPANESE

14
What Are the Differences?

• Hong Kong JVs
• small

• US, Europe, Japan JVs
• often large

15
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors

• US, Europe, Japan JVs
• often large
• wide range of sectors

16
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors
• do low-tech labour-intensive assembly work

• US, Europe, Japan JVs
• often large
• wide range of sectors
• more complex industries and technologies

17
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors
• do low-tech labour-intensive assembly work
• partners are TVEs
• South Coast

• US, Europe, Japan JVs
• often large
• wide range of sectors
• more complex industries and technologies
• partners are SOEs
• all parts of China

18
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors
• do low-tech labour-intensive assembly work
• partners are TVEs
• South Coast
• export-oriented

• US, Europe, Japan JVs
• often large
• wide range of sectors
• more complex industries and technologies
• partners are SOEs
• all parts of China
• China market-oriented

19
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors
• do low-tech labour-intensive assembly work
• partners are TVEs
• South Coast
• export-oriented
• vertically shallow
• little technology transfer

• US, Europe, Japan JVs
• often large
• wide range of sectors
• more complex industries and technologies
• partners are SOEs
• all parts of China
• China market-oriented
• vertically more deep
• many linkages

20
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors
• do low-tech labour-intensive assembly work
• partners are TVEs
• South Coast
• export-oriented
• vertically shallow
• little technology transfer
• limited linkages, training and skills transfer
• HK people in 100 control

• US, Europe, Japan JVs
• often large
• wide range of sectors
• more complex industries and technologies
• partners are SOEs
• all parts of China
• China market-oriented
• vertically more deep
• many linkages
• extensive technology transfer
• control much more difficult

21
What Are the Differences?

• Hong Kong JVs
• small
• in limited number of sectors
• do low-tech labour-intensive assembly work
• partners are TVEs
• South Coast
• export-oriented
• vertically shallow
• little technology transfer
• limited linkages, training and skills transfer
• HK people in 100 control
• VERY SUCCESSFUL

• US, Europe, Japan JVs
• often large
• wide range of sectors
• more complex industries and technologies
• partners are SOEs
• all parts of China
• China market-oriented
• vertically more deep
• many linkages
• extensive technology transfer
• much more difficult
• NOT OFTEN SUCCESSFUL

22
What Are The Major Issues Facing International
Business With Respect to JVs in China?

• Should we be in China at all?
• Few FIEs are making profits, even after many
  years, and in 1999 disillusion is significant
• BUT can any major firm be outside a market with
  25 of the worlds population?

23
What Are The Major Issues Facing International
Business With Respect to JVs in China?

• Should we still take the JV approach?
• Vanhonacker has argued that the time has come for
  a shift towards WOFEs. Working with Chinese
  partners is difficult and their contribution of
  guanxi and resources is less useful as reform
  continues
• BUT has reform really gone that far?

24
What Determines Good Performance in JVs?

• A huge volume of research on this issue
• Good Performance can mean many different things
• SYSTEM PERFORMANCE the survival, profitability
  and market share of the JV itself developing its
  own skills and capability in marketing, HRM,
  finance, technology
• GOAL PERFORMANCE providing what the parent/s
  wanted learning about technology and management,
  developing the new product
• A JV which fails in terms of System Performance
  may have succeeded in terms of Goal Performance
  e.g a JV which closes down because both partners
  have learned what they wanted

25
Any Lessons for Good Performance?

• If one partner (probably the Foreign Investor) is
  dominant, good performance is more likely
• decision-making and action can be crippled by
  debate, negotiation and non-compliance if power
  is equally shared
• but some evidence that the BEST performance may
  arise from shared control, understanding and
  sensitive involvement of Chinese side

26
Any Lessons for Good Performance?

• Dominance may be partly achieved by having
  majority ownership share but that is neither
  necessary nor sufficient
• ownership of key resources may be more important
• technology
• brand name
• managerial abilities

27
Any Lessons for Good Performance?

• Impact of Cultural Distance very Unclear
• cultural commonality may make co-operation easier
• distance may mean both sides expect
  misunderstanding and adjust for it

28
Any Lessons for Good Performance?

• Complementarity of Contribution?
• If each partner contributes in different areas,
  less room for disagreement
• Compatibility of Objectives?

29
How Compatible Are Partners and Governments
objectives?

• Foreign Partners want
• access to Chinas market access to Chinese
  resources labour, faclities, permissions
• maintenance of control over technology and brand
  names

30
How Compatible Are Partners and Governments
objectives?

• Chinese Partner Firms want
• improved competitivenessbrand names technology
  managerial skills preferential treatment on
  taxes, foreign exchange

31
How Compatible Are Partners and Governments
objectives?

• Chinese Government wants
• better technology and better management coming
  under Chinese control exports or import
  substitutesChinese brand names

32
How Compatible Are Partners and Governments
objectives?

• No general pattern of compatibility/
  incompatibility but possible to have same bed
  different dreams

33
What Are the Operational Problems Facing JVs?

• Partner Selection - who do we work with? Someone
  with common capability or in a different field?
  What type of enterprise - SOE, TVE, private
• for UK firms - someone who can negotiate with the
  government for us, who we can trust, who has
  sound financial position and complementary
  resources. Not so concerned about their
  technological ability

34
What Are the Operational Problems Facing JVs?

• Negotiations - time-consuming, frequent failure
  to agree, lack of clarity over who has authority
  on the Chinese side, written agreement often the
  start not the end of the negotiation

35
Problems After Establishment?

• Marketing -
• 2.4billion socks is an illusion. Markets are
  smaller, more diverse than expected and
  establishing distribution channels to reach those
  markets is very difficult.

36
Problems After Establishment?

• Marketing -
• 2.4billion socks is an illusion. Markets are
  smaller, more diverse than expected and
  establishing distribution channels to reach those
  markets is very difficult.
• Relatively limited marketing orientation
  amongst Chinese firms and personnel

37
Problems After Establishment?

• Marketing -
• 2.4billion socks is an illusion. Markets are
  smaller, more diverse than expected and
  establishing distribution channels to reach those
  markets is very difficult.
• Relatively limited marketing orientation
  amongst Chinese firms and personnel
• Reform of housing and welfare is encouraging some
  industries (IKEA sold out in Beijing in one day)
  but generally making consumers nervous about
  spending

38
Problems After Establishment?

• Marketing -
• 2.4billion socks is an illusion. Markets are
  smaller, more diverse than expected and
  establishing distribution channels to reach those
  markets is very difficult.
• Relatively limited marketing orientation
  amongst Chinese firms and personnel
• Reform of housing and welfare is encouraging some
  industries (IKEA sold out in Beijing in one day)
  but generally making consumers nervous about
  spending
• fake products are a major problem

39
Problems After Establishment?

• Marketing -
• 2.4billion socks is an illusion. Markets are
  smaller, more diverse than expected and
  establishing distribution channels to reach those
  markets is very difficult.
• Relatively limited marketing orientation
  amongst Chinese firms and personnel
• Reform of housing and welfare is encouraging some
  industries (IKEA sold out in Beijing in one day)
  but generally making consumers nervous about
  spending
• fake products are a major problem
• government intervention on direct marketing

40
Problems After Establishment?

• Human Resource Management
• limited skills in the work force

41
Problems After Establishment?

• Human Resource Management
• limited skills in the work force
• state-owned mentality makes a
  customer-orientation difficult to implant

42
Problems After Establishment?

• Human Resource Management
• limited skills in the work force
• state-owned mentality makes a
  customer-orientation difficult to implant
• issues arising in respect of managing migrant
  workers
• language and culture
• industrial life-style
• social tensions

43
Problems After Establishment?

• Human Resource Management
• limited skills in the work force
• state-owned mentality makes a
  customer-orientation difficult to implant
• issues arising in respect of managing migrant
  workers
• language and culture
• industrial life-style
• social tensions
• limited understanding of training
• a reward for loyalty not performance enhancement

44
Problems After Establishment?

• Human Resource Management
• limited skills in the work force
• state-owned mentality makes a
  customer-orientation difficult to implant
• issues arising in respect of managing migrant
  workers
• language and culture
• industrial life-style
• social tensions
• limited understanding of training
• a reward for loyalty not performance enhancement
• residual of the iron rice bowl
• SOE workers sense of status - rather be poor and
  standing in an SOE than rich and kneeling in a
  private firm

45
What of the Future for JVs in China?

• JVs will always be a fundamentally difficult form
  of business
• WOFEs taking an increasing share of new FDI
• BUT as long as the co-operation of the
  bureaucracy and access to guanxi networks is
  important, local partners will be needed
• Western and Japanese firms may keep moving
  towards WOFEs in most sectors. HK firms seem to
  have less difficulty and may retain this form of
  business, perhaps givng more control to local
  firms