Joint Ventures in China: Advantages and Disadvantages

In this article, we will explore joint ventures to help you understand what they are, how they work in China, and their advantages and disadvantages. Then, you can consider this market entry method as you make your business plan.

What makes China so attractive for business?

The British Consultancy Centre for Economics and Business Research (CEBR), projects China’s economy to maintain a growth rate of 5.7 percent yearly till 2025. From 2025, they project it to maintain a 4.7 percent annual growth rate through 2030. If the predictions prove accurate, by 2030, China will be the world’s largest economy.

China’s growth rate forecasts sharply contrast with the U.S. According to the OECD; the U.S. economy will grow by 0.5% in 2023 and 1.0% in 2024.

When we consider the fact that China is a country with 1.4 billion people, it is no surprise that businesses across the globe are looking to come to China for business and are using joint ventures to enter the market.

Joint Ventures – What are they, and how do they work in China?

A joint venture (JV) is a business partnership structure that involves two parties – in this case, your company and a Chinese investor – pooling funds together to achieve specified business goals.

However, unlike regular partnerships, which may be broad and pursue multiple goals over an extended period, JVs are formed with a specific goal in mind and tend to exist on a short-term basis.

In China, JVs typically exist for a fixed term, explicitly stated in the JV contract, and are subject to government approval.

Before 2020, Chinese investors were usually not permitted to hold shares in JV, but that changed after the China Foreign Investment Law took effect starting on January 1, 2020. Since then, Chinese investors have been permitted to freely invest in JVs with foreign investors.

Equity Joint Venture (EJV)

EJVs have the following characteristics:

Limited liability company
It is subject to approval by the Ministry of Commerce or local government authorities (depending on the size and type of the business)
Governed by the laws on Chinese-Foreign Equity Joint Ventures
Governed by the laws on Implementing Regulations for the Joint Venture Law
Foreign partner holds a minimum of 25% equity
Profits and losses are distributed on a pro-rata basis
Required to use the dual-entry, accrual accounting system
EJVs are subject to an environmental impact assessment (EIA)
Equity joint ventures must set aside a particular portion of their post-tax revenues for a reserve fund, an enterprise growth fund, and an employee incentive and welfare fund.
Has a fixed term: usually 15 to 50 years

Cooperative Joint Venture (CJV)

There are two types of cooperative joint ventures in China:

Pure CJV:

o No legal entity is established

o Partners contribute to the project directly

o Unlimited liability

o Profit and loss are split directly

Hybrid CJV:

o A separate legal entity is established and registered

o Parties enjoy limited liability

CJVs typically have the following characteristics:

It is subject to approval by the Ministry of Commerce or local government authorities (depending on the size and type of the business)
Profits and losses are distributed as per the JV contract
Although limited, foreign entities may repatriate their investments before the joint venture expires
Pure CJVs have a shorter fixed term than equity joint ventures
Hybrid CJVs have a longer fixed term, similar to equity joint ventures
CJVs are ideal for projects whose assets will remain with the Chinese party at the end of the JV
Parties can distribute profits and losses per the agreed ratio without considering capital contributions.
CJVs must keep a unified account, and each party must keep a separate one.

What are the advantages of joint ventures in China?

Establishing a joint venture with a local partner who has the requisite local expertise and resources for your project can present the following advantages for your firm:

Access to a local workforce and facilities: Partnering with an excellent local enterprise gives you unfettered access to a skilled local workforce and any distribution and facility networks you need to do your business.
Access to local know-how: A local enterprise with the requisite expertise will also serve as a guide for your firm to guide you through regulatory requirements and local customs.
Access to local connections through “guanxi”: Guanxi in Chinese culture refers to the trust and strong relationships individuals can leverage for productive purposes. Collaborating with a partner who has strong guanxi is key to your success in China.
Access to restricted industries: There are specific industry sectors that you are only permitted to enter through partnerships with local partners, such as finance, education, mining, and agriculture.
Access to other local opportunities: An excellent local partner will provide information about business opportunities beyond the scope of your business that could present an opportunity for you to make massive profits.
Access to greater market share: Collaborating with the right local partner could help you quickly grow your market share if you are looking to establish the distribution of your product/service locally.

What are the disadvantages of joint ventures in China?

Collaborating with partners with weak connections and poor ability to perform is the primary reason foreign enterprises fail in China.

Some of the common problems foreign enterprises encounter from JVs are as follows:

Vague JV agreements: The primary source of all problems foreign enterprises have faced is the failure to ensure that JV agreements contain detailed and precise information about expectations and goals for management, profit, etc.
Weak exit clause: Failing to include detailed deadlock, exit, and termination clauses in your agreement could draw out the JV dissolution process and lead to more loss of time and resources for your company.
Deviating from agreement terms: When JV partners make fewer contributions (financial, tangible, and intangible assets, etc.), the JV is starved of resources and fails to achieve the intended goals.
Culture clash: When one or both parties refuse to empathize with the culture and method of doing business of the other party, communication stalls, partners become less committed, and the JV fails.
IP vulnerabilities: Crooked individuals or enterprises could leak your intellectual property to competitors and counterfeiters.
Costs: Many costs are associated with finding the right Chinese partner and getting approval to establish the JV. Companies that need more adequate resources may be able to complete the process.

Final Thoughts on Joint Ventures in China

Establishing a JV in China is straightforward but requires know-how and familiarity with the local culture to expedite the process.

Entry-to-China has partnered with various foreign companies to simplify their entry into the Chinese market and expedite the process of establishing partnerships with outstanding local enterprises.

Foreign companies who work with us quickly overcome culture and language barriers, enter the market quicker and with lower costs, establish solid partnerships with enterprises with good reputations and the right connections, and enjoy long-term success.