作者：Nick Palmer, Bruno Lannes
It's no secret that joint ventures between multinationals and mainland companies are losing ground to wholly owned foreign enterprises. Among all forms of direct foreign investment, the share represented by joint ventures has dropped an average of 25 per cent a year since 2000, with multinationals preferring to fully control their operations as the government has made that option available. Another reason is they rarely work. Some reports show the rate of failure is more than double the rate of success.
But when properly planned and managed, joint ventures still can be the best route for multinationals looking for a quick way to participate in the booming economy. They can deliver customer and channel relationships, a supplier and service network, local management talent and often critical government relationships. We will show how diligent planning for a venture before the contract is signed can boost its odds of success.
There is a host of reasons why so many joint ventures hit the skids. The list of well-known problems includes recruitment and training issues, the lack of a common business vision, the country's political system and the catch-all "cultural differences".
What can multinationals do at the outset to avoid such pitfalls? We've identified three seemingly straightforward but often poorly executed factors.
Overinvest in due diligence - both formal and informal. Due diligence is a difficult task anywhere - in the mainland it's often more daunting and more important.
With unofficial payments and other hidden costs part of doing business, published accounts aren't as transparent as they are in many other regions. To compensate, overinvest in obtaining information from primary sources. For example, talk to customers and suppliers to help build a picture of your partner and the market they operate in to test key elements of the investment thesis. Track pricing at stores.
Piece critical information together by comparing notes from wholesalers and retailers. And don't overlook the importance of the softer side of due diligence. Carefully review the resumes, histories and affiliations of key people such as board members, C-level executives and regional heads.
Understand who is really pulling the strings at the potential partner company. "Analyse the shareholder register to understand control overlaps, who will vote in blocs, who's aligned," advises Richard Williamson, general manager, Asia strategy at Commonwealth Bank of Australia which has joint ventures with two mainland banks.
2. Discuss and agree the detail around the economics. Be clear about your expected return on equity for the entity. This will also help anchor later negotiations, providing a hard-to-argue-with basis for a quid pro quo. Be explicit around key results areas at the entity level and one or two levels down.
This may be very hard to do later on as it's typically not part of the local partner's culture.
3. Firm up exit terms. In the mainland, joint venture exit terms typically are vague. But it's critical to have them clearly spelled out at the outset. Poorly defined rights of first refusal or valuation mechanisms are a sure recipe for drawn-out negotiations, missed alternative exit opportunities and mutual frustration.
This not only has implications for the entity value itself but also the future application of the capital.
It makes sense to assume the joint venture is only a step in your overall China strategy, not an end in itself. If it fails, you'll have spelled out your exit options - whether it's buying your partner's share in the joint venture or selling your share - and moved forward with other moves in your overall strategy. This was the route Groupe Danone took recently when the company announced it was terminating its joint venture agreement and selling its 20 per cent stake in Shanghai Bright, its first China dairy partner.
Despite the landmines, joint ventures often are still the quickest way for a foreign company to extend its mainland reach. Following these three guidelines will help you better understand why and with whom you are entering the partnership in the first place, structure the joint venture to lower the risks of failure and frustration and enable you to walk away before it's too late.
Nick Palmer is a partner in Bain & Co's Hong Kong office. Bruno Lannes is a partner in the company's Shanghai office