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. R&D

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. R&D • 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 CHINESEJVsAND WESTERN/JAPANESE

14. “Hong Kong” JVs small US, Europe, Japan JVs often large What Are the Differences?

15. “Hong Kong” JVs small in limited number of sectors US, Europe, Japan JVs often large wide range of sectors What Are the Differences?

16. “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 What Are the Differences?

17. “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 What Are the Differences?

18. “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 What Are the Differences?

19. “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 What Are the Differences?

20. “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 What Are the Differences?

21. “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 What Are the Differences?

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 world’s 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 Government’s objectives? • Foreign Partners want; • access to China’s market; access to Chinese resources : labour, faclities, permissions • maintenance of control over technology and brand names

30. How Compatible Are Partners and Government’s objectives? • Chinese Partner Firms want: • improved competitiveness;brand names; technology; managerial skills; preferential treatment on taxes, foreign exchange

31. How Compatible Are Partners and Government’s objectives? • Chinese Government wants: • better technology and better management coming under Chinese control; exports or import substitutes;Chinese brand names

32. How Compatible Are Partners and Government’s 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