China veteran lawyer Mark Schaub looks back at the three decades he was involved with China and assesses how the country might look like in 2023, in his China chit-chat. What can larger foreign companies and the smaller ones expect? And of course: what is happening to the joint ventures?
The Clock is Clicking for Joint Ventures – The PRC Foreign Investment Law came into effect on January 1, 2020 contains a time bomb for joint ventures (ok a bit overly dramatic but bear with me). One of its provisions abolishes the differences between Sino-foreign joint ventures and other types of PRC companies – primarily in respect of their governing structures (i.e. move to a shareholder meeting, board of directors and management). The law provides a five-year transition period for existing JVs so January 1, 2025 is D-Day.
Many may think that this is just simple paper shuffling – change the joint venture contract and articles of association. They may be right but normally life is much more complex. In addition to the mandatory changes the law also allows joint venture partners to agree to more flexibility on governance. All long term joint ventures have issues – opening up the joint venture contract will also open up a Pandora box of issues that have built up over decades.
Life has Moved On – 1993 was really so long ago. Back then Jiang Zemin was PRC president, Bill Clinton US president. The European Economic Community created the single market. Ukraine had recently become independent of the Soviet Union. Inflation in USA was under 3%. China’s annual GDP per head was USD377. People in Shanghai would ask foreigners if they like their own country or China better.
So, a lot has changed.
Things have probably changed in your JV or China business.
Has the market changed? Is the business still profitable? Has local competition become stronger? Does the current business model still meet market requirements? Has the business been impacted by practical changes? This is often in respect of procurement. Is the old way of doing business still the right way to do business? Are the contractual arrangements which are in place still fit for purpose? What are the real risks of 2023? Has the management changed? There must have been management changes. Worse still have there been no management changes?
How is your JV partner? Still looking healthy? Many successful SME JVs are based on a foreign and a Chinese entrepreneur forging a business together. Often outside of first tier cities. Wanting the best for their children a lot of these Chinese entrepreneurs sent them to Harvard or Oxford. These children also wanting the best for themselves are often unwilling to return to rural or industrial Sichuan or Liaoning province. Even if they return is this second generation tough enough and knowledgeable enough to run the business. They often have a less than perfect knowledge – in one case the founder’s son who showed us around the factory got lost and had to phone someone to find us. US and European family-owned businesses bring in family members or professional management early on – China often not so much. These kids may be more interested in trust funds than widgets.
Are you looking for more strategic experts at the China Speakers Bureau? Do check out this list.