Transcript Establishing a Presence in China for Marketing and Other

Establishing a Presence in China
for Marketing and Other Business
Purposes:
Joint Ventures versus Going It Alone
Green Trade Network Summit
Monterey Bay International
Trade Association
September 19, 2008
Martin Lewin,
KALIK LEWIN
What is a Joint Venture?
A Joint Venture is a generic term loosely
referring to any association of persons or
companies jointly undertaking some
commercial enterprise
• Typically in a Joint Venture the participants
contribute assets and share risks.
• Often the Parties create a separate legal entity for
the commercial enterprise.
• A Joint Venture can be a partnership, a corporation,
or some other limited liability company, depending
upon tax, liability and other considerations.
Do you need to enter into a
Joint Venture to do
Business in China?
There are three legal structures available
in China under which foreign companies
can conduct most kinds of business:
• Equity Joint Ventures
• Cooperative (Contractual) Joint Ventures
• Wholly Foreign-Owned Entities
In addition, foreign companies can conduct
limited business operations (i.e., market
research but not sales) through a
Representative office.
Key elements of Equity Joint Ventures:
•Profit and risk sharing are proportionate to the equity of each partner
in the joint venture, except in cases of a breach of the joint venture
contract.
•A minimum of 25% of the capital must be contributed by the foreign
partner(s).
•There is no minimum investment for the Chinese partner(s).
•Share holdings in a joint venture are usually non-negotiable and
cannot be transferred without approval from the Chinese government.
•Either party can hold the position as chairman of the board of
directors.
•Equity can include cash, buildings, equipment, materials, intellectual
property rights, and land-use rights but cannot include labor.
Key elements of Cooperative Joint Ventures:
•Parties involved may operate as separate legal entities and bear
liabilities independently or may be registered as a limited liability entity
resembling an equity joint venture in operation, structure, and status.
•No minimum foreign contribution is required.
•Contributions are not required to be expressed in a monetary value and
can include labor, resources, and services.
•Profits are divided according to the terms of the cooperative venture
contract rather than by investment share
•The foreign investor is permitted to withdraw all or part of its registered
capital during the duration of the cooperative venture contract.
•Trade unions must be allowed to represent the employees in
employment matters .
Key elements of Wholly Foreign Owned Enterprises:
•Registered capital must be subscribed and contributed
solely by foreign investor(s).
•Business scope must be defined.
•WFOE can only conduct business within its approved
business scope.
•Amendments to the business scope require further
application and approval.
Chinese authorities encourage Joint
Ventures in order to obtain exposure to
advanced technology and new
management skills.
However, Joint Ventures are not
required for
foreign company participation in most
industry sectors
When can a foreign
company conduct
business as a
WFOE?
Basic information on the requirements for foreign investment can be
found in “the Catalogue for the Guidance of Foreign Investment
Industries” published by China’s State Development and Reform
Commission.
• The Catalogue classifies industrial sectors as "encouraged," "restricted" or
"prohibited"
• Category coverage is comprehensive and precise, including 351 encouraged
industry sectors, 87 restricted industry sectors, and 40 prohibited industry
sectors
• Industries not specifically identified fall by default under the "permitted"
category.
• If a particular project falls under the "encouraged", "permitted" or "restricted"
category, foreign investors can invest in a project as long as the appropriate
level of government approval can be obtained and the investment complies
with applicable restrictions on foreign ownership.
• Direct foreign investment is not allowed in projects classified as "prohibited".
WFOEs are allowed in almost all encouraged and
restricted
industry sectors listed in the Catalogue.
Key exceptions include:
• Development and application of new technologies that can
increase the recovery factor of crude oil (limited to equity joint
ventures or contractual joint ventures)
• Production as well as research and development of certain
automobile electronic devices, including, among others, power
cell (NiH and Li-con) and control systems (limited to equity joint
ventures);
WFOEs are allowed in almost all encouraged and
restricted
industry sectors listed in the Catalogue. (Con’t)
Key exceptions include:
• Power transmitting and transforming equipment (limited to equity joint
ventures and cooperative joint ventures): non-brilliant form transformer,
high voltage implement great bushing, high voltage on-off operation
implement, and freedom integer arc contact, direct current transmit
electricity dried reactor, 6 inch direct current convertor clique high-power
grain-valve tube, electrical apparatus contact material, and non-Pb, nonCd solder accorded with EU command of RoHS
• Manufacture of the equipment of new energy electricity-power (limited to
equity joint ventures and cooperative joint ventures): photovoltaic power ,
geothermal power generation, tidal power generation, wave power
generation, rubbish power generation, methane power generation, wind
power generation over 1.5M
Wholly Foreign Owned Enterprises are authorized to
invest in:
• Construction and operation of electricity power by employing the clean
fuel technology of integral gasification combined circulation (IGCC),
circulating fluidized bed more than 0.3 million kw, Pressurized Fluidized
Bed Combustion Combined Cycle(PFBC) more than 0.1 million kw.
• Construction and management of hydropower stations with the main
purpose of power generating.
• Construction and management of new energy power plants (solar energy,
wind energy, magnetic energy, geothermal energy, tide energy and
biological mass energy, etc.).
• Utilization of sea water (direct use of sea water, seawater desaltation),
using industrialization to recycle industrial sewage.
(Continued on next slide)
Wholly Foreign Owned Enterprises are authorized to
invest in (Con’t):
•Construction and operation of urban water-supply plant.
•Technology for recycling and comprehensive utilization
of resource, development and application of the recycling
technology of the waste dispelled by enterprises.
•Technology for environment pollution treatment and
monitoring.
Joint Ventures versus
Wholly Foreign Owned
Entities: Which Way to
Go?
There are advantages to establishing a presence
in
China through a Joint Venture.
• Overcoming a lack of familiarity with China’s business and
legal environment.
• Gaining access to the JV partner’s knowledge base.
• Lowering capital costs.
• Addressing human resource issues.
• Gaining local community and government support.
There are significant potential downsides as
well.
• Significant time and resources are needed set up a joint venture and to
oversee it.
• Local partner’s objectives may be different than the foreign company’s.
• Cultural differences may lead to misunderstandings and operational
conflicts.
• Potential loss of control over day-to-day operations.
• Local partners have many ways to profit personally without the Joint
Venture itself making any profit.
• Foreign company may lose control over intellectual property.
A Study in the 2004 Harvard Business Review reported
that 48% of nearly 1,600 international joint ventures ended
in failure in less than two years’ time.
Advantages of a WFOE:
• Autonomy and independence to carry out
strategies without having to consult their Chinese
partners
• Operations and management efficiency
• Full control over management and profit
distribution
• Safeguard Intellectual Property
As a general rule, choose the simplest structure that
accomplishes the company’s objectives.
Even where collaboration with Chinese partners is
needed, consider accomplishing this by long-term
contracts: Purchase/sale; licensing; distribution, etc.
Think of Joint Ventures as a last option, except where
both the foreign company and Chinese partner will
be contributing substantial assets (e.g., technology,
land, buildings, equipment), long-term planning and
operations are required, and objectives and
operational modalities are clearly understood and
agreed upon.
Maximizing the Prospects
for a Successful China
Joint Venture
If a Join Venture is determined to be the best
option, the following elements can help
maximize the prospect for success:
• Due diligence: Thoroughly vet joint venture partner
• Develop a jointly agreed upon detailed business plan for
the joint venture
• Maintain control over the day-to-day management of the
joint venture company
• Recognize that a Joint Venture must be win-win and that
changed conditions may require changes to the Joint
Venture to insure both parties continue to benefit
(Continued on next slide)
If a Join Venture is determined to be the best
option, the following elements can help
maximize the prospect for success (Cont’d) :
•Plan carefully for dispute settlement: When should mutual
consent be required for action?
•Plan for an orderly dissolution, in the events disagreements
cannot be resolved (“Hope for the Best; Plan for the Worst”)
•A good Joint Venture design should address organizational
differences, provide flexibility, and enable effective
management control for both partners.
Is a Legal Entity Even
Needed to Establish
a Presence in China?
Depending on a Company’s objectives, a legal
presence in China may not be needed:
• Licensing of technology and distribution of products
can be achieved through transnational agreements
between the foreign company and Chinese partners.
• U.S. and Chinese service providers often can help
manage a company’s market entry into China, often
more cheaply and effectively than a company can
manage market entry on its own, without the
company having to establish a presence of its own
in China.
Martin Lewin
KALIK LEWIN
4720 Montgomery Lane
Bethesda MD 20814
Tel: 240-744-7611 (Direct)
Fax: 240-744-7601
www.kaliklewin.com