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Joint ventures out of favour

Joint ventures out of favour as top route into Chinese market

But intellectual property remains the key area of concern for consumer businesses

Joint ventures (JV) are rapidly falling out of favour as the preferred way of establishing a foothold in the Chinese market, according to new research released today.

Much of this may be to do with the persistent problems in China over protecting a company’s intellectual property (IP) – an issue which ranks at the very top of the list of areas of major concern.

The research, undertaken by business advisory firm KPMG International in association with market research firm Taylor Nelson Sofres, surveyed 136 consumer companies operating in China, sourcing from China or planning to operate in China. Of those businesses already in China, 37 percent are in some form of JV. However, only 19 percent see it as the best way forward for their business. The preferred way forward is to be a Wholly Owned Foreign Enterprise (WOFE).

Commenting on these results, Joanna Perry, Head of KPMG’s New Zealand Consumer Markets group, said: “Any company planning to establish operations in China really should sit up and take notice of these findings.

“The attraction of the JV approach is on the wane. At one time, it was the only way to enter China and even after WOFEs were permitted in this sector, conventional wisdom held that a local partner was a necessity.

“However, the view from inside is now very different and the popularity of the WOFE approach is soaring. It is actually a more popular approach with the companies already in China – who have likely seen many failed JVs up close - than with the companies planning to enter China. It’s a theme which the latter group would do well to take note of,” she said.

Different JVs succeed or fail for different reasons. However, common problems include a divergence of goals, disagreements on how to expand the business, and disputes over management style and roles. Another well-publicised problem within JV agreements has been the difficulty that foreign entrant firms have in protecting their own intellectual property . For example, direct copies of companies’ products, logos and production processes have all come to light after foreign firms have entered into partnership with a local business.

Within the KPMG International survey, businesses were asked for their major areas of concern. Perhaps unsurprisingly, IP was named as a key concern by 73 percent of respondents – well ahead of the problems around sourcing decent market information (57 percent), the repatriation of funds (53 percent) and import / export procedures (52 percent). Summing up the IP concerns of many businesses in China, one president of a Fast Moving Consumer Goods company told KPMG that, “every year 25 percent of our business is eaten away by counterfeits. In a fair playing field the government should take care of this.”

One of the reasons often given for entering into a JV is that it gives instant access to local workforce and management. However, the KPMG International survey shows that availability of labour is now one of the areas of least concern for consumer market companies. With employee attitudes and the ability to attract expatriates also rated as being of little concern, it becomes clear that the need to buy into an existing workforce is much diminished from what it was.

Joanna Perry said: “Many businesses coming to China have had some pretty bad experiences when engaging in JVs. Successful JVs are the exception, rather than the rule. The two partners may have similar short-term aims but we’ve seen plenty of cases where one side’s long-term aspirations were at odds with the other side’s. If the ready-made workforce aspect of the JV – one of the perceived key benefits – is no longer that important, then the appeal of the JV approach will surely fade further.”

ENDS

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