joint ventures in China

Daxue Explains: Joint Ventures in China

Based on an article by Brenda Goh. Interestingly, the article tells us about the joint ventures in China made between General Electric and Huawei to develop a smart machine to boost productivity to promote its industrial internet business in China. The value of the launch is worth $11 million for digital space to incubate start-ups and have developers work on new software applications to make machines more intelligent. The move is part of General Electric’s ambitions to lead a productivity revolution in the global industry. This tie-up with Huawei would see the Chinese communications technology firm to adopt General’s Electric Prefix operating system. General Electric would in return “leverage” Huawei’s product portfolio and to co-create an end to end applications for customers.

From the article above, we can identify that two big players in the respective industry have made the decision to go into a partnership or joint venture with mutual benefits. In light of this, Experts at Daxue Consulting have taken this opportunity to talk about partnerships and joint ventures in China. This article, we hope to explain why some partnerships succeed, fail and why do companies engage in partnerships.

Why do companies engage in Joint Venture in China?

To understand why companies go into Joint ventures in China, we first have to understand what are the benefits of two companies go into a Joint Venture in the Chinese market. Theoretically, joint ventures can offer an opportunity for growth and expansion. However, in reality, joint ventures can be highly complex and require an excellent relationship between the senior management of each partner. A joint venture can help the business grow at a faster pace, increase productivity and generate greater profits. Companies go into joint ventures to share information such as customer database, research, and development, services and flexibility.

Below shows the benefits of a successful joint ventures in China.joint ventures in China

A successful joint venture can offer the following:

– Access to new, untapped markets and distribution network

– Enter related businesses with lower barrier to entry

– Ability to gain new capacity and expertise

– Sharing of risks and costs with partner

– Access to greater resources which includes specialized staff, technology, geographical and finances

– Offers a creative way for companies to exit from non-core business

Why do some Joint Ventures in China succeed and some fail?

As partnerships between two businesses can be very complex, as mention above it requires commitment, time and effort from both sides to build the right relationship. With that in mind, below are problems that would likely arise:

– Setting of unrealistic objectives of the joint venture that is not clear and not aligned to a common goal

– The partners have different objectives for the joint jenture

– There is an imbalance in levels of expertise, investment or assets brought into the venture by the partners

– Coping with different cultures, management styles and working relationship will result in poor integration and co-operations

– The partners do not provide sufficient leadership and support in the early stages

– Managing communication with senior managers and employees in both companies so there’s a consistent understanding of the objectives of the joint venture

– Making poor tactical decisions caused by a misunderstanding of the roles of each company

To enjoy the success of a joint venture is depended on the thorough research and analysis of aim and objectives of both parties involved. Cultural and ideological differences top the list of why most joint ventures fail. Most companies do not perform proper compatibility and integration analysis. To add to that, companies do not go through a thorough evaluation of corporate culture and management style. This would result in failure to blend their differences thus causing the joint venture to be unstable. It requires time and effort to build the right relationship and partnering with another business can be a challenge. It is very important to review the business strategy of both parties before committing to a joint venture. This should also be followed up with effective communication of the business plan among everyone that in involved during the partnership. This will help define what to expect and if both parties can work together effectively and efficiently. Additionally, it will allow the organization to define what can be sensibly expected and understand if there are better ways to achieve the company’s goals and vision. It is important to consider employees’ perspective and understand that people can feel threaten by a joint venture. It would be difficult to promote effective working relationships if the other party has a different way of doing business. As for the other reasons for the failure of joint ventures includes disagreement over operating policies, strategies, and tactics. When embarking on a joint venture, it is very important to have your understandings written. A in-depth discussion on the terms and conditions should be agreed upon in a written contract to prevent any misunderstandings and provide both parties with strong legal recourse in the event the other party fails to fulfill its obligations while under contract. Insufficient planning is another prevalent reason for the failure of joint ventures in China. A joint venture plan consists nothing more than a statement of each party’s intended contribution to the project or their respective share of profits. If both parties wish for their joint venture to succeed, there should be a comprehensive written plan upfront.

Below a few examples of the terms and condition should include:

– Provisions for future contribution

– Logistical issues

– Governance of the venture

– Dispute resolution

– Ownership of jointly developed assets that include intellectual property

– Terms and termination of the venture that includes provision for winding up its business

Partnership Screening

Taking up on a joint venture in China can represent a significant reconstruction to the business. However, as favorable the Joint Venture may be to the potential of growth, it has to fit with the overall business strategy. By studying both enterprises with the strength, weakness opportunities and weakness will identify whether both businesses are compatible. Both organizations have to contemplate, evaluate, and assess the reconstruction of both organizations involved. It is without a doubt having the suitable partnership screening, and advice from an experienced attorney and account is needed to make a joint venture successful.

See more about Joint Venture in China at DXC Ventures – Capital advisory China