Business Environment in China - When Joint Venture Goes Wrong

WHEN JOINT VENTURE GOES WRONG

Introduction

Joint venture initially is the most suitable approach for international companies wanted to conduct business in China since there are many different components. By purpose of finding the key successful factors that can help foreign companies having better understanding and strategy for entrancing Chinese market, this study will base on the case of HSBC and Danone, and other materials to figure out these key factors. At the end of study will provide implication and recommendations.

With the fastest growth rate in last two decades, China has become one of largest markets in international business. It attracted hundreds of international firms that have been competed for having opportunities in doing business in China under various forms such as joint venture or foreign direct investment since Chinese Government opened its market in 1980. The joint venture then became the most popular form for Chinese government to attract foreign investment and also gave opportunities for foreign companies to enter Chinese. In late 1993, there were about 167.500 joint venture firms between China and multi-nations, cooperative enterprises and wholly foreign-owned enterprises - WFOE (According to Peoples Daily, 1994), with the whole capital asset up to 233 billion USD. Afterward, China government implemented economic reform to continuously piqued interests of international business giant (Ma, 1997). As a result, in June, 1997, more than 200,000 joint venture firms had registered business in China, with total foreign capital asset was 204 billion USD (8% of those from American firms) (China National Statistics Bureau, 1997). With this current sustain growth rate, China was known as the most-potential-growth countries among 5 developing countries which were Russia, China, India, Brazil, Indonesia (World Bank, 1997)

Chinese companies changed itself to become stricter with having their own global ambition and have not been constrained by global multinational partner anymore. History records many failures in Chinese- Western companies’ co-operation. Refer to the case, HSBC and Danone were successful first movers which HSBC occupied 19.9% stake in Bank of Communication and targeted to full takeover in the future and Danone acquired 51% of Wahaha Beverage. However, they were similar to other joint venture and failed to deliver their promises which lead to failure in the future.

It cannot be denied that joint venture has a lot of advantages which are ability to leverage Chinese partner’s guanxi including ruling party, benefit Chinese partner experiences of doing business in China, capacity to access Chinese workforce, facilities as well as distribution channels, handle local registration and application easily excluding procedure of WFOE and able to reduce red tape and bureaucratic hassles. But in return, foreign companies should also consider to disadvantages of joint venture which are cost of finding and negotiating with Chinese partners, vulnerability of intellectual property, risk of ‘secret night shift’ in manufacturing without foreign partner’s knowledge, divisions of profit and share, loss of proprietary technology transfer and trade secret.

As a result, many researches were conducted to figure out conflicts of culture, tradition and value system between Chinese-Western companies but scarcely focus on finding out successful factors for international companies to enter Chinese market. It should be seen as a typical multi-criteria multi-attribute problem. To examine this issue, one of the most preferred approach is Analytic Hierarchy Process (AHP) (Graph 1)

According to AHP model, five factors which are culture, politic, economic, society and management were found as key influence factors for international companies to enter Chinese market.

Economic factors

After economic reform in early 1980, Chinese economy was in transition period from centralizing economy to open and more centralizing market economy. As a result, the connection and interaction between Chinese economy and international market increased dramatically. Nevertheless, for international investors, their investment decisions and actions will depend on the sustain in Chinese economic policies, establishment of business legal system, confidence level of consumer, increase of real wage, the development of industrial infrastructure constituents such as energy, communication, transportation of Chinese economy (Yuan, 1997).

Culture

China has great strengths with a 5,000 years history of civilization, culture, traditions and value systems. This has affected the operations of enterprises, especially for joint ventures in China. Besides that, China has the most powerful population in the world with 50 ethnic minority communities, each with its own unique culture, standards, traditions and even unique language. In addition, China is also in the top three of the largest nations, so the land is divided into several self-governing regions, each with its own set of rules, systems, and cultures. For example, Shanghai, Hong Kong are self-governing, self-governing, highly populated, and prosperous economy, and they are the business hub of many Chinese joint ventures. Eastern areas are more modern, affluent and developed than the western areas (Morgen Witzel and Tim Ambler, 2004). These different conditions will make it difficult for international companies who wish to do business in China.

Political factors

Since China is large and has many different cultural regions, many wars have taken place in 1949 in the political system of China. It has influenced development and economic systems with varying degrees. Therefore, for foreign investors, the consideration of political factors, governmental stability, the system of policies and law, trend of economic reform become the key criteria to make investment decisions.

Case study 1:

Motorola Incorporated is one of first coming multination corporations who targeted Chinese market since 1980s with its investment primarily focused on semiconductor industry such as telephone (Zhou and Wang, 1997). Till late 1998, company generated 23,6 billion Chinese $RMB annual revenue. According to research of Jiaqin Yang and Huei Lee in 2002, its success is attributed by key factor that is represented in Table 1. For example, an effective long-term business development strategy (A1) proved that in order to operate successfully in competitive market, company strategies must be established and developed based on long-term strategy objectives. At first, Motorola China Incorporated established long-term strategy by careful researching about Chinese local market, supply chain, labor, technology and also legal system, economic policy, and society. Therefore, the company’s strategy concentrates on long-term market share and strived to maintain positive, trustworthy relationship with Chinese partners and government agencies. Besides, Motorola Corporation decided to reinvest all profits into further expansion and providing most advanced technology support to local partner to support long-term strategy. Secondly, Motorola introduced most appropriate technology (E2) from developed countries to implement technology transfer which is most suitable for local partner’s needs, financial capacity and skill level of workers.