A Few Things to know before establishing a Joint Venture in China

What is a Joint Venture?

Before reading about the facts to know before establishing a joint venture in China, it is necessary to understand the nature of a joint venture. A joint venture is a business arrangement usually between two enterprises in which the participants create a new business entity or official contractual relationship and share the investment and operation expenses, management responsibilities, and profits and losses.

What does a Joint Venture mean in China?

The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share. Joint Ventures are sometimes the only way to register in China if a certain business activity is still controlled by the government. e.g. Restaurants, Bars, Building and Construction, Car Production, Cosmetics etc.

After a joint venture is registered, the entity is considered a Chinese legal entity and must abide by all Chinese laws. As a Chinese legal entity, a joint venture is free to hire Chinese nationals without the interference from government employment industries as long as they abide by Chinese labor law. Joint ventures are also able to purchase land and build their own buildings, privileges prevented to representative offices.

There are 2 types of Joint Ventures in China; Equity Joint Ventures and Cooperative Joint Ventures.

What are the two types of Joint Ventures in China?

1. EJV (Equity Joint Venture)

Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner.

2. CJV (Cooperative Joint Venture)

Compared to a EJV, a CJV is much more flexible. In a Sino-Foreign Cooperative Venture (also known as Contractual Joint Venture), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. A cooperative venture may also be registered as a limited liability entity resembling an equity joint venture in operation, structure, and status as a Chinese legal entity.

What to Keep in Mind when Establishing a Joint Venture in China

– Have trade clauses allowing the maximization of the return on your profits

The trade clause articles must be submitted to the local government agencies for approval and deposit upon registration of license. Therefore, you must incorporate all necessary clauses in the statements and paperwork from the very beginning.

– Understand the responsibilities and obligations of being an employer in China

China issued the new labor law in 2007 that identified issues of contract, dismissal, etc. Without prior knowledge of the law, you can end up spending a lot of time and money to terminate certain contract labor contract. You should also be aware of the well-being of employees and require to include such costs in your budget.

– Check the trustworthiness of your partner(s) in your joint venture

Always be careful and cautious. Your partner(s) may not be what they claim to be. Your Chinese business partner(s) may seem financially reliable, but they may very well live on bank loans and personal debts. Make sure to conduct thorough research.

– Establish a system of management of local employees

It is hard work to recruit appropriate staff in a foreign country. It is even more difficult to manage them effectively. A reliable and robust management system encourages employee participation and commitment of local staff in order to avoid potential risks. You can include reporting and communication policies, staff training, performance evaluation, compensation, career management and manual management of employees in the system.