Joint ventures in China as commercial investment sense

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JVs still a valid legal vehicle for use in China manufacturing

By Chris Devonshire-Ellis

Feb. 20 – Joint Ventures (JVs) were the first legal entities to be promulgated and available for foreign direct investment into China and remain the vehicle of choice for many larger investments.

The reasons for entering into a JV agreement are divisible into two main areas of consideration:

Regulatory
Where China’s regulatory system restricts the activities foreign investors may participate in, and requires the presence of a local partner. This includes many significant investment areas in China, including banking, insurance, healthcare, publishing, energy, property, communications and many others. For the complete catalogue for the Guidance of Foreign Invested Industries in China, in English, which includes the specific industry sectors that require a JV partner, please click here.

Infrastructural/financial
If faced with a decision where the regulatory environment permits wholly owned foreign investment, a decision can then be made whether or not to go it alone or to proceed with the assistance of a Chinese partner in a JV agreement. JVs have had, and in some instances continue to have, poor media attention. However, this usually down to an ill-thought out approach to the businesses actual needs, a lack of due diligence, or just sub-standard advice. Joint venture law is a complex subject, encompassing two specific types of regulatory regimes – Co-Operative Joint Venture Law and Equity Joint Venture Law – and you will need to find lawyers familiar and experienced in these to assist with evaluating the suitability and negotiating your way around the regulations. Certainly, an easy dismissal of the suitability of JVs for investments into China denies the foreign investor the ability to leverage assets the Chinese partner can potentially bring to the table. These can be fairly easily identified as being:

Financial assets
Where the Chinese partner’s factory, workforce and equipment assets are already in place and it makes sense to utilize these as existing assets instead of building your own green field site from scratch. In such circumstances, attention to detail needs to be put into place in terms of obtaining a reasonable valuation, and liabilities (especially concerning staff) need to be examined, however a reasonably competent China based practice will have these capabilities.

Supply chain assets
A major asset a Chinese partner can also possess is an existing supply (or supplier) chain. Again, due diligence needs to be undertaken to ascertain the extent and integrity of this, and supplier contracts properly subjected to testing to ensure no middle – man mark ups are being added, however the existence of an existing client base and supply chain to get product to market via bolting on production of new foreign invested products through a JV should not be under-estimated.

China Briefing has written extensively about joint ventures in China, while our consulting practice, Dezan Shira & Associates, remain industry leaders in this field of Chinese foreign direct investment law. For specific legal advice on JVs in China, our Legal Counsel Richard Hoffmann will be pleased to assist.

To read more material about this complex yet potentially rewarding legal structure for your investment into China, we recommend reading the Catalogue for the Guidance of Foreign Invested Industries as mentioned above, as this will detail the regulatory necessity of having a JV partner or not, and the following recent issues of China Briefing magazine which deal with the subject and related due diligence issues:

Joint ventures are back!

Conducting due diligence in China

Analyzing Chinese financial reporting

China Briefing’s Technical Guide to Establishing Joint Ventures in China, which has just been released in its 2nd edition, can be reviewed with full content descriptions and chapters here.