Chris Devonshire-Ellis: Want China National Coverage? The JV Route Provides

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Op-Ed Commentary: Chris Devonshire-Ellis

Aug. 5 – As China’s changing economic balance shifts the emphasis away from export manufacturing towards a more domestic consumer market, opportunities are now finally starting to appear from those who always dreamt of “selling to a billion consumers.”

China’s government has handed out, as part of the process to encourage this, massive fiscal stimuli to its inner regions to get the population there to buy. Subsidies on everything from agricultural products to consumer goods are provided to persuade China’s rural population of some 900 million to spend – the nation, after all, possesses the world’s highest level of savings with 52 percent of income being squirreled away.

For investors, this market represents a major challenge. As China opens up to get its population to buy goods, opportunities to provide consumables to them are rife. Finally, for the first time since China’s reform and development, there really is an opportunity to sell “chopsticks to the Chinese.” How to do that is easier said than done, and the bigger problem here is logistical rather than regulatory. Assuming that your industry is able to sell to China, the issue then becomes one of how to execute that sale. Here, the China joint venture lends a hand as the vehicle of choice, for three main reasons.

Market size
For national coverage, the JV provides the quickest route to getting your product out there and on the shelves all over China. This is because the JV provides an inroad into an already existing business – that of the China partner. They will possess an already trained workforce, supply chain, and distribution channels to customers. Doing that on your own from scratch via the WFOE route will take forever. The China JV, multiplied by several locations, can give a foreign investor almost immediate national coverage. The largest structure my firm ever put in place was for a European pharmaceutical client, who went from one representative office to 17 JVs in the space of a year. For sure that had to be supported, and required serious commitment from the head office, but it gave them a truly national base to launch products from on a pan-China basis within 12 months.

Local knowledge acquisition
Selling to a market as large as China’s requires local knowledge; the country has over 50 regional minorities, hundreds of dialects, and six major linguistic groups. Individually, each Chinese partner firm will already posses that knowledge and know-how. Joint venturing with them will provide instant ethnic intellect that doing it yourself would take years to accumulate.

Buy out options
With a pan China structure, of course some JVs will fare better than others. Even assuming they all work well, it is relatively simple, once the initial structure is in place and operational and local knowledge has been acquired, to buy out each partner on a systematic basis. Locally, the partner will have done well out of the individual arrangement, collectively, you’ve just acquired and then built a complete China network that can be 100 percent owned if necessary.

China in fact provides additional structures to assist with the development of such networks on a national basis. An issue with possessing many individual entities in China is the transferring of cash and management between them, however this is provided for under the China holding company structure, which allows a foreign investor to set up an umbrella organization to cater for the dispersal of funds across different entities. Businesses looking to conquer the China market would do well to consider the holding company structure with a geographic spread of JVs under it.

The JV option is normal for larger investments, either for the structural and time saving benefits they bring as described above, or for investments that require a Chinese partner for regulatory reasons, such as Tom Group’s recent deal with China Post. In fact, of the US$91.8 billion in total utilized FDI last year , some US$19.3 billion was invested through joint ventures in China, close to one in four of all investments. For building and developing a China national structure, then tying that together, the JV provides the quickest route to market access and the structural ability to put a management office in place, in China, to monitor it.

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates and has been involved with strategizing and structuring joint ventures in China for 18 years. He may be contacted at info@dezshira.com.

Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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