Joint ventures way forward but beware of the pitfalls

While difficult funding conditions have led to a slowdown in new foreign companies being established in China, there has been a resurgence in joint venture activity.

There are a number of reasons for this. Firstly, some Chinese companies have become stronger and more robust in recent years. The country’s continued dynamism and increasingly sound economic management prove attractive attributes for incoming businesses. As a result, China often represents a better option for UK businesses looking to expand overseas, moving away from the more traditional, but currently more volatile, US and European markets.

Secondly, there has been a degree of economic slowdown in some regions of the country and some UK firms are exercising more caution, becoming more reluctant to enter on their own. Instead, they find real financial, as well as practical, value in partnering with a Chinese company that already has the staff, capabilities, infrastructure, market knowledge and client contacts in place.

Regulation remains a key factor. In some sectors, limitations on foreign ownership mean it’s almost impossible to establish a business unless it’s done through a joint venture. The car building, publishing and recruitment industries all operate in this way.

However, while the advantages of finding a Chinese party to join forces with may appear to mitigate some commercial risks, the increase in partnerships has led to a marked increase in disputes between UK and Chinese businesses.

While at the start, relationships may appear to be mutually beneficial and non-competing, complications can arise if the commercial interests that brought two businesses together in the first place are no longer aligned.

Businesses are increasingly finding themselves in dispute over alleged contractual breaches, or facing issues concerning profit sharing, management of the business or exit clauses – matters which weren’t properly considered at the time of entering into the joint venture meaning there is no agreement between the parties when these issues arise. Problems also occur if one partner starts applying know-how from the other, creating products that directly compete against their partner’s offering.

It is difficult terrain to cover and often, when relationships are strong at the outset, partners are reluctant to approach the possibility of a breakdown in partnership by tackling some of the more sensitive areas.

However, as joint ventures in China must be governed by PRC law, such discrepancies can prove extremely troublesome to UK businesses. It is absolutely vital that Yorkshire businesses ensure their joint venture agreements are comprehensive, legally drawn up and account for any outcome. This is a vital part of ensuring a successful partnership in China.

n Josh Wong is a partner at DLA Piper. He runs the law firm’s China desk in the UK.