The China Venture

3.3.3.2 Bargaining Situation II: SME – Chinese Joint Venture Partner
High-Tech SME Chinese Joint Venture Partner
• Cheap production for export or
• Long term foothold or
• Service & maintenance
• Technology as equity
• Keep control of operations
• Getting access to distribution networks
• Short term focus
• Get rid off own excess staff
• Personal motives: travel, etc.
• Upgrade of product and process technologies
• Getting access to foreign markets
TABLE 3-15: Interests, objectives and expectations between High-Tech SMEs and
Chinese JV Partners
When a SME considers a joint venture as entry vehicle, be it for export oriented production,
getting a long term foothold in the market or to provide service and maintenance for its
products, its goal is usually for a stable and long lasting presence in China. Eventual profits
are often reinvested to support the future growth of the joint venture. Chinese companies tend
to have a short term focus; in many cases the goal is to make profit and extract from the
operation as much as possible instead of reinvesting the profit. Conflicts are difficult to avoid
because the different time horizons lead to different business strategies. Equity Joint Ventures
(EJV) where both parties hold an equity share are generally more stable than Contractual Joint
Ventures (CJV) where co-operation is based on a contract without strict equity requirements.
To minimise problems, special attention has to be given to a careful partner selection.
One of the biggest problems is the valuation of assets brought into the joint venture as equity
by the parties. Machinery, technology and hard currency is usually contributed by the SME
while the Chinese partner provides land, eventually buildings, a sales organisation and
manpower. Equity contribution in form of technology (know -how, patent rights, etc.) is
restricted by law to 20% of the total equity. Often land and buildings are evaluated much too
high so that the Chinese side gets the desired equity stake which is relevant for profit
distribution and control of the joint venture. SMEs and MNCs alike usually have to make
concessions in this question.
Overstaffing is a serious problem in many Chinese companies. Getting rid of excess staff
might be a motive to form a joint venture. Like in the equity issue, concessions to the Chinese
side are often necessary. Both issues are hard to solve and are a common reason for the failure
of JV negotiations.
One important, if not the most important reason for a SME to opt for the joint venture solution
is the expectation that the Chinese partner has a lot of “guanxi” and a well developed sales
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