Joint Ventures, Strategic Alliances Remain Attractive Ways to Do Business in China

While there has been much coverage of China’s slowing economy, as well as increased scrutiny of foreign companies and the country’s rising labor costs, a new report finds that joint ventures and strategic alliances remain attractive ways to do business in China for both Chinese and foreign companies.

Seventy-six percent of foreign respondents and 70% of Chinese respondents surveyed are planning to enter into a partnership (i.e. joint venture or alliance) in China.

A significant majority describe the prospects of a partnership in China as “good” or “excellent”. Such business partnerships rely on the sharing of resources and are therefore less risky and costly than wholly foreign-owned enterprises. Sometimes they are the only viable option.

"Courting China Inc.: Expectations, Pitfalls and Success Factors of Sino-foreign Business Partnerships in China" is a report commissioned by PwC and written by the Economist Intelligence Unit (EIU). The authors surveyed 300 senior executives from China and eight other geographies, across 20 industries.

"It is essential that the partners’ strategic objectives for the JV are aligned from the outset,” says Katy Spooner, Transaction Services Leader for PwC Southern China. “An appropriate management structure, clear contributions from the partners and the full support of both Boards will maximise the likelihood of a successful venture.”

The growing importance of compatibility in areas such as market responsiveness is one of the major findings of the report. It has displaced "guanxi", or relationship-building capabilities, as the key focus for foreign partners.  Instead, they are looking for compatible brands and organisational cultures.

However, the costs involved and the growing complexity of setting up a JV are still an important issue for both foreign and Chinese partners.

The report also finds that foreign investors are more concerned about JV failure than their Chinese counterparts, who tend to be more focussed on whether the JV will effectively deliver access to technology and R&D capabilities.

But both parties agree that there is no chance of success without a shared strategy and an ability to deal with the differences in cultural and corporate values.

"The benefits of sharing resources and skills in a joint venture or strategic alliance can help counter-balance the perceived risks," says Kevin Plumberg, Senior Editor of the EIU.

“But these benefits need to translate into an improved bottom line.” The report finds that such partnerships must deliver on financial objectives once they are up and running. Survey respondents cite poor financial performance as the top reason for terminating a JV early.