With its extremely promising market growth rate, the Land of The Red Dragon has established itself as a major player in the global economic arena. Chinese economic reforms of the nineties piqued the interest of investors across the world and since then, it has turned into a haven for foreign entities looking to extend their operations beyond their borders.
While establishment of WFOEs has been favored by overseas investors, their success is only limited to parts of China where little to no effort was required to attract local population to the brand name. To succeed in a market with more local tastes and interests, it’s better to collaborate with a partner based in China and initiate a Joint Venture.
Here’s everything you need to know before you embark on your journey to a successful joint venture in China:
Joint Ventures and Its types:
Chinese joint ventures can be molded into two kinds of structures. These include:
1.Equity Joint Venture:
Such a venture comprises a completely new company funded by at least two or more partners. Initial investment can be made in the form of hard cash, land or intellectual property; the money invested by partners determines the liabilities and profit of the venture. Under Chinese law, foreign investors cannot have shares less than 25% in an Equity Joint Venture.
2.Contractual Joint Venture:
As the name suggests, a Contractual Joint Venture reposes on a distinct contract that regulates the relationship between the overseas investor and Chinese partner.
Unlike Equity Joint Venture, the liabilities and profits in a CJV are divided according to the contract, instead of on the basis of equity shares. One factor that makes CJVs trickier to handle is the high risk of inter-partner disputes which can take place over the terms and conditions of the contract.
Establishment procedure:
The establishment process of a joint venture in China typically takes 4 to 6 months and includes the following steps:
√ Pre-Licensing: This includes paperwork requesting for approval of the JV from government ministries, such as letter of intent, submission of JV’s name, certificate of approval from the Municipal Commission of Commerce (MOC) in China
√ Licensing: This includes application and registration of the venture to attain a business license from the State Administration for Industry and Commerce. Post registration formalities are also part of this step.
For a more comprehensive representation of their interests before Chinese authorities, foreign investors often seek assistance from consultation companies, which use their long standing relationships with local bodies to eliminate any pitfalls in the process.
Choosing the right partner:
It’s always better to understand the goals and motivation of your prospective partners before initiating a joint venture, to ensure smooth business operations. Some key factors to look for in prospective allies, prior to signing up for the venture include:
a.Unique competencies:
The potential partner should be able to bring something unique to the table, which can be leveraged to improve the economic value to the venture.
b.Compatibility of goals:
A venture in which parties involved have different goals and ambitions is destined to fail. Ensure that your partner has a vision that is similar to yours.
c.Financial resources:
All parties involved should have the potential to fulfill their financial commitments to the union. Learn more about the financial standing of your expected partner through due-diligence procedures.
d.Historical performance:
The track record of your potential ally is essentially an evidence of their capabilities. Ensure all partners to be taken on board have a consistent performance history.
Foreign investors can reap tangible benefits by teaming up with Chinese locals on joint ventures. To kick-start your Chinese joint venture in full stride, seek assistance from an experienced business consultation firm, such as Business China.
Our team provides professional management services to ensure that international clients have a smooth company registration process in China, with minimum hassle. Get started today, by
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