The landscape is littered with casualties such as Danone Group's relationship with Hangzhou Wahaha Group, which remains in litigation, and Interpublic Group of Cos.' ill-fated joint venture between Lowe Worldwide and the Chinese conglomerate Guangming.
Procter & Gamble and Unilever also faced problems with local partners in their early days in the mainland. More recently, contamination issues facing Fonterra in its joint venture with Sanlu Group have received global attention and essentially destroyed their operation in China.
American Matthew Mouw has lived in China since 1981, helping multinationals set up and operate a range of business models there. Based in Shanghai, he is currently the CEO of Weight Watchers International's recently established joint venture with Danone in China.
Whether your company opts for a wholly foreign-owned entity (WFOE), known as "woofies" in China, or a joint venture, below are his six "golden rules" for setting up a successful business in China.
1. Decide if you really need a partner
The decision should be based on business need, not some fuzzy idea that you need a partner based on the business environment that existed in China in the 1980s. China has changed tremendously in the last 30 years, and there are many successful examples of both joint ventures and wholly foreign owned businesses operating in China, just as there are many examples of failures with both business models.
The local partner must be able to contribute to the business on an ongoing basis and should not simply be a partner in name if the partnership is to endure. Both partners must recognize and appreciate the contribution of the other party. Keep in mind your best partner may not necessarily be a local partner.
2. If you do need a partner, choose carefully
The standard rules of business apply in China just as they do in the rest of the world and there is no need to jump in bed with the first potential partner that comes along. Look at all the options and make a business decision based on the strengths and weaknesses of the potential partners available after gathering information from your auditors, lawyers, and other local contacts. The best partnerships are those that make clear business sense, not those based on speed and expediency. Time spent making the right decision will be time saved during future operations.
3. Get a clear prenuptial agreement with your partner
Think about both the marriage and the potential for divorce. Priorities change over time and you need to have clear contractual mechanisms in place to revise the relationship as the business evolves, and if necessary, amicably part ways. Disputes normally arise when a joint venture is either wildly unsuccessful or wildly successful. The biggest disputes typically stem from wildly successful ventures.
4. Put only one partner in charge of day-to-day operations
No matter if the business is 50/50 or 90/10, at the operational level, a joint venture is best run by a single partner. Consider both the majority and minority partner for the operational role and make the choice based on merit and current business needs. In other words, hire the best person for the job at the time.
Clearly separate the operational and oversight roles in the business, setting clear objectives and milestones at the oversight level. Be sure you have in place mechanisms at the oversight level to change the operational management if the objectives are not met.
5. Choose the location of your headquarters and manufacturing facilities after comparing potential locations
China is not a monolithic business environment. It is a collection of over 2,000 counties and districts that each have their own priorities and development plans. To maintain strong local governmental support, you need to be a contributor to the local community, either as a large taxpayer or as a business that fits the local development priorities. Don't just plop yourself down where your partner happens to be. Choose the right location for the partnership, not for one of the partners.
6. Stay engaged with your partner
It is important to ensure you and your partner remain on the same page throughout the life of the venture. You should spend considerable face time with your partner and remain actively involved and informed about what is happening in the business.
This means developing multiple channels of communication with multiple levels of the business. Contracts and agreements cannot replace face time, and face-to-face communications at multiple levels is essential to a smooth and enduring relationship.
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