The post-Covid economic crisis in China and continuing geopolitical challenges have stimulated many investors to setting up joint ventures with a Chinese company again, for the Chinese market, but increasingly also for global expansion.
A historical perspective
After the opening of China in the late seventies, Sino-foreign joint ventures were often the only choice of investment due to regulatory requirements. After further economic reforms in the eighties and nineties, joint ventures remained the most popular investment mode in China, with foreign enterprises taking the majority share and many Chinese companies being state-owned enterprises. Examples of successful Sino-Belgian joint ventures in the eighties are Shanghai Bell (now Alcatel-Lucent) and Xi’an Janssen.
By the early 2000s and China’s membership to the World Trade Organization (WTO) in 2001, there was a notable shift in the dynamics of Sino-foreign joint ventures. China committed to liberalizing its markets, reducing trade barriers, and creating a more level playing field. This led to increased competition and the rise in popularity of wholly foreign-owned enterprises, providing foreign companies with greater autonomy and flexibility. Increasingly also SMEs started investing in China.
By the 2010s, China had become the world’s second-largest economy and investment costs significantly increased, such as labour costs, land, and infrastructure. Consequently, many Belgian companies started sourcing from China or look at China as a potential export market for their products. If they decided to set up a legal entity in China, preference was given to a wholly foreign owned enterprise and merely sales and marketing activities, no manufacturing. From 2019 to 2020 the number of joint ventures in China even fell by more than 50%.
Post-Covid trends
According to a recent study by Deloitte, the recent economic crisis has created conditions that increasingly favor joint ventures, as they offer an advantage in accessing markets with heavy regulatory restrictions, such as China. Additionally, the high degree of market uncertainty has made the joint venture business model more attractive. Joint ventures require less initial investment and can be set up with a clear exit mechanism in mind.
Undoubtedly, joint ventures come with problems and challenges, and they expose the foreign side to risks such as intellectual property theft and battles for control over the business. Nevertheless, despite many prejudices and even fears of foreign companies to enter in a joint venture with a Chinese company, in fact over 90% of joint ventures in China under the age of 15 years are still operating today.
Much of the success of a joint venture in China is linked to finding the right partner. Western companies seeking to undertake joint ventures in China need to consider the peculiarities of the Chinese market and take the time to understand the market and business culture. Above all, foreign investors need to take the time to assess if their potential partner has an alignment of goals, has the necessary business capability, and is trustworthy.
Sino-foreign joint ventures outside of China
Apart from the strategic advantages of a joint venture for the business development in the Chinese market, in recent years also opportunities for global business development have increased. Engaging with Chinese companies can also open doors to global expansion, by leveraging the strengths of both the foreign and the Chinese partner. Through the partners’ networks and supply chains in their respective home markets, joint ventures can provide these companies with access to new markets, funding and technological expertise, as well as enhanced innovation speed.
To conclude, the decision to set up a joint venture with a Chinese company involves a careful weighing of the advantages and disadvantages. The economic situation, both globally and within China, plays a significant role in influencing this decision. Companies should conduct thorough market research, risk assessments, and due diligence to make informed choices that align with their strategic objectives and risk tolerance.
Please contact the Belgian-Chinese Chamber of Commerce (BCECC) in case you need more information.