- Are you thinking of opening a business in China and growing it rapidly by making products?
- Do you want to market or manufacture your goods in the Chinese state and take advantage of low-cost manufacturing?
- Have you tried reaching out to companies in China and starting the process by forming JV’s?
China has slowly emerged as one of the world’s manufacturing superpowers. The prevalence of cheap labour aided by advancements in technology have made China a very attractive proposition for many big businesses all over the world.
From Apple to Nike, everyone manufactures the most high-end products in China. There are numerous reasons for the same. If you are someone who wants to set up new manufacturing or benefit from the technical expertise, you can form a Joint Venture with firms in China and get all the benefits.
Then, you should consider selecting a joint venture (JV).
However, joint ventures come with their share of benefits and disadvantages, and you should weigh them well when planning to take your business to China. Here is a comprehensive guide to starting up a joint venture in China.
What is a Joint Venture?
A joint venture is a type of limited liability company in China, and it is created through a partnership between Chinese business and a foreign-invested enterprise. The investment can also be between individual investors, one being a Chinese and the other a foreigner.
Although many investment areas in China have recently been opened up for wholly foreign-owned enterprises (WFOE), there are a number of reasons why some investors still prefer JVs. For example, the partnership makes it possible to combine two businesses’ assets, raising the capital for operations and faster growth.
As mentioned above, JVs are very good if you are looking to raise capital or seek funds from a financial institution like a bank. It is also great to have a JV to balance out the risks and mitigate the losses. When you form a JV, the local Chinese company also gets the responsibility of investing their best in the new business.
JVs also help in assessing the technology, learning about various new things, and improving one’s world-view in general. Sharing of information, technology, marketing and skills leads to the creation of a more robust business operation, which is more likely to succeed than fail.
What are the Different Types of Joint Ventures in China?
People need to keep in mind that not all JVs are the same. The kind of agreements, taxes, licenses and permits required for different kinds of JVs can be confusing. This is why in this section; we have taken the trouble of identifying the different JVs you can get into.
We have also briefly looked at the pros and cons of each type of JV to give you a better understanding.
Starting from 1st January 2020, the Foreign Investment Law abolished the distinctions that clearly differentiated the two main types of joint ventures; Equity Joint Venture (EJV) and Cooperative Joint Ventures (CJV) in China.
Even the joint ventures that were started before 1st January 2020 have to change to the new requirements under the Foreign Investment Law.
- Equity Joint Venture: In this type of joint venture, the profits and losses are distributed based on the ratio of the capital that an investor contributed. For example, if you as an investor have contributed 60% of the entire mark-up capital, you stand entitled to get 60% of the profits, which the company is going to make. The same stands true for the losses as well.
- Cooperative Joint Venture: This type of joint venture can be structured to follow a limited liability company’s model. You can also draw an agreement on how you want to share the profits. In a Cooperative JV, there can be a detailed negotiation among the parties, which should then be put into a legally binding document.
Pros of Setting up a Joint Venture
In the introductory section of the article, we spoke about some of the benefits, which a JV can bring to a business. In this section, we will list all the major pros and cons of JVs. This will help you understand the concept better and explore whether a JV will be the best option for your company moving forward.
- You can gain access to the restricted business sectors.
- It is a great way to gather experience of doing business in China.
- You can use the already established channels for doing business.
- A great way to get treated like a local when bidding for tenders.
Cons of Setting up a Joint Venture in China
- The process is expensive and lengthy.
- Establishing the business and maintaining it is complicated.
- Merging two companies with two different cultures and management styles is challenging.
- The risk of facing patent-related and management issues.
- Dividing profits can be challenging.
The Process of Setting up a Joint Venture in China with an Agency
Like a wholly foreign-owned enterprise, setting up a joint venture in China can be complicated. There are multiple rules and laws, which you need to understand and adhere to. Communications can also be an issue as even some of the best manufacturers do not speak English. In such a case, it is best to work through an intermediary.
For instance, you need to craft all the documents in line with the new Foreign Investment Law and adopt a realistic structure. This process is also lengthy and can take up to five or six months. The best option is working with a professional agency.
Because experts who have been in the market for long time run agencies, they understand the best way for setting up a joint venture in China.
For example, they will tell you the mistakes that most offshore investors make and help you avoid them. Well, do not just enter into a business partnership; work with professionals to make the joint venture successful.
You can visit this site to take help from our experts in setting up a joint venture in China and use their expertise to map your way to success.