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China Joint Ventures. Can Things Get Any Worse?

By Dan Harris and Steve Dickinson

My 11 year old daughter is always asking me whether I can drive any slower. I usually respond to that by proving that I can. Seems almost as though China is now doing the same thing to me in response to my constantly harping on the dangers of China joint ventures? When I was just starting out as a lawyer, I negotiated what I thought was a great settlement for my client. The amount it would pay would be far less than we were expecting it would take to settle, and the other side would be giving us a more complete release than we were expecting. As part of this agreement though, my client, a Fortune 50 company, would have to allow the opposing party to pursue a third party in litigation, under my client's name. Legally, I thought that a very small price to pay for what I thought was a great settlement. I took this to the senior partner with whom I was working on the case, expecting nothing but kudos. He hated the deal. He agreed I had set things up to save our client millions of dollars, but he would not recommend it to our client and he was convinced our client would reject it. The client did reject it and the reason it gave was that it would "never" allow some other company to use [and possibly] abuse its name. They were absolutely right and I was dead wrong. That case came to mind recently in light of the Sanlu baby formula scandal. CLB's own Steve Dickinson was recently interviewed by the Dominion Post about the New Zealand company's (Fonterra) handling of the tainted baby formula. Steve pointed out how as a minority owner of a Chinese joint venture, Fonterra had virtually no say on anything:

Steve Dickinson, a partner at law firm Harris Moure, was surprised, however, that Fonterra learned what was going on as early as it did. Mr Dickinson, who has been based in China since the 1980s, is heavily involved in its food industry. "If you're a 43 per cent shareholder in a joint venture in China, you don't have any power. And the fact that Fonterra even found out means that they're far more involved than a typical 43 per cent joint venture partner. It just shows you the problems of being a minority owner of a Chinese company. You're not really aware of what's going on."

Hong Kong's Media Magazine just came out with a very interesting article on Danone's China public relations problems stemming from its longstanding dispute with Wahaha. The article is entitled, "'Hegemonic' Danone loses PR battle" and subtitled, "When the People's Daily newspaper starts referring to your brand as 'hegemonic' and calls on your local joint venture partners to rise up against you, it is probably safe to say that you have a serious PR problem in China." Media interviews David Wolf of Silicon Hutong who views joint ventures as potentially deadly for the brand and just plain bad news:

Wolf agrees that Danone sacrificed goodwill by ?running to its own courts?. He also points to a deeper problem that other MNCs would do well to avoid: the temptation to sling mud in an environment where brand awareness is evolving rapidly. Wahaha founder Zong Qinghou, for example, compared Danone?s tactics to the Western powers that bullied China a century ago. ?Danone was baited into a public war of words, but, in retrospect, it won nothing by doing so. It should have portrayed it as a purely legal matter, and focused on its consumers.? * * * * Brands experienced in foreign expansion such as Disney, Coca-Cola and McDonald?s remain well protected in China, although for some others that assertion is arguable. ?Brand ownership has to be completely clear,? says Wolf. ?In Danone?s case it was left up in the air. Given China?s relatively immature IP regime for protecting brands, you cannot rely on sophisticated legal agreements.? Where, then, does the collapse leave that most storied of Chinese structures, the joint venture? Wolf believes they are obsolete. ?The strategy should be to build your company from the ground up. The other option is acquisition?. Coca-Cola, presumably, is listening closely.

I agree with David Wolf, but with a few exceptions. There are still some industries in China where foreign companies can enter only by joint venture. There are also some instances where a Chinese company can contribute so much as to warrant a joint venture, though usually in those instances, there are legal workarounds that can take advantage of what the Chinese company can offer, without need for a joint venture. For additional reading on joint ventures in China, check out the following: "Chinese Joint Ventures -- The Information The Chinese Government Does Not Want You To Know " "WFOE v. JV" "China's Joint Venture Jeopardy" (this post is on an article I wrote for the Wall Street Journal on the same subject. "China -- Damn The Joint Venture" "Beware The China Joint Venture" "Beware The China Joint Venture, But Do Not Ignore It Completely" "China SMEs: Own If You Want To Own." UPDATE: A reader just pointed out this very interesting blog post, entitled, "Lessons for foreign investors from the Sanlu scandal," over at the Chinese Law Prof Blog, discussing what foreign participants in Chinese joint ventures can do to protect themselves. UPDATE: Just saw that the Off The Record Blog talks about the risks of being a "passive" investor in China, in its post, "Time for new China game plan."

Full post as published by China Law Blog on September 27, 2008 (boomark / email).