WFOE v. JV

One of my best friends from childhood, who is now a senior executive at  Miniature Precision Components, Inc (a successful supplier of plastic parts to the auto industry) sent me an Automotive News article today, entitled The Easy-Money Era in China is Over .  This article details the advice given by the Executive Director of Magna International's China operations, Keith Lomason, during his speech at the still pending 2006 Automotive News World Congress.  Though primarily directed at the auto industry, Mr. Lomason makes a number of excellent points applicable to any company seeking to do business in China, but I find it particularly heartening to see him emphasize the benefits of foreign companies entering China "alone rather than [by] setting up a joint venture." 

On January 1, 2006, China enacted a new company law further increasing the industries in which foreign companies can participate as a Wholly Foreign Owned Enterprise (WFOE) as opposed to as a Joint Venture (JV) partner.  In most instances, we are finding that a WFOE is preferable to a JV, with the WFOE using a regular contract to secure its relationships with local Chinese companies. 

Washington Post China reporter, Peter S. Goodman, had this to say about Chinese joint ventures:

By and large the term "joint venture" provokes fear and loathing among seasoned foreign investors in China.  Local partners simply have too many ways to profit personally without the business making any profit.  They can use the joint venture operations to do the low cost work for their wholly owned factories. They sometimes run illegal night shifts that make counterfeit goods that are then sold in direct competition to the joint venture's wares.  They funnel the construction and maintenance biz to their unemployable cousins, then share the spoils privately. When foreign investors can, they pretty much favor wholly owned operations to avoid the minefield of jumping into a mysterious system with a partner whose motivations may be hard to discern. 

We Agree.  Forming a WFOE is usually the way to go.  Establishing a WFOE and then contracting (with a written contract in Chinese and in English) with the Chinese company with whom you initially planned to form the joint venture can position you (the foreign company) to achieve all of the goals of the JV, while avoiding most of the joint venture's inherent problems.