The Motley Fool is Foolish on China

The Motley Fool, a hugely popular investment advice site, recently posted this article on Home Depot's planned expansion into China.  The article talks about how Home Depot is looking to buy a 49% stake in Orient Home, a leading do-it-yourself China retailer. 

The artcle goes on to correctly point out that for big companies going in to China, "it often pays to piggyback on established regional players to gain the necessary localized expertise and consumer acceptance."  The article then veers off course by saying that in China "it's practically an imperative," and cites Starbucks as an example of this: 

In China, it's practically an imperative. When Starbucks opened its first store in China in 1998, it sought out a local partner. Even though the majority of the company's stateside stores are wholly company-owned, Starbucks has gone on to broker partnerships in Beijing, Shanghai, Hong Kong, and southern China.

This approach isn't limited to the retail world, of course. Even though the Internet is seen as the great leveler, many of our own country's most successful Net companies had to find an established partner in China. Last year, Yahoo! paid $1 billion for a 40% stake in Chinese auction site Alibaba. That came after eBay had entered the market through the acquisition of Alibaba rival EachNet.

The article concludes by stating that Home Depot shareholders should "be thankful that it [Home Depot] isn't thinking of going in alone."

I am a quite happy Depot shareholder, but the Motley Fool has it wrong.  I am not challenging Home Depot's decision to go in to China with a partner, but I am challenging the Motley Fool's contention that a partner is imperative. I also have to believe that Home Depot did seriously consider going into China alone before deciding to seek to join up with a Chinese company.  The need for a partner was true years ago when China's laws required foreign companies in most instances to come in as part of a joint venture, but in most sectors, that is not the law today. 

Contrary to the Motley Fool's assertions, many companies are eminently capable of going in to China on their own, without a partner, without being part of a joint venture.  By saying this, I am not in any way seeking to minimize the need for assistance on the ground in China from a whole slew of people who know and understand China business.  I am, however, staking out the position that in most cases it makes better sense to go into China as a wholly owned foreign entity (WFOE) than as part of a joint venture.

I previously blogged on the pros and cons of WFOES and joint ventures here, here, and here, but am doing so again because I see the purported need to "always joint venture" as one of the most persistant misconceptions about China.  About half our calls from companies seeking to go into China begin with their telling us they want to enter China as part of a joint venture.  When we ask them why, they typically say it is because they are under the impression that is the only way they can go in or they say that is how one of their competitors did it, and so they assume that must be the best way. 

In January, 2005, and again in January, 2006, China greatly liberalized the types of companies that can come in as a wholly foreign owned entity and our advice to any business seeking to enter China is to consider all options.  Sometimes the best way is as a WFOE.  Sometimes it is as part of a joint venture.  And sometimes, the old fashioned way of going in through a representative office is still best. 

Last week, The China Daily, quoting from a recent AmCham survey, noted that Amcham members in Chna are "increasingly more likely to have WFOEs, with 60 per cent reporting to have one in 2005, versus 33 per cent in 1999. Conversely, the percentage of AmCham members with joint ventures dropped to 27 per cent in 2005, versus 78 per cent six years prior." 

Bottom line:  Don't be, well, foolish.  Your company and its needs in China are unique. There is no one size fits all solution to Chinese entity formation and you should examine all options.