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Publication: IE Singapore & Manchester Business School

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In 2007, International Herald Tribune reported that “Danone officials concluded that their closest partner in China was operating secret companies outside the joint venture and were siphoning off million of dollars”.  Danone and Wahaha eventually announced the “conclusion of their joint venture relationships” in 2009.  What can we infer from this Danone-Wahaha saga?

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A Chinese Partner will provide solid value-add to a Foreign Player that needs to differentiate its home model for the Chinese market.  Even Danone will agree to this but as its plight has suggested, a Foreign Player that focuses too much on managing its China joint venture (“JV”), and too little on managing the needs of its Chinese Partner, does so at its own risk.

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Efforts by a Foreign Player to implement strategic, management and operational initiatives (“initiatives”) are often hindered by what it perceives to be Chinese Partner concerns (“concerns”), such as failure to abstain from competing business and resistance to international best practices, amongst others.

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How can these be managed?

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To begin, a Chinese saying comes to mind: “treating the symptoms and not the causes of an illness”.

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Managing the needs of the Chinese Partner is crucial because motivation to explore alternative means of meeting its needs outside of the China JV may be present when the initiatives are perceived to be detrimental to its needs.

 

This, in turn, often leads to the concerns.  Therefore, focus on treating the causes (manage the needs); not the concerns themselves.

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Next, an appropriate combination of short and long term incentives should be established to serve as linkages (“linkages”) between Chinese Partner’s needs and the initiatives; and in this regard, over reliance on short-midterm incentives should be avoided as they can weaken the linkages.

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If available, and the immense potential of the China market will lend strength to this option, a stock market initial public offering is a powerful platform that will align the Chinese Partner and Foreign Player.

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A Foreign Player should also consider maintaining the shareholding of the Chinese level at a substantial level (appropriately that is) as this will underpin the effectiveness of incentives, and reinforce compliance of non-compete obligations.

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Functionally, the Chinese Partner should take the lead where local expertise and knowhow are vital, such as sales, marketing and business development.  By the same token, the Foreign Player should appoint “on the ground” managers in functions where they are perceived to be of value, such as IT, finance and international businesses.

 

By supporting the Chinese Partner in its area of expertise, and actively contributing where it is of value, a Foreign Player will be well positioned to truly drive competitive advantages across its China JV.

 

Management reporting system to track the progress of initiatives should be expanded to cover the incentives and linkages to provide input on managing the Chinese Partner.

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Finally, management of the China JV is necessary but not sufficient.  To create sustainable value for the China JV, a Foreigner should also manage the needs of its Chinese Partner.

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This is an extract, for the full article please click here.

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This article was published in the newsletter of Manchester Business School and IE Singapore.

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