Disruption creates difficulties, but it also creates opportunities. Post Covid-19, investors have an opportunity to benefit from a first-mover advantage in this new world, and one of the ways to do this will be through international joint ventures (IJVs).

The majority of IJVs in China are manufacturing companies. This is viewed by the Chinese authorities as a preferable form of foreign investment because it provides an opportunity for the transfer of advanced technology and management skills to the Chinese economy and leads to increased exports.

Foreign companies have a particular interest in manufacturing in China, as it gives them access to the large Chinese market and to potentially low production costs. The international economic slowdown has also created a high degree of market uncertainty. When uncertainty is high, joint ventures become more attractive because they require less initial investment than the alternatives and can be set up with a clear exit mechanism in mind.

According to a study done by Deloitte, the Covid-19 pandemic is creating conditions that increasingly favour JVs. IJVs also offer an advantage in accessing markets with heavy regulatory restrictions. This is the case in China which effectively limits foreign investment in certain industries if the foreign investor does not partner with a local firm. However, there is a notable trend towards opening more industries to foreign investment, with the Chinese government recently reducing foreign ownership restrictions on investments in finance and the automobile industry.

The rising risks and costs of products due to supply chain disruptions, inflation and tariffs are also pushing companies to consider a JV, which would allow both sides to share the increasing burden.

Another way for both the foreign buyer and its Chinese manufacturing partner to reduce risks and increase sales and profits is to have the manufacturer sell the foreign buyer’s products in China.

Many experts consider JVs in China to favour the local partner and believe that it rarely makes sense for the foreign company. Joint ventures with Chinese suppliers have their own special issues/problems, and they expose the foreign side to risks such as IP theft and battles for control over the business.

Chinese factories usually know little about how to market products (even their own) in China, and when they are your factory and your JV partner, it can be difficult for you to monitor the joint venture’s sales and profits.

It usually does not make sense for a foreign company to become a co-owner of a joint venture entity with its Chinese manufacturer before it knows how good that factory will be at selling their product in China. Therefore, a China-centric distribution agreement could be a better option to set forth sales goals. It also allows the foreign company to walk away if the Chinese factory does not meet those goals. Having a trademark licensing agreement with the distributor also makes sense.

IJV manufacturers in China face many challenges, such as difficulty with recruiting and training suitable employees;  supplier management; problems with achieving high-quality output; and creating an effective IJV business culture.

Investments in IJV manufacturing are often thought worthwhile because of the strategic benefits they can bring to both local and foreign partners. But despite their apparent advantages, IJVs in China are not always successful, and parent companies are often dissatisfied with IJV performance. Poor financial performance is often related to operational problems.

IJVs are a way for businesses to get a foot in the door and establish themselves in a new market. Consequently, measuring the success of an IJV should take into consideration what the stated objectives of the venture were at the time of signing and ask whether the IJV achieved them.

Over 90% of ventures in China under the age of 15 are still operating today. Remarkably, nearly 70% of ventures over 25 years old are still legally operating. It is worth noting, though, that some of this high survival rate could be attributable to the legal difficulty of winding down a company in the country.

IJVs make up a substantial proportion of foreign investment in China. Since 2010, roughly 40% of foreign-funded capital into China has come via JVs. IJVs also allow the foreign partner to make use of the local know-how, and get access to the capital, business relationships and talent of its local Chinese counterpart.

According to Deloitte, Chinese-based IJVs will continue to be attractive to Western companies after Covid-19. American and European firms will seek to leverage the relatively high growth rates possible in the Chinese market. Firms investing in China can take advantage of the increasingly skilled and sizeable workforce and its comprehensive supply chains.

Much of the success of an IJV in China hinges on finding the right partner from the beginning. Western companies seeking to undertake joint ventures in China need to consider the idiosyncrasies of the Chinese market and take the time to understand the market and business culture. Above all, firms need to take the time to assess if their potential partner has an alignment of goals, has the necessary business capability, and is trustworthy.

Get immediate access to the China market with Launchpad, CBBC’s flagship market entry service. Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out more.

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TP: Can you introduce yourself, where you were born, grew up and educated?

ML: I am a mother of three sons, born and raised in Hong Kong. My entire education was in Hong Kong, from primary school to my Masters of Law in the University of Hong Kong. I have never lived in another country.

TP: Can you tell us about your career progression?

ML: I was trained in what was formerly known as Johnson Stokes & Master (now Mayor Brown), the biggest local law firm at that time. I then joined my principal to set up our own firm one year after qualifying as a solicitor. In 1991, in anticipation of the possibility of immigration after Hong Kong was returned to China in 1997, I joined the US firm Coudert Brothers.

From there, I moved on to start up a local firm with my partner Peter Carey whom I lost to a traffic accident in 1998. In 1999, I joined DLA Piper and helped that to grow from a three partner office to a multi-discipline practice with offices in Shanghai, Beijing and other Asian countries. After 17 years in DLA Piper, I joined the US firm Winston & Strawn with a view to develop its corporate practice.  In 2017, I joined Withers, also with the mission of developing corporate practice.

Throughout 40 years in the profession, I have principally been a corporate /commercial lawyer, though also have experience in real estate and private wealth management. I see myself as a trusted advisor who can assist clients in a wide range of matters.

TP: You were involved in the first-ever JV in 1979 – can you tell us how that came about and how it took place?

ML: Maxim’s Group, the Hong Kong investor in the JV, was and still is a client and I assisted them in the set-up of the first JV in 1979.

TP: Have you seen a shift in recent years from inbound (CN) investment to outbound?

ML: I would not consider it a shift but, as I anticipated many years ago, China has developed from an inbound capital receiver to also providing outbound capital.

TP: What are some of the mistakes that companies still make when dealing with China?

ML: I think some of those working with the Chinese still make the mistake of underestimating the strength of China – both in terms of commercial sophistication and financial power.

TP: How do the issues affecting Hong Kong at the moment affect China’s image? And will this affect how businesses invest in China?

ML: It really depends to whom you are asking the question and what information they have received from the media. From my perspective, China has been very constrained and has not interfered with or even given direction to what should happen in Hong Kong. Despite the provocation, China is determined not to have a repeat of June 4th and those who are waiting for the People’s Army to come into Hong Kong will be disappointed. However, if you discuss the situation with people outside Asia who have not got the full picture from the media, they would think that China has already taken over Hong Kong. The people in China are robust about the country’s future. What is happening in Hong Kong should not affect business investment in China.

TP: The Greater Bay Area is clearly a huge regional development in China, what kind of opportunities do you think it will offer to international business that wants to get involved. 

ML: Much anticipated by real estate developers, industrialists, and investors alike, the Greater Bay Area (GBA) has already received plenty of attention for its ambition to transform nine mainland cities and two special administrative regions into a new Silicon Valley-type technology and innovation hub. To help the region become more economically valuable, the initial plans are for it to become an important global centre for advanced manufacturing, and to also focus on innovation, financial services, transport and logistics, trade, and tourism and leisure. These are areas where the GBA is already strong, with different cities in the region already establishing their own unique strengths. Hong Kong is known as a world financial centre; Shenzhen is known as ‘China’s Silicon Valley’ because of its innovation and start-up culture; Guangzhou is known for manufacturing and as a logistics hub; whilst Macau and Zhuhai are known for leisure and tourism.

I think some of those working with the Chinese still make the mistake of underestimating the strength of China – both in terms of commercial sophistication and financial power.

Further to this, in January 2017, China and Hong Kong agreed to build the Lok Mau Chau Loop Technology Park. Located in Hong Kong, right on its border with Shenzhen, the park will allow Hong Kong to tap into Shenzhen’s booming innovation and start-up ecosystem while also maintaining access to Hong Kong’s strong legal system and business environment.

The initiative will have an international impact beyond the GBA, as the region is located on the maritime section of China’s ambitious Belt and Road Initiative.

TP: As a female business leader, what challenges and obstacles have you personally overcome in your career and how did you deal with them?

ML: I am often asked this question and I have to say that I have had very few challenges or obstacles as a woman. With domestic help and family support, I have always been able to maintain dedication to my work and career while raising the family. Woman are not in the minority in the legal community in Hong Kong and there is no strong discrimination against women.

TP: What advice would you give young female entrepreneurs or those trying to further their careers?

Women should not consider themselves any different from men. Women have to believe in equality first. On the other hand, it is important to have a clear understanding of one’s priorities. Thus, if a young female entrepreneur wishes to dedicate herself to her family and take a break from her career, she should do so and should feel no stigma. It does not make sense for a woman to try to do both tasks at the same time, putting herself under immense pressure while struggling to succeed with both tasks.

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