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.

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Last year, China signed the United Nations Convention on International Settlement Agreements Resulting from Mediation, known as the Singapore Mediation Convention. This was a momentous event in the development of the cross-border dispute resolution industry and provides China with an opportunity to develop a dispute resolution mechanism that addresses its international strategic commercial needs better than existing adjudicative forms, such as litigation and arbitration. These needs could propel China to become a primary service provider for the resolution of international commercial disputes by way of mediation – provided that China, through judicious capacity building – can fully professionalise its commercial mediation services institutions.

The United Nations Commission on International Trade Law approved the Singapore Mediation Convention (SMC) in 2018 with the UN General Assembly adopting it shortly afterwards. By the summer of 2019, 46 nations signed on to the SMC including China, India and the US. Although the UK, the EU and Japan have yet to sign on, it has broad support and further signatories are expected.

These needs could propel China to become a primary service provider for the resolution of international commercial disputes

China, for its part, has a long history of mediation. Mediation traditionally was limited to family, civil and property disputes. This preference is reflected in the Peoples’ Mediation Law of 2010, which describes mediation as a form of semi-official, non-professional neighbourhood and community mediation. In the context of a Confucian society, mediation tended to be practised with the help of elders as conciliators, whose practice of mediation was highly evaluative or didactic. Commercial mediation was practised for a long time by judges who, partly in response to high caseloads, would switch roles from judge to mediator in order to accelerate the resolution of cases.

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In contemporary China, the birth of modern commercial mediation can be traced to the years immediately preceding the 2012 amendment to the Civil Procedural Law. Article 122 states that in any civil case, unless the parties refuse, an attempt must be made to come to a mediated settlement.

In the years prior to the 2012 amendment, pilot programmes had been initiated in the court system and commercial mediation rules were subsequently issued in the insurance, securities, construction, e-commerce, medical and other industries. Industry based mediation centres, as well as comprehensive commercial mediation centres such as the Shanghai Commercial Mediation Center (SCMC), (established in August 2011) were formed.

The SCMC is a Shanghai registered NGO with its own panel of mediators and is a project unit with a key role under the Diversified Dispute Resolution Mechanism Reform led by the Judicial Reform Office of the PRC Supreme People’s Court. It has formed relationships with bodies throughout the world, including entering into a strategic cooperative relationship with US-based JAMS ADR, which has contributed to the elevation of the capabilities of SCMC’s mediators and professional staff through training. The pace of integrative collaboration accelerated with the formation of a joint panel of mediators in 2018.

Mediation is cheaper, simpler, and quicker than litigation or arbitration [and] the SMC can facilitate the Belt and Road Initiative

The PRC government has been generally supportive of the SMC and contributed through its participation in the drafting of the SMC text. However, the United Nations General Assembly resolution to adopt the SMC triggered a heated debate between various authoritative bodies in China as to whether China should accede to the SMC at all. These debates centred around China’s lack of a national law on commercial mediation that sets out general standards that address mediator qualification and confidentiality; the need to amend the Civil Procedure Law to address issues such as the SMC’s by-passing of the recognition procedure mandated by the Civil Procedure Law; and the inconsistency arising from the PRC requirement to confirm settlement agreements judicially for such agreements to become enforceable.

For the PRC, the advantages of signing the SMC are clear. First, the SMC provides a process for the direct enforcement, through local courts, of cross-border settlement agreements between two parties resulting from mediation, as long as the state, where enforcement is sought, is a member. Second, mediation is cheaper, simpler, and quicker than litigation or arbitration. Third, the SMC can facilitate the Belt and Road Initiative (BRI), President Xi Jinping’s program to link China’s economy with those throughout the global South through trade and investment.

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Mediation is unfettered by PRC arbitration’s structural and procedural limitations. Mediation does not involve any governing law, or procedural law of the arbitration seat or risks derived from any compromised independence of those delivering awards, as the credibility of mediators hinges merely on their ability as solution facilitators. Further, mediation is a flexible enough device not to be hampered by cultural and legal system differences – a key issue that has the potential to severely hamper the increase of investment, particularly in the private sphere, along the BRI.

However, the SMC presents China with significant challenges. First, there are inconsistencies between the SMC and domestic PRC law. As mentioned, there is not yet any national law in the PRC that recognises and harmonises standards in respect to commercial mediation. Second, most commercial mediation in China is either conducted by the courts or by commercial mediation centres by way of referral from the courts. There are still not many truly private sector commercial mediations that arise independently of the court system. Third, it has been difficult, to date, to convince the majority of legal professionals in China that their interests and those of their clients would be well served by using commercial mediation in advance of resorting to arbitration or litigation.

Through educating the market and the creation of a body of professional international mediators and mediation centres of international repute, China can become an international commercial mediation centre.

Non-Chinese parties are reluctant to sign on to using commercial arbitration or litigation in China. But international commercial mediation in China – now that it has overcome, by virtue of the SMC, its most obvious disadvantage compared to arbitration (ie enforceability) – has the opportunity over time to exceed the utility rates of arbitration for international disputes.

Through educating the market and the creation of a body of professional international mediators and mediation centres of international repute, China can become an international commercial mediation centre. Given the natural conservatism of Chinese state-owned enterprises, over the short term, the greatest opportunity for growth would be to tap into the market for disputes of small and medium-sized enterprises (SMEs).

The cost, time, complexity and inconvenience of arbitration has, to date, discouraged SMEs from resorting to arbitration to resolve their cross-border disputes. We expect that the absence of such impediments in cross-border mediation, with ample market exposure, will lead to a progressive increase in usage which, in due course, will place international mediation at the very centre of BRI dispute resolution strategy.

Peter H. Corne is the Managing Partner of Dorsey & Whitney’s Shanghai Office, NYU Global Adjunct Professor of Law, and Mediator of the Shanghai Commercial Mediation Center. Matthew S. Erie is an Associate Professor of Modern Chinese Studies and Associate of the Centre for Socio-Legal Studies of the University of Oxford, and Principal Investigator of the “China, Law and Development” research project, funded by the European Research Council.  

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