Accessing China through Joint Ventures & Strategic Investments
May 17, 2011
You’re sitting in your office thousands of miles away from China…thinking ‘how can I take advantage of this massive China opportunity?’. All the analyst reports indicate a huge, rapidly developing market. 900 million mobile subscribers! 800 million internet users! 135 million broadband users! Your Board is asking ‘what’s your China plan?’
The numbers are staggering – but so seem the complexities and challenges…the hassles and risks. You’ve heard the China horror stories. Years of “science projects”. Lost intellectual property. Bad local hires. Wrong partners. Damaged careers.
Fortunately the technology market is maturing and more and more professional and global-thinking China companies are emerging that can offer foreign technology companies with an attractive China partner. Companies like Baidu, Tencent, Digital China, Huawei, Longtop, Asiainfo-Linkage, Alibaba, Sina, among many other that have international aspirations have seen the light and the importance of reputation and adapting global best practices.
In this month’s ADG Insight we would like to share some best practices on what it takes to get the cooperation model headed in the right direction.
1. Choose the right partner not the first partner
Often companies make the mistake of teaming up with the first company that approached them. To many times this can be dangerous as many times these companies are the weaker players in the market or have more dubious intentions. It is not to say that some great Chinese JV haven’t begun in this manner but in ADG’s experience it is critical that you do your homework first and get out and meet with all of the key ecosystem players to understand what is happening in the industry, who are the up and comers and what are their strengths and weaknesses? It is not always necessary or advisable to partner with the best company but understanding their real motivation is critical to starting off in the right direction.
2. Term Sheet Negotiations – not too detailed not to simple
Finding the right balance of business points to agree on prior to papering the deal is an art form in China given the wide divide between the classic Chinese JV contract which is summarized on a few pages and the Western approach of starting with a novel drafted by lawyers. In fact today, many Chinese companies are familiar with the Western approach and are more than willing to spend endless hours arguing the nuances of definitions; however it is critical to avoid the overly structured legal document and spend your energy discussing the details around the vision of the business and the expectations of the parties. While both parties know the contract can’t address the dynamics of a quickly changing world, the energy spent will go a long way in helping to building a relationship based on understanding and respect. At ADG’s we find it useful to discuss a PowerPoint based business plan in conjunction with the term sheet discussions.
3. Rely on 3rd parties
Given the vast opportunity for misunderstandings negotiations can fall apart before they even get started. The western approach of laying out a starting point in a document with the expectation the other side will markup it up has sent more than a few negotiations into a tailspin. The best method in China is to adapt a slower back and forth styles of addressing points. Use trusted advisors, lawyers if they have good business acumen or non-executive trusted employees to go through points verbally and pay close attention to the verbal and non-verbal feedback provided at the meeting and over the following days as the discussions make their way to the Chinese decision makers.
4. It’s the translation stupid
Translation, either verbally or in writing is an art form that can make or break the cooperation. Here I will address the translation of written communications. During the creation of any key negotiating document it is absolutely critical for the business person and a trusted translator to go line by line through the document to ensure both the literal meaning and the tone are suitable in Chinese. In many cases it is not possible for a literal translation to maintain the integrity of the business intention and the translator will almost always make the mistake of defaulting to a literal translation that he can more easily defend and understand. At ADG we require a 3-step translation process on all critical documents: 1) literal translation to Chinese, 2) edit to make sure that the Chinese version make sense and stands on its own without the English and 3) edit again with the business people involved to make sure all parties agree on the tone of both versions.
5. Keep some Value at Home
It is pretty intuitive and not particularly unique to remind you about the importance of maintaining some key aspects of your IPR at home. However, beyond the obvious there is real value and often an opportunity for your team at home to provide additional ongoing support to the China entity. This can be in the form of less obvious means that the entity in theory can do for itself such as customer service, marketing support, research, etc or any other ongoing support that helps to build continued connections and less obvious dependence on your company. The long term interaction will also help remind your board of your affiliate in China so they are ,more willing to see and address problems before they become serious.
