Joint Venture Risks in China: What Foreign Companies Must Know

Joint ventures were once the only way for foreign companies to enter many Chinese industries. While regulations have relaxed, JVs remain common — and they remain risky. Understanding these risks before you commit can save your company from costly mistakes.

Common Joint Venture Problems

1. Misaligned Objectives

Foreign and Chinese partners often have fundamentally different goals:

• Foreign partner wants: Market access, profitable operations, long-term growth
• Chinese partner may want: Technology transfer, quick profits, or simply the prestige of a foreign partnership

These misalignments often don't surface until the JV is operational and problems arise.

2. Control and Management Disputes

Even with majority ownership, foreign partners often find they have less control than expected:

• Day-to-day operations may be dominated by the Chinese partner's personnel
• Key decisions require unanimous board approval, giving minority partners veto power
• Local relationships and government connections rest with the Chinese partner

3. Intellectual Property Concerns

IP protection is a major concern in China JVs:

• Technology contributed to the JV may be difficult to protect
• Chinese partners may establish competing businesses using JV knowledge
• Employees may leave and take trade secrets to competitors
• Contractual protections are only as good as your ability to enforce them

4. Financial Transparency Issues

Foreign partners frequently struggle with:

• Incomplete or inaccurate financial reporting
• Related-party transactions that benefit the Chinese partner
• Difficulty verifying expenses and revenues
• Multiple sets of books (for tax, investors, and actual operations)

5. Exit Difficulties

Getting out of a troubled JV can be extremely difficult:

• Chinese partners may refuse to approve dissolution
• Asset valuation disputes can drag on for years
• Government approvals may be required for exit
• Non-compete clauses may prevent you from operating independently in China

Due Diligence Is Critical

Before entering a JV, thoroughly investigate your potential partner:

• Financial health: Review audited financials, tax records, and bank statements
• Legal history: Check for litigation, regulatory violations, and disputes
• Reputation: Talk to their other business partners and customers
• Ownership structure: Understand who really controls the company
• Government relationships: Assess their political connections and risks

Protective Measures

If you proceed with a JV, build in protections:

Governance Provisions

• Require supermajority or unanimous approval for major decisions
• Ensure foreign partner controls key positions (CFO, technology)
• Establish clear reporting requirements and audit rights

IP Protection

• License technology rather than transferring ownership
• Keep core technology outside the JV
• Include strong confidentiality and non-compete provisions
• Register all IP in China before the JV is formed

Exit Mechanisms

• Include clear buyout provisions with predetermined valuation methods
• Establish deadlock resolution procedures
• Consider put/call options for equity
• Plan for dissolution scenarios from the start

Alternatives to Joint Ventures

Consider whether a JV is really necessary:

• WFOE: Wholly foreign-owned enterprises now permitted in most industries
• Contractual arrangements: Distribution, licensing, or franchise agreements
• Acquisition: Buy an existing Chinese company outright