A China Joint Venture Survival Guide. 22 Facts and 22 Practical Tips (III)

This is the third post of the series entitled “A China Joint Venture Survival Guide” based on Mike Smith’s experiences as his company’s representative in a Chinese joint venture. If you have not read our previous posts you can read them here:
A China Joint-Venture Survival Guide (I)
A China Joint-Venture Survival Guide (II)

A Joint-Venture Survival Guide (III).(Tips 16-22)

“Watch Out for the Money Holes”
16. Money Hole #1: Company employees & Social Security.
There are a couple of “black holes” that are often used to suck your money away: the stated number of employees in the company and the payments to social security. You need to get two proofs here:
– Proof of the total number of employees in the company
– Proof that they are paying Social Security forthose employees.
Do not accept their word for this.
Experience: Our partner kept swearing that the company had 74 employees. My calculation was that there were no more than 50 employees in the company. I asked them to prove their claim but there were no contracts to be seen. When I asked for the bank transactions to assess the amount of money we were investing in overheads I was told it was paid in cash. When I asked for the receipts signed by the employees they said there were none.
I was not alone in this situation. I encountered other companies facing exactly the same challenge.
! Tip: You need to check this when you are negotiating and you still have bargaining power. If you discover this when you have already invested several million dollars you will be helpless. Do not accept their word on this. In China they file Social Security online. They have a website where they can access, through their company name and password, all their social security, accounting and fiscal (tax) data. Request to have access to this while still negotiating.

17. Money Holes #2: Stock Control
Companies often do not have good stock control in place and this is another big “black hole” your money will slip through.
Experience: You are told they bought 10 units of a product and they just purchased 5. When you try to investigate in detail they tell you there are not stock control systems in place, or the switch off the computer, or they tell you it does not work …
! Tip: Make sure you have access to all the policies and procedures manuals before you sign a deal. And once you have access, make sure you assess whether the policies and procedures are really happening or not. It is also quite possible that they do not even exist
The people from the purchase department should be “your people”. If that does not sound possible it is better to create the department from scratch and hire a local purchase manager of your choice, that you can trust, to ensure proper control.

18. Money Hole #3: Accounting
How many accounting books is your partner keeping? Make sure you keep a tight accounting process.
Experience: I always used to work late. One evening I happened to walk through the accounting department and somebody had forgotten to lock away the accounting books. To my surprise, the number of accounting books was higher than what I thought our company was keeping. I did not need to be too smart to figure out what was happening. Our partner was using fake purchase orders to divert money into his own personal accounts. Our accounting team was also keeping the books for his own company, which by the way was not supposed to exist any longer but should have merged into the J-V.
! Tip: Make sure you have unrestricted access to all cabinets and locations where information is stored.
!!Tip: Keep a very strict monitoring of the accounting. All expenses must come with proof of purchase,authorised and signed by you or your team.Fa piao (we could translatefa piao as “super-receipts – receipts that are hand-stamped and recognised for tax and other purposes) are difficult to audit as they usually come without a description of the expense.
!!!Tip: Develop a good relationship with the CFO
!!!!Tip: Purchases should come with double signature (CFO and your representative) on set days (probably not necessary more than three times a week as purchases are planned in advance)

Other things that could go wrong
19. Technology Transfer – IP Risks
A fact you should be clear about is that your partner is likely to end up copying your technology.
Experience: Our target market was China, so our J-V was supposed to manufacture a product more sophisticated than the existing competition in China but not as technologically advanced as our products in Europe. In order to do that, we needed to transfer some know-how to our Chinese partner. I strongly suggested against it but at that time, it would have been equivalent to giving up the project and I still did not have physical evidence of what was going on.
My fears were soon proved right and I caught them copying our electronic cards … And later on I found out about them copying machinery and tooling.
!Tip: Well, you have no way to control it. Fingers crossed and good luck (do not forget we are talking “deep China” and not main business hubs). If all steps have been taken correctly things are more likely to go better.
Most business people I´ve met in China share a view that the new generation of Chinese business people who have studied abroad understand how to do business for the long term rather than for immediate and dishonest gain.

20. Company Seal- Always with You.
In China documents can be signed and stamped with the company seal. Back home contracts would not be valid unless you have signed them. Here the company seal is enough to make a contract valid … so
!Tip: Never leave your Legal Representative seal with somebody else. If you absolutely need to, be sure you can trust that person 100% as that seal is equivalent to your own signature.

21. Be ready to test your endurance
Experience: My Chinese partner was responsible for my house utilities. Once I was left without power for several days, another time I had no running water for three days. I also got internet connection discontinued.
People around me also suffered. I went through three finance managers who left the company shortly after I hired them. I remember the case of one of them who would systematically arrive at the canteen to be told there was no food for him. These are highly paid professionals who have no interest in going through that hell when they can have a nice well paid job somewhere else.
!Tip: I think when you have reached this stage, things are going really bad. In this case, it could be safest to control your house contract and utilities directly (probably through somebody you trust).

22. Beware of direct communication between your partner and your headquarters.
When you start proving to be a “damned nuisance” in your partner’s life he may try to get rid of you in different ways. He may contact your headquarters and try to make you look like inept or make them believe you complicate your life (and everybody else´s) with non-existent problems and issues.
Experience: In my case the Chinese partner kept calling my company’s president and emailing the board of directors in order to undermine their trust in me. I was very lucky because in the end I managed to get access to all sort of documents that proved we were being ripped off. But I’ve later on met other people who lost their positions due to pressure from the Chinese partner.
!Tip: Invest in “Educating your Headquarters” before you start operating in China. Headquarters don’t like to hear bad news. And some of the stories you will tell them are so unbelievable that they may end up thinking you have gone China-mad.

So what are your tips and experiences in Chinese joint ventures? You can leave a comment or contact me to share it in a longer form!

You can also subscribe for future post updates.


One comment