A China Joint Venture Success Story (Part III). Where To Go Now?

Today I bring you the third part of “A China joint venture success story”, an anonymous guest post by somebody who has been a partner in a joint venture in the manufacturing sector in China for over ten years. Make sure you do not miss the first and second part. You may read them in the links below:
A China joint venture success story (part I)
A China joint venture success story (part II). The lessons I have learnt.

Today´s post will describe this JV´s new situation. After more than 10 years of successful operation, key aspects of the relationship change: different players, different capabilities and new decisions to be made. Let´s read about it.

A Joint Venture Success Story (Part III). Where To Go Now?

We have had an excellent relationship over the past 11 years as we have been very profitable and able to sort out our differences amicably (and there have been some big differences), and accepted each other’s foibles. But the one thing we have not been able to do is to get the JV to change to meet the new and different market realities.
Our GM moved up the ladder some five years ago, as a bright and competent leader should, but he could not break the unspoken rule of the SOE (State-owned enterprises)  and find a replacement for himself outside the organization, even on our insistence.
We ended up with the accountant running the operation. Although managerially able, she has no commercial sense and we are suffering. We therefore will continue with the JV as long as it works for us but have already started up our own plant elsewhere in the same area. I understand, having spoken to a lot of people about our experience, that this is the normal cycle for JV’s and that eventually one partner outgrows the other and the “joint” goes out of the “venture”. We have reached this stage but it was great while it lasted.

 

What do you think? Is this the expected life cycle for a China joint venture?

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If you are interested in this topic you may also want to read the following article:

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

A China Joint Venture Success Story (Part II)

Today I bring you the second part of “A China joint venture success story”, an anonymous guest post by somebody who has been a partner in a joint venture in the manufacturing sector in China for over ten years. Make sure you do not miss the first part. You can read it here.

 A China Joint Venture Success Story (Part II)- The Lessons I Have Learnt

Over the past 12 years of dealing with the Chinese,  I have learned three lessons which have been very useful to me.

 1. “When in China, do as the Chinese do”
The first is the BIG cross cultural issue of “when in China, do as the Chinese do”….even though it is inefficient, ineffective and sometimes humiliating for the person performing the task. It took a good 5 years for me to accept that I must only look at the result and not how it was arrived at, of any request I make; as trying to prescribe a given method invariably ended in failure and frustration for both parties.  The Chinese are particularly inclined to follow the known path and have learned, after millennia of having their heads cut off for straying from it, that it is the safe route.  This is particularly true in a JV where you really have little power to influence the day to day unless you have tremendous resources and patience to expend in imposing “your way”. We were lucky that we had been preceded (as customers) by large Japanese companies who had set up the control systems  and thoroughly trained the production  and quality staff in the making of their transformers.The  manufacturing methods therefore were already excellent when we arrived on the scene. But heaven forbid we try and change any of these methods!! So as long as the end product is good, you don’t need to know how they made it. But then lesson 2 applies.

2. Chinese culture is about form over function
The second lesson was to realize that the Chinese culture is about form over function. Probably the best example of this trait is the tradition of gift giving. If you are a frequent visitor to China you invariably end up with a trunk full of trinkets. You would expect this to stop or at least to receive different gifts when you visit the same company many times. But no, you will continue to receive the same framed Beijing Opera masks or tea sets you got last year and the year before that. No one asks you what you would like or find useful. Gift giving is a form that must be fulfilled whether the recipient likes the gift or not.   This principle of form over function applies everywhere so you must be very specific as to the end result you want or you will get what I call “ token outcomes” that meet the request but not the spirit of what you are looking for. This is particularly important to be aware of in quality control where a product can pass all the functional electrical tests you specify but no one on the line will fail the product for an obvious mechanical fault that was not on the list.  This is how Mattel gets lead in the paint used on its toys and melamine ends up in milk powder. You must make your functional expectations abundantly clear in a detailed fashion or you will get very creative surprises from people with generally the best intentions.

3. Some people will stay in the organization forever no matter how incompetent they are
You must accept that the people that are part of the organization when you start your relationship will probably be there forever no matter how incompetent they might be. Because of the Chinese habit of job changing (mainly in the younger generation), in the psyche of Chinese management, anyone who comes to work every day is worth keeping. The other reason, of course, is that many employees have some sort of political or economic connection with the company which makes them unmoveable. Their uncle may be the local tax collector or a sister is the secretary to the Chairman of the company.  My experience is coloured by that fact that our partner is an SOE and I understand that this phenomenon is particularly bad in this type of organization, but I have also seen it in private companies too. So if your engineering manager is a moron and your partner accepts that as fact, you cannot automatically expect him/her to be replaced. If you are lucky he may get a very competent assistant.

4. Listen to the “view from the other side”
A final thought is that our Head Engineer, in our home country headquarter, played a very large role in making this relationship work as he truly had a foot in each culture and understood the assumptions and frustrations each side brought to the table.  He was always able to offer me the “view from the other side”to  consider  before making up my own mind. This was invaluable as it  gave me perspective to work things out in an acceptable manner to both sides. A diplomat in your organization is a good investment when going to China.

What is your experience?

Coming soon: “A Joint Venture Success Story (Part III)- Where To Go Now?

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A China Joint Venture Success Story (Part I)

A few months back I wrote a series of posts entitled “A China Joint Venture Survival Guide”. It was based on the story of a joint venture that had gone very wrong (you can read it here). As soon as I finished the articles, I started looking for a joint venture success story, and I soon found it amongst my readers. Today I start a series entitled “A Joint Venture Success Story”, for which I´ve only written this introduction. This is an anonymous guest post by somebody who owns a Chinese Joint Venture, and although he wants to keep his company identity anonymous he has been very generous devoting time to these articles. In these posts he shares the lessons he has learnt during his eleven years of Chinese joint venture experience. This is a story very worth reading.

 A CHINA JOINT VENTURE SUCCESS STORY

We are a custom electronic transformer manufacturer with 26 years in the business and 32 employees in our home country,  of which 18 are involved in manufacturing our low volume and highly specialized products in house (while our JV in China produces the higher volume product).  China represents 20% of our turnover and we supply to contract manufacturers.

We currently have a joint venture with a medium sized SOE where we own 35% of the shares in the company and hold one seat on the Board of three people. The joint venture company has 250 full time staff plus another 150 contract workers. Our partner is an SOE Group of 20  companies all in the electronics sector. The Group has been in the business for over 50 years and our specific company within it started making transformers and inductors for Japanese companies back in the early 1980’s.  Basically we bought into a going concern, not a start up.

Why Did Our China Experience Start?

Custom transformer manufacturing is a labour intensive process and for that reason we decided to go to China in 1999 to find a manufacturing company we could work with. Our Head Engineer was Chinese and had seen the need,  well before Management woke up to the fact,  that we were losing the competitive fight in our home market to international distributors who were already sourcing out of Asia. 

How Did We Choose Our Supplier?

At that stage we tried to draw up a list of characteristics a Chinese company would have to have in order to be able to work with us but  in the end we settled on only one:
they would have to be truthful at all times.

We then did the usual quoting, sample orders, quality checks, etc. with five possible companies and we stuck with the one which did what it said it would do, our current JV partner.

From Supplier to Joint Venture Partner

We traded for over  18 months and this gave us both  the opportunity to get to know each other as individuals and as organizations. The trust that quickly developed between our operations can be credited to my opposite number who is one of the most forthright persons I know. He had started on the production floor and risen through the ranks, through sheer ability, to become the GM. Even though he is 15 years my junior, we  developed a very close personal bond, also shared by our Head Engineer,  which permeated the whole commercial relationship. We were very lucky!

In 2000 the GM came to us with the proposal of our buying into his company to form a joint venture (JV). It meant  good tax benefits for the operation as a whole and we understood that he was looking for the prestige within the SOE Group and the technology transfer that such an arrangement would bring. We, on the other hand, had not even contemplated a JV option, but having traded with Chinese companies for two years, we had learned that you are generally given service and pricing proportional to the amount of business you bring to the table. For us the JV presented the opportunity to sit at the table and therefore insure most of our requirements were met regardless of volume while we built the business up. The due diligence and subsequent value negotiations were very easy because of the tight personal and organizational relationship previously developed and by January 2001 we were partners.

Coming soon “A China Joint Venture Success Story (part II)

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