Multinationals rethink the JV
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Multinationals are reconsidering a practice they adopted when entering the Chinese market 30 years ago: establishing joint ventures with Chinese partners, according to McKinsey's quarterly report released Tuesday.
Over the last decade, multi-nationals began turning away from JVs as the investment choice in China as the government loosened foreign investment restrictions, according to McKinsey. They instead preferred to share in China's growth by establishing wholly-foreign owned companies or acquiring local companies.
Strong growth boosted acquisition prices for Chinese companies being wrangled over by foreign competition, leading to increased cost for multinationals, according to the report. This phenomenon has made joint ventures a more appealing option.
But McKinsey reminded multinationals should learn lessons from the past deals to improve chances of success. They should choose partners that can make tangible business contributions, safeguard intellectual property, ensure operational control of the joint venture and manage talent.
With the nation's economic development over the past years, China has an increasing number of local companies which have become good candidates for business partnerships, said Wang Jing, a partner with Allcen Consulting.
The 50-50 JV between Daimler AG and China's BYD early this year has proven to be a valuable deal for Daimler, as BYD has the advanced battery technology they need, he said.
"By establishing the JV with BYD, Daimler can get the leading battery technology, low labor cost of manufacturing and the massive market in China," Wang noted.
Ideal business partners of foreign companies could be in sectors like heavy industry, electronics, machinery and auto-making, where Chinese companies usually have developed core technologies.
But for multinationals having unique valuable brands such as Coca Cola and/or having intellectual property rights that could be easily copied, it would be best for multinational companies to remain wholly-foreign owned, Wang said.
With the growing population of new rich, foreign firms may be more interested in technology transfer and setting up R&D centers to take advantage of inexpensive skilled labor in China, which will take center stage when developing a business in the country, he said.
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