Joint ventures with your China factory/supplier: Okay, but maybe not

By Dan Harris

Huge swaths of China's manufacturing sector are being thrown for a loop. Large numbers of foreign buyers of Chinese manufactured product have ceased or reduced their manufacturing in China and even larger numbers are looking to do so. Chinese manufacturers are rightly concerned and our manufacturing lawyers are seeing the results of that like never before. See e.g. Moving Your Manufacturing Out of China: The Initial Decisions. For instance, we are getting massive numbers of emails regarding bad quality product and far too often there is little we as lawyers can do to help because the foreign buyer does not have a China-centric manufacturing contract with its China supplier.

We are also getting at least triple the number of foreign companies looking to do joint venture deals with their Chinese manufacturer. The high level thinking on these joint ventures usually goes as follows:

1. China product risks and costs are rising due to tariffs and duties and working with the factory will mean both sides share in these increased risks and costs. See Has Sourcing Product From China Become TOO Risky?
2. The way for both the foreign buyer and its Chinese manufacturer to reduce risks and to increase sales and profits is to have the Chinese manufacturer sell the foreign buyer's products in China.

The above makes sense, but there are usually better and safer ways than a joint venture for achieving these things.

As we so often write, joint ventures tend to favor the Chinese JV partner and they rarely make sense for the foreign company. See China Joint Ventures, Part 4, in which we explain why our China joint venture lawyers both love them and hate them. In addition to the various problems inherent in any China joint venture, joint ventures with your Chinese supplier have their own special issues/problems.

Chinese factories usually know very little about how to market products (even their own) domestically and when they are your factory and your joint venture partner, it can be very difficult for you to monitor the joint venture's sales and profits. This article I wrote for the Wall Street Journal describes many of these problems. It usually does noot make sense for a foreign company to become a co-owner with its Chinese factory of a Chinese entity before it knows how good that factory will be at selling the foreign company's product in China. The better way to handle these relationships is usually with a China-centric distribution agreement that sets forth sales goals and allows you to walk away if your Chinese factory does not hit those goals. It usually makes sense to have a trademark licensing agreement with your distributor as well.

The views, opinions and images in this article are purely the author's own. Global Sources does not own responsibility for what is presented in the article.

Dan Harris is founder of the Harris Bricken law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.