A joint venture may be your best bet in China

Joint ventures can provide many benefits for Canadian companies working in China, says Paul Kim, Chief Financial Officer of BioteQ Environmental Technologies Inc.

“Joint ventures are a good way for small companies to begin operations,” he says.

A joint venture involves a partnership between Canadian and Chinese investors who share the management, profits and losses.

BioteQ, an industrial water treatment company, operates a water treatment plant at China's Dexing Mine in a 50-50 joint venture with the Jiangxi Copper Company (JCC). The Vancouver-based business and the largest copper mining company in China established their partnership in 2006. They are currently completing their fourth water treatment project at the mine.

BioteQ's joint venture uses local employees to operate the plant with technical supervision from BioteQ in Vancouver and assistance from JCC to integrate the water treatment into the entire operation.

Investors like BioteQ may choose to create a joint venture in China because their local partner can offer benefits including established distribution channels, government relationships and market knowledge.

As well, certain industries require a Chinese partner due to foreign investment restrictions so joint ventures also allow companies to take advantage of these tangible benefits as well as the ability to work in sectors that would otherwise be restricted to foreign companies.

Kim says BioteQ found it easy to decide to create a joint venture as opposed to establishing a representative office or a wholly foreign-owned enterprise.

“Administratively, it's a lot easier,” he says. “If we were to set up our own entity within China there's the physical office that you must have to maintain on a regular basis and there are additional administrative costs that go along with that. There are certain types of services or products that a foreign company cannot sell or provide, so by going the joint venture route we were able to accomplish what we wanted to do.”

The disadvantages of joint ventures include the cost of starting up the partnership, managing the complexity of Chinese regulations, establishing the division of profits, intellectual property management and conflicting interests with partners.

“If you go the joint-partnership route, first you need to find the right partner,” advises Kim. “Get to know them and their reputation. A suitable partner will have the same objectives and the same level of cooperation.”

Joint ventures generally fall into one of two types: Equity Joint Ventures (EJV) and Cooperative Joint Ventures (CJV). An EJV is where profits are distributed according to the ratio of capital investments from both the foreign and local partner. If a company contributes 60 percent of the equity, it will reap 60 percent of the profits.

A CJV allows greater contractual flexibility for the investors so profit distribution can vary. To create an EJV, the foreign partner must contribute a minimum of 25 percent, whereas the CJV is more flexible.

Establishing a joint venture with a Chinese partner will usually take between four and six months. Canadian investors may wish to hire a consulting company to represent their interests when creating this partnership.

For more information, download the Canadian Trade Commissioner Service Report on Selling to China.