Steve Dickinson discusses what foreign investors need to know before investing in a business in China.

1. B
efore deciding to invest in
a business in China, the
ZHANG HUI
make a fundamental deci-
enterprise should take. The investor
can go it alone and form a 100% for-
VIEW POINT
business and operate through some Avoiding Mistakes
form of joint venture entity (an equity
joint venture, or “EJV”). With the ex-
ception of some market sectors, China
in Chinese Joint
is remarkably open to foreign invest-
ment, and in the past several years
Ventures
WFOEs have become the most com- By Steve Dickinson
mon vehicle for foreign investment,
partly due to investor skittishness as
- fundamental mistake that effectively
nese EJV partners made the rounds. - -
- take so critical that it accounts for tions in the company.
eign investors still choose to enter the most of the failed EJVs in China. In order to exercise effective con-
market through a joint venture, and Foreign investors too often assume trol over a joint venture in China, in-
that a Chinese joint venture company vestors must avoid this mistake. It
type of arrangement require very care- is managed according to a common is necessary to have control over the
ful planning. day-to-day management of the joint
venture company. Such control comes
risk from an unscrupulous EJV part- over the company. Since the board is
- elected by a majority vote of company
cut your cooperation is by thoroughly The power to appoint and re-
vetting them ahead of time. Taking - move the JV’s representative.
the time to learn more about poten- The side that appoints the repre-
investor then assumes he has the right -
increase your likelihood of success. to elect the entire board, and thus ef-
In addition, controlling the levers of fectively control the company. The usual practice of conceding
-
can help you succeed, or potentially or director to another investor is
doom you to failure. - a mistake.
A Chinese joint venture is formed -
as a limited liability corporation un- resentative director and the company The power to appoint and re-
- move the general manager of the
mental issue in forming such an entity joint venture company. It must
- As a result, the investor’s struggle for be made clear that the general
timate control over company opera- board control is rendered meaning- manager is an employee of the
less. Frequently the Chinese side in-
to maintain control over the entity, tentionally angles to ensure this out- employed entirely at the discre-
this issue is paramount for them. Yet tion of the representative direc-
foreign investors frequently make a partner concedes on the percentage tor. The common practice of ap-
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2. pointing the same person as both
representative director and gen-
eral manager is a mistake.
Control over the company seal,
or “chop.” -
trols the registered company seal
AmCham-China
contracts on behalf of the joint
venture company and to deal
2008 Membership Pricing
other key service providers. The
AmCham-China has announced new
carefully guarded. Ceding con- membership dues for 2008. In addition to our
trol over it as a matter of con- standard categories, this year we have added
venience is a mistake. There is a
some new promotional pricing options.
long, documented history of this
seemingly minor consideration
dooming EJVs. Corporate SME Membership (New!)
For companies with fewer than 300 employees
In most cases, the Chinese side
or less than US$50 million in annual revenue,
agree to these three measures of con- the standard corporate annual dues of
trol. The common argument is that it RMB 8000 also includes one free additional
representative.
side to control day-to-day manage-
-
Corporate Entrepreneur Membership
management is a primary reason for (New!)
operating as a joint venture. If your company has fewer than 10 employees
In many cases, the local partners and less than US$ 1 million in worldwide
political connections, or guanxi, into
revenue, for a reduced corporate annual dues
rate of RMB 5000 you will also get an additional
the representative director and gen- representative for free.
eral manger. This is often a bit of a
red herring and the point should not
be accepted at face value. When these
Young or Senior Professional
arguments are made, the real issue is Membership
operational control over the company. If you are a US citizen resident of China, and
Majority control is simply a smoke are either 18-30 years of age or over 60, you
screen for the true levers of control in
a company in China.
may be eligible to become an AmCham-China
Once these three control mecha- member for only RMB 2000.
nisms are entirely under the control
quickly discover that they have relin-
the investor should face the reality of For complete details and a membership
the situation, and either reduce the in- application form please see page 33 or on the
vestment to a minority share or aban- “Join Us” section of our website:
- www.amcham-china.org.cn
erations is out of an investor’s hands,
-
To contact our membership staff directly, please send
cessful partnership in China.
an e-mail or give us a call.
Steve Dickinson is a partner at E-mail: membership@amcham-china.org.cn
Harris Moure PLLC, Seattle, Wash- Phone: (8610) 8519-1920
ington and co-author of China Law
Blog.
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