Why Do So Many Western Firms Partner Up With Chinese Companies?

With China appearing to be a thriving country on the up, with a booming economy and over a billion citizens who are finding themselves with increasingly more disposable income. It should come as no surprise the market appears extremely attractive to Western brands and companies. An increasing demand by these citizens for foreign luxury goods suggests there could perhaps not be a better time to entry into this market. However, when reading the news, we frequently hear how these Western firms enter into partnerships with Chinese firms as a way of breaking into the market.

At face value, there may not appear to be a logical reason for this. True, the knowledge and experience these Chinese firms have of their domestic market may be valuable to foreign firms. However, a standard 50/50 partnership would result in significant profits being shared which comes at a hefty price.

Ultimately though, the reason why foreign firms enter into such agreements isn’t usually to gain access to skills or knowledge, but rather because there is no other option. These agreements are generally joint ventures where two companies both enter into a commercial venture while still being two separate distinct companies. That is not to say there are no advantages to such a venture, skills and knowledge can prove to be valuable, as can combining resources and spreading the risk.

An early example of a popular joint venture in China can be seen within the automobile industry. In the 1980’s, foreign companies were restricted from owning a majority share in a manufacturing plant in China. Many car manufacturers saw the potential of the vast Chinese market, and as a way to access this area had to enter into joint ventures with Chinese firms. One of the earliest success stories can be seen by Volkswagen, who partnered with China’s Automotive Industry. Currently Volkswagen sells over 2million cars to Chinese consumers per an annum, with an operating income of over $850m yearly.

While China has seen a vast amount of liberalization since the 1980s, the concept of joint ventures is still extremely common. Not all industries require such a setup for a foreign firm to operate in though. As a result of China trying to protect its own domestic market, and one of the methods they employ is restricting access to foreign firms. This seeks to create a knowledge and technology transfer to take place and enable Chinese firms to benefit.

Lessons are still being learnt by international corporations who see China as an easy market. This could not be further from the truth and many brands have failed to be considered successful in China. While China is becoming more alike to countries such as the USA in many ways, there is still a contrasting culture rooted deep within the country. For example, KFC tried to set up their chain of stores in China, however were unsuccessful and withdrew from the market. They found difficulty in catering to the difference tastes between their current market and China. While KFC did enter into a joint venture to enter the Chinese market, this was still not enough to help the company thrive. Despite altering the menu to try and suit local tastes, declining sales and controversies relating to the sale of expired meat, has resulted in KFC struggling in this market.

Overall however, it goes to show that many Western companies are quickly learning the Chinese market isn’t as simple as they may think. Joint ventures can be a strategic way of spreading the risk between two separate entities. They can also help a company understand the local market much better. Sometimes, there is no other way to enter the market if the industry is restricted or has severe amounts of red tape.

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