Lessons for Joint Ventures in China

1. Objectives and scope.
The aim of this paper is to investigate and analyze the lessons for joint venture in China.

First, the author decided to define joint ventures and analyze relational factors. The next step was to compare Chinese and French culture using national context provided by Hofstede’s model and its implications for organizations. Then, the historical and sociological description of Chinese culture was introduced. Further, the case study was described. And finally the lessons to be learnt were investigated. The paper is finished by conclusions. Above mentioned points will be discussed taking into consideration the case study of Danone and Wahaha joint venture. The basic information about joint ventures theory will be provided first.

2. Joint Venture: definition and relational factors
Harrison (2010, p. 216) describes joint venture as “an agreement between two or more companies involving joint equity ownership and control. Because a degree of control is involved, it may also be classified as a form of FDI”. He states that this type of arrangement is used as an international entry strategy where full ownership is considered too risky or is not allowed in the host country, or where for some other reason the parties want to retain their separate legal entity. In China, an international joint venture is defined as an enterprise established jointly by one or more foreign/regional companies, enterprises or other economic organizations or individuals and one or more Chinese companies in accordance with the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures (Li et alia, 2008). As per Zhang & Van Deusen (2010, p.83), the parent companies jointly exploit their combined resources to indentify and create capabilities and core competencies to capture market opportunities mainly on Chinese market.

Chinese partner provides knowledge about government laws and customs, along with networking relationships, while foreign firms provide financial resources and technological and management expertise. In the literature relational factors like trust, commitment, cooperation, and satisfaction are present. Wilson and Brennan (2008) explored the effects of trust and commitments on performance of international joint ventures between the UK and Chinese companies. Their research was conducted in order to find out the impact of trust and commitment on performance of international joint ventures.

It was discovered that trust is the most significant factor that affect on level of joint venture’s satisfaction. In addition, they stated the importance of commitment on performance of IJVs as a significant factor along with trust. Fukuyama (1995) defines trust as “the expectation that arises within a community of regular, honest and co-operative behavior, based on commonly shared norms, on the part of other members of that community.” Wilson and Brennen (2008) noticed that “development of a trustworthy partnership has been argued to be the most effective way of prolonging a business relationship”. Fukuyama (1995) described trust in the Chinese culture as ‘ingroup’ trust at the personal level, whereas trust in Western culture is ‘system trust’ built up at the organizational level (impersonal). This systems trust is tied to formal, societal structures, which have an existence separate from the material preferences, motivation and actions of individuals. What underlines systems trust in many respects is the contract.

Fukuyama distinguishes high-trust societies form low-trust ones (Child, 2005, p. 340). Building trust is essential for maintaining a long-term business relationship in a joint venture. There needs to be a mutual understanding between the Chinese and the foreign party otherwise even small issues can become major problems and affect the joint venture’s performance. Foreign investors are used to trust contracts, but Chinese people emphasize informal relationships and the development of trust between partners. The reason for this is the weak property rights laws and an uncertain and dynamic institutional environment.

3. Comparison of French & Chinese cultural models. Hofstede’s model Ahlsftrom and Bruton (2010, p. 47) stated that Geert Hofstede created a valuable cultural framework based on data gathered from surveys with respondents which were IBM employees working in the local subsidiaries. Hofstede initially identified four dimensions as: 1. Power distance (PDI) is a measure of how hierarchical a culture is. In a culture with a large power distance, less powerful individuals “expect and accept that power is distributed unequally.” 2. Individualism vs. collectivism (IDV) is a continuum. In individualistic cultures, “ties between individuals are loose”. In collectivistic cultures, individuals are members of “strong, cohesive in-groups.” 3. Masculinity vs. femininity (MAS) is a continuum.

In masculine cultures, social gender roles are rigidly defined. In feminine cultures, social gender roles are looser and overlapping. 4. Uncertainty avoidance (UAI) is a measure of the extent to which individuals “feel threatened by uncertain, unknown, ambiguous, or unstructured situations.” In the 1980s, on the basis of research by Canadian psychologist M.H. Bond centered in the Far East (Hofstede, 2011) a fifth dimension was added: 5. Long-term vs. short-term orientation (LTO) is a continuum. In long-term-oriented cultures, there is a focus on future rewards and “adaptation, perseverance and thrift” are valued. In short-term-oriented cultures, there is a focus on the past and present and “respect for tradition, preservation of ‘face’, and fulfilling social obligations” are valued. By exploring the 5-D Model, available on geert-hofstede.com, comparison of Chinese and French culture is visible in each dimension. At 80 China sits in the higher rankings of PDI – i.e. a society that believes that inequalities amongst people are acceptable.

The subordinate-superior relationship tends to be polarized and there is no defense against power abuse by superiors. Individuals are influenced by formal authority and sanctions and are in general optimistic about people’s capacity for leadership and initiative. People should not have aspirations beyond their rank. On the contrary, France scores high on the scale of the PDI (68). It means a society in which inequalities are accepted. Hierarchy is needed if not existential; the superiors may have privileges and are often inaccessible. The power is highly centralized in France. In management, the attitude towards managers is more formal, the information flow is hierarchical. Further, China (score: 20) is a highly collectivist culture where people act in the interests of the group and not necessarily of themselves. In-group considerations affect hiring and promotions with closer in-groups (such as family) are getting preferential treatment. Employee commitment to the organization is low.

Whereas relationships with colleagues are cooperative for in-groups they are cold or even hostile to out-groups. Personal relationships prevail over task and company. At 71 France scores high on the individualistic index. This means that the French favor individual and private opinions, taking care of themselves and immediate family rather than belonging to a group. In the work environment, the relationship with work is contract based, the focus is on the task and autonomy is favored. The communication is direct and everyone is allowed to speak up, voice out their opinions even more if they do not agree. The management is the management of individuals and the recognition of one‘s work is expected. In case of MAS: France is a relatively Feminine country. With its famous welfare system, working time (35h/week) and 5 weeks holidays per year, France cares for its quality of life and focuses more on work in order to live. Competition amongst work colleagues is usually not favored. And material signs of success, especially flashy ones, should not be too visible.

The management should be supportive and dialogue should help resolve conflicts. In comparison to China (with 66) which is perceived as masculine society –success oriented and driven. Many Chinese will sacrifice family and leisure priorities to work. Leisure time is not so important. The migrated farmer workers will leave their families behind in faraway places in order to obtain better work and pay in the cities. Another example is that Chinese students care very much about their exam scores and ranking as this is the main criteria to achieve success or not. At 30 China has UAI low score. Truth may be relative though in the immediate social circles there is concern for Truth with a capital T and rules (but not necessarily laws) abound. Adherence to laws and rules may be flexible to fit the actual situation and pragmatism is a fact of life. The Chinese are comfortable with ambiguity; the Chinese language is full of ambiguous meanings that can be difficult for Western people to follow. Chinese are adaptable and entrepreneurial.

At 86 France has one the highest scores on the UAI Index. Certainty is often reached through academic work. Teachings and trainings are more inductive. In management structure, rules and security are welcome and if lacking, it creates stress. Therefore planning is favored, some level of expertise welcome, when change policies on the other hand are considered stressful. The research shows the biggest difference is in regard to LTO. With a score of 118 China is a highly long term oriented society in which persistence and perseverance are normal. Relationships are ordered by status and the order is observed.

France at 39 is a short term oriented society. This means a great respect for tradition as well as a need for norms and absolute truth as guidelines. In terms of business this short term orientations focuses on quick results i.e. companies are driven by quarterly results. Consumption is driven by immediate gratification, sensivity to social trends and rituals. There’s not much focus on saving. Management is based on self reliance, personal achievement, hard work and managers are judged on short term results. Chinese people recognize the government is by men rather than as in the Low

LTO countries by an external influence such as God or the law. Thinking ways focus on the full or no now confidence, contrasting with low LTO countries that think in probabilistic ways. Fletcher and Fang (2006, p. 431 ) argue that Hostede and other models are based on etic (culture-general) rather than on emic (cultural specific) and the modern approach is to be cultural specific and based the categorization on conditions in the specific geographic area, religion and philosophy, as well as strategy and tactics used in the specific industry. According to the author of this paper the emic approach is more useful to analyze the Chinese way of doing business in joint ventures. Thus the next section is devoted to attitudes and behaviors unique for Chinese culture.

4. Short introduction to Chinese culture. The social and historical description of Chinese culture and Confucianism. Chinese culture has been formed by a Confucianism philosophical tradition. For Chinese people, Confucianism is the most important philosophy in China’s society. Confucianism is based on the teachings and writings of the philosopher Confucius, and is based upon the concept of relationships. Confucianism exists in every level of Chinese society, including the daily life of ordinary people. It upholds core values like family and interpersonal relationships, respect for age and hierarchy, harmony, face and moral cultivation. In Confucianism every relationship has the dual aspect of responsibility and obligation. Therefore in the relationships in the family all members have responsibilities and obligations. However, Confucianism incorporates the relationships of individuals with the state, subject and ruler, bureaucrat and civilian. Foundations of Confucianism are based on the following three principles and five constant virtues in Confucianism: goodness, rightness, ritual, wisdom, and credibility.

Three principles are explained as follow: the king is the master of the minister; the husband is the master of the wife; the father is the master of the son. These three relationships represent all the relationships in a highly hierarchical society. In the modern business society of China, these relationships emphasize an important hierarchical relationship (e.g. the manager is the master of the worker, the supervisor is the master of the normal employee, the higher level is master of the lower level, and so forth). The people in low positions are subordinate to the people in higher positions without any terms. China is divided into many regions and the country has over fifty different minorities which all have their own culture –language and traditions. This can mean increasing challenges for foreign firms doing business in China. It is likely that the joint venture has factories in many parts of the country and the foreign manager need to deal with many different cultures even within China.

In China, interpersonal relationships are termed as guanxi. It is a special relationship between individuals where each part can make strong and close to unlimited demands on the other part. When it comes to business relationships the term can be translated as networks based on mutual interests. In China it is more important who your friends and connections are than the individual person’s qualities. Face plays an important role in China and interpersonal communication is often indirect. This can be a big contrast for foreign companies who come from cultures, where people are very direct in their communication.

Social status and prestige are major sources of face and it is important for the Chinese not to lose face. Conflicts can arise because western managers do not pay enough attention to saving the face of the Chinese employees and staff. Problems may also arise due to the lack of information from the Chinese part who might be trying to save face. When good relationships have been established, the importance of face is not as big anymore (Selmer, 1998). Honesty is a norm that only concerns people with whom the Chinese have a close relationship. It is acceptable in China to engage in deception to gain strategic advantages. In contrast to this, western people consider this to be immoral. Chinese people will often say one thing and then do another, in order to save face or keep harmony (Selmer, 1998).

5. Case study
Hangzhou Wahaha Group Co. Limited was founded i 1987. From its creation, Zong Qinghou has led and grown the business, exercising control over the day-to-day operations. A joint venture agreement with Danone and Baifu which formed Singapore Corporation: Jin Jia Investment Co. Ltd was signed in March 1996. The foreign partners took 51%, while the Chinese partners held 49% (of which WHH holds 39% and employees own 10%). From Wahaha Goup’s point of view, the division of ownership was 49% Wahaha Group, 25,5% Danone and 25,5% Baifu. They considered themselves as a majority shareholder in the JV. In 1998, Danone bought out the interest of Baifu in Jinjia and became 100% owner of Jinjia and effectively the 51% owner of the JV. On 28 March 1996, five joint venture companies were formed, each of which Danone owned 51% and Wahaha and its employees owned the remainder. The business had grown into 39 joint venture entities by 2007, and the total injected capital amounts to US$131 million.

In 2006, the turnover of the joint ventures contributed €100 million to the top line of Danone, and in excess of 5% of Danone’s total net profit. And the total number of JVs between Danone and Wahaha had grown from five to 39. Besides JV investments with Wahaha, Danone also bought stakes in more than seven Chinese food and dairy companies, spending almost another $170 million over the past decade in China. In 2006, Danone became the biggest beverage maker by volume in the country. At the same time, Wahaha pursued huge growth in China, some of which was beyond the scope of JVs with Danone. By 2006, Wahaha Group controlled 70 subsidiary companies in China. All of them use the same brand “Wahaha” but only 39 of them had JV relationships with Danone. After several years of cooperation, Wahaha apparently built several production sites for food products parallel to the Danone-Wahaha joint venture, selling almost identical products to originals produced by the joint venture. According to it was possible as the sense of guilt for copying ideas is lacking in Chinese culture.

The Chinese saying goes: “A good copy honors the master” (Hoeck, p.70-71) Danone agreed to terms of joint venture which didn’t give it much involvement, allowing the day to day running of the company rested in the hands of Zong, while he continued in his autocratic ways. Zong has even boasted about the managers sent by Danone whom he had sent packing. A major dispute erupted concerning Wahaha’s other (non-JV) subsidiaries. Danone had made several attempts to buy out Zong, but was rebuffed. Danone and Zong signed a deal in December 2006, allowing Danone to buy out the non-JV operations. However, Zong had second thoughts about the deal and reneged, claims he could not carry his co-investors, according to the Wall Street Journal. Zong claims the offer was rejected as it was underpriced and wanted to squeeze more out of Danone. He also asserted that the buyout would jeopardize the existence of the “Wahaha” brand, because Danone would phase it out and promote global brands such as Danone and Evian.

The heart of the disputed stemmed from master agreement between Danone and Wahaha, which granted the subsidiary JVs Exclusive rights to produce, distribute, and sell food and beverage products under the “Wahaha” brand should be approved by the board of the master JV. Danone thus claimed that the non-JV subsidiaries set up by Zong and his managers were illegally selling products using the ”Wahaha” brand and were making unlawful use of the JVs’ distributors and suppliers. However, Zong claimed that the original JV agreement to grant exclusive rights to use the “Wahaha” brand was never approved by Chinese trademark office and so was not in force or effect. He also stated that Danone had not made an issue when Wahaha embarked on its expansion and openly used the subsidiary JVs’ assets – it seemed that Danone preferred Wahaha to shoulder the risk first.

Further Zong noticed, when Wahaha expansion was successful, Danone, driven by greed, wanted to reap the fruits. Finally, Zong argued that forcing Wahaha Group to grand the exclusive rights for the “Wahaha” brand to the JVs with Danone was unfair to Wahaha Group, because the French company was actively investing in the other beverage companies across the country and competing with Wahaha. The boardroom dispute spilled into the public domain when Zong publicly criticized Danone in April 2007. In response, Danone issued statements and initiated arbitrations against its Chinese partner in Stockholm, Sweden. Danone also launched a lawsuit against a company owned by Zong’s daughter in the United States, alleging that it was using the Wahaha brand illegally. Outraged, Zong resigned from his board chairman position at all the JVs with Danone. Wahaha’s trade union, representing workers of Wahaha Group, sued Danone in late 2007, demanding $1, 36 million in damages.

The union also froze Danone’s ownership in the JVs. This made the dispute worse, and revenues of the JVs only increased 3% in 2007, 17% less than the industry’s average growth. In late 2007, both sides spent mostly dealt with lawsuits and arbitrations. In December 2007, pressured by respective governments, both companies agreed to suspend their legal battle and resume negotiations. As of this writing (March 2008), no resolution was in sight – expect the divorce. The history of Wahaha Danone cooperation was described by the author of the paper based on case study written by Sunny Li Sun and Hao Chen (Peng), Report of Steven M. Dickinson “Danone v. Wahaha: Lessons for Joint Ventures in China”, and document of Zhang and Van Deusen (2010).

6. Lesson for the future
According to Bosshart at alia (2010, p. 2) “companies pursuing joint ventures would do well to reflect on the lessons of past deals to improve the chances of success. In China, some of those lessons are especially critical, such as choosing partners that can make tangible business contributions, safeguarding intellectual property, ensuring operational control of the joint venture, and managing talent. Others are critical for joint ventures in all geographies, such as aligning strategic priorities, creating a structure that permits rapid responses to change, and preparing up front for eventual restructuring.” There are factors which determining success of external relationships. They are complementarity, compatible strategies and cultures, no surrender of key resources and competencies, stakeholder agreement, and low risk of host becoming a competitor. As described above they were not met. Cultural issues were appearing during JV duration. Mr. Zong resented the takeover of Wahaha by stealth.

This is manifested in Zong’s nationalistic defense against Danone. Zong occasionally used expressions like “unequal treaties”, which are a throwback to the colonial era. The restrictions contained in contracts and regulations limited entrepreneurial style of Zong, who complained that, is not possible to run the business under such conditions. The greater maturity in the company has made Zong feel he needs his foreign partner less. Finally, many Chinese officials commented that the dispute was neither inherently commercial nor contractual, but was more to do with “fault”. Zong could have felt to lose his face. The dispute took on a personal dimension when Danone filed in Los Angeles against his wife and 25-year-old daughter, who represented interests which owned the external ventures. Zong accused Danone of trying to destroy his family.

Also marketing strategy/investment issues were present. The differing marketing choices of the groups contributed to the conflict. Zong was resentful that Danone was happy just to sit back and collect money, and wanted to stop him from investing. Conflicts of interest occurred. Zong controlled a significant number of companies which make and sell products competing with the joint venture in its markets. Interpreting a clause in the JV agreement that the foreign partner must endeavor not to act in detriment to the interests of the JV, Zong was upset that Danone acquired sizeable stakes in many of its competitors.

7. Conclusions
Joint ventures with a partner from another country, especially from China involve risks but can also be of great advantage if they are run in a good way. How to run the joint venture might differ between firms but some factors seem to be common for most firms. It is important to be careful which partner to choose and to do a due diligence in the beginning as well as having a letter of intent written down in the initial stages. Operating in China might bring unusual challenges so it is important for the foreign firm to have knowledge about the Chinese culture and the Chinese laws and regulations before establishing in China. Apart from the business, it is crucial to remember that interacting with other culture implies also the understanding of its historical and social background and its implications on today issues.

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