It was obvious he had done his research. Mr. X discussed whether it was best to form a Wholly Foreign Owned Entity (WFOE), Representative Office (RO), Joint Venture (JV) or other foreign invested enterprise (FIE). (For unsurpassed detail into these and other China business forms, run, don’t walk to my friend Dan Harris’ China Law Blog).
I explained to Mr. X that, while all the formalities are important, it was crucial that he understood that success in China means a lot more than simply setting up a business and hoping that your widgets will sell in Guangzhou, Shenzhen or Tianjin.
I touched on this concept in an earlier post, How to Avoid International Disputes. First Be Good to Your Suppliers. The central idea was that you needed to build solid relationships to achieve any level of success in China.
I mention this because I just read a great piece in the Wall Street Journal written by Edward Niedermeyer. The piece, Good for GM, Good for China, was a review of the book American Wheels Chinese Roads by Michael J. Dunne.
The article takes a fascinating look at how one of America’s largest companies, General Motors, successfully rode the tidal wave of China’s market growth and stayed ahead of the competition in the auto industry’s new source of critical mass.
As the article points out, simply, having a presence in China is no guarantee of ultimate success.
Success in China is built on relationships.”
For some companies, success means entering into a 50-50 strategic alliance with a local partner. For others, it means working out a different arrangement with a group of local entities..
For GM, success meant ceding control to its Chinese partner and allowing them to take the wheel of the China venture. While viewed as a risky or even fatal strategy, GM understood the long-term value of relationships and the attendant sacrifices that oftentimes must be made.
GM’s decision proved to be its saving grace.
Giving top priority to its partner relationship allowed GM to take on a $400 million line of credit from Chinese banks thanks to the backing of its partner. The financing also allowed GM to rescue its Korean Daewoo division, which provides critical components for its products in China.
Because the supplies were being financed locally, GM avoided having to ship U.S. bailout money overseas allowing it to keep the funds at home in the U.S. where it was most needed.
GM now has the option to regain its 50% stake in the venture that made the business so successful.
Had GM chosen to sacrifice its partner relationship for short-term gain, things would have probably turned out much worse for GM in China.
Success. It’s built on relationships.