This is the follow-up post I promised to my last post on joint ventures, "The China Joint Venture. It's BACK!!!" I promised a follow up post because the first one received so many comments and a few of them raised issues I thought needed addressing.

That last post was really mostly a podcast I did with AmCham, which can be found here.

In particular, I wish to address when a joint venture with a Chinese company makes sense, and how best to structure it when it does. I will confine this post to when a joint venture makes sense and will write later in the week on how to structure them when it does.

I want to first go on record (again) as stating that my views on joint ventures have not changed one bit since I first started doing them around fifteen years ago. My experience is that they are always risky and that they should be thought through very carefully. I mention this only because some commenters seem to think that whereas I was once against joint ventures, I am all of a sudden in favor of them now because the economy has gone bad and American companies have no other choice. Wrong. My position has always been that it is my job as lawyer to explain the legal risks and the job of my client to figure out whether the potential rewards justify the risks. Now that more companies are unable to go into China without going in as part of a joint venture, the risk/reward equation has shifted to the extent that there is now more often no other, perhaps safer option.

Having said this, when exactly does it make sense to go into a China joint venture. The obvious answer is when the reward outweighs the risk and when a joint venture makes better sense than a Wholly Foreign Owned Entity (WFOE). But when is that most likely to be true?

Restricted Industries. It is going to be true in whatever industries the Chinese government prohibits foreign WFOEs yet permits joint ventures. These businesses are most commonly found in mining, fisheries, farming, energy, telecommunications, media, and finance. If the Chinese government prohibits foreign companies from conducting business in China as a WFOE, but allows it as a joint venture, the choice is clear.

Supply Chain Access. I hate to use a cliche, but it fits here. China is not one market. It is many and some parts of China are far more and far less developed than others. I suggest you read All Roads Lead to China's weekly China logistics wrap-ups blog to get a better feel for logistics in China. A few posts from that site ought to tell you that moving product within China can be very difficult. Add to that the fact that well established national retail distributors and chains are extremely rare and you can see how getting a product to market in China can be difficult and expensive. Being able to slide your company into an established supply chain on either a national or multi-regional or even regional level is one of the best reasons for joint venturing in China.

Ready to Go Factories. This is where I have seen the most change since the recession started. Whereas a few years ago our clients were mostly choosing to establish their own manufacturing facilities in China by way of a WFOE, they are now much more likely to opt for a joint venture so as to be able to take advantage of an already existing facility with workers ready to go. This is an area though where a WFOE would typically make better sense, but if a company is faced with the choice of having Chinese manufacturing via a joint venture or not having it at all, then certainly a joint venture must be considered.

We have worked on a number of these deals where the American company contributes its technological know-how (and some cash) and the Chinese company contributes its factory and its workers. On one level this makes sense, yet on another, this sorts of arrangements can be particularly risky because once the Chinese company has learned the technology and burned through the cash, the need for the American company may be over. Concomitant with our handling of these sorts of joint ventures increasing, our handling of these sorts of joint ventures having gone bad has also increased. These are the joint ventures that most require smart handling, which handling I will discuss in our next joint venture post.