Magazine article Global Finance

Divorce in China

Magazine article Global Finance

Divorce in China

Article excerpt

Time is up for China's joint ventures. Overcapacity is driving down prices, costs are high, and sales are anorexic. Blinded by China's potential, "companies didn't do their homework at the start," charges Jonathan Woetzel at consulting firm McKinsey & Company in Shanghai. "Those that married in haste are now repenting in leisure." Adds Todd Fortner, a senior consultant with accountants Coopers & Lybrand: "In the early days investors found potential partners in China's most attractive industries to be in scarce supply. A seller's market led many foreign companies to rush into imperfect joint ventures."

Today, the number of Chinese joint venture divorces is skyrocketing. According to the Ministry of Finance, 61% of the nearly 56,000 foreign-invested companies in China lost money last year. The 55.2 billion renminbi ($6.7 billion) combined loss, a 50% jump over 1996, is apparently scaring off prospective JV partners. Foreign investment pledges to China slid to $40 billion in 1997, down 35% from 1996, as the number of joint ventures approvals decreased 55.9% from year-earlier totals. Investment that was paid in (as opposed to promised) grew at a surprisingly slow 8.3%, to $35.6 billion.

In many cases the Chinese are just as anxious to divorce as the foreign partners. "Whether they were under duress from the government or whether they were just plain naive," says Woetzel, the Chinese, too, pushed potential partners into shotgun weddings.

But after 10 or 15 years in a venture "the Chinese partners think they're strong enough to do it alone," says Ding Ming, a consultant at Coopers & Lybrand's Shanghai office. That's because joint ventures established in the heyday of the 1980s are reaching their natural expiration date. "Most partnerships are formed between natural competitors, says Woetzel. "Worldwide, this tends to lead to one player acquiring control of the alliance within a decade."

China corporate divorces play out in one of four scenarios. Foreign partners:

* Buy out locals. With corporate demand for capital outstripping local supply, xenophobic China is dismantling restrictions on foreign shareholdings. "That's reducing reliance on joint ventures and the need for partners at all," says Robin Weir, senior consultant with Crosby Corporate Advisory in Beijing. American paper company Kimberly Clark, for example, recently bought out its local partner of eight years.

* Set up wholly owned companies. Solely foreign-funded projects accounted for 45% of newly approved foreign investments last year; foreign companies made particular inroads in such unrestricted areas as consumer goods and industrial products. Caterpillar established a wholly owned facility in Tianjin to make undercarriage parts for Caterpillar equipment. The US-based machinery maker had learned its lesson after its three-year partnership with Shanghai Diesel ended last year with the liquidation of Caterpillar Shanghai Engine. The JV, launched in 1994 when China's economy was rocketing, banked on local customers snapping up its top-quality engines. But customers proved less discerning. The venture lost 30 million renminbi in 1996 and closed down last year.

* Consolidate and streamline existing JVs. Germany's Siemens group, one of China's biggest foreign investors, invested more than $650 million between 1990 and 1997 in some 40 projects employing 15,000 people. President Ernst Behrens says consolidation will mean, among other things, cutting some of the 218 expatriates that Siemens employs in China.

High overhead is also forcing Shanghai Volkswagen to streamline. John Pinkel, vice president of Merrill Lynch's China team, says the company has been slashing prices on its signature Santana model in a bid to move its inventory. The joint venture, which commands a 52% share of China's sedan market, has cut its sales growth target for 1998, a move that will have widespread consequences for makers of tires, parts, and steel. …

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