Managing Risks in Chinese Joint Ventures

By Hampton, John J. | Risk Management, April 1991 | Go to article overview

Managing Risks in Chinese Joint Ventures


Hampton, John J., Risk Management


John J. Hampton, D.B.A., is provost of The College of Insurance in New York.

In the past Westerners paid close attention to the market prospects and profits from their joint ventures with Chinese state corporations. In today's business environment, however, they should pay greater attention to the risks. Certainly, in the event that China's political climate improves and U.S. businesses resume negotiations with the Chinese, risk managers should be ready with plans to make these ventures safe and profitable.

The 1980s was an active period of contractual and equity joint venture negotiations between Chinese state organizations and foreign businesses. Western partners in ventures still in operation are reluctant to discuss the difficulties they faced in negotiating and implementing their business operations in China.

Still, it is relatively well known that despite the imposition of martial law in 1989, many of the early hopes and aspirations have not been realized. In fact, frustration has turned to bitterness in some cases.

1991 is an appropriate time to reassess the business climate for ventures with Chinese partners. For one, martial law in Beijing has provided insight into the political exposures confronting joint ventures there. Second, more than a decade of experience working with the Chinese allows businesses to avoid repeating past mistakes. Furthermore, in 1997 Hong Kong will become part of China. Perhaps some of the lessons learned in the 1980s can help Western businesses prepare for 1997.

The 1980s began with great hope. After being closed to foreigners for many years, China, the world's most populous market, opened to Western business. Companies reacted by constructing their business plans with a long-range view and negotiating with the Chinese. As the decade progressed, conflicting signals began to emerge. Although thousands of ventures were getting off the ground, problems were becoming obvious. Inadequacy was felt in nearly every area, including facilities, transportation, communications, government approvals and foreign currency. The timetable for future profits grew more elusive.

The end of the decade was a stressful period in the Chinese economy. Improvements in the infrastructure were not keeping pace with service demand. Materials and supply shortages produced run-away inflation and encouraged corruption. Economic and social tensions ran high. Thus, martial law came to China as a political and economic reaction to a turbulent economy and external political events, consequently disrupting many joint ventures.

Today, Chinese politics permeates every discussion on the future of business in that country. The uncertainties are expected to drain personnel and financial resources from Hong Kong. And while Western businesses may be reluctant to form joint ventures, they will no doubt eventually resume.

Operating Risks

An operating risk is the chance that a joint venture will not make money from its major area of business. To reduce the risk, a business must know whether the goods it manufactures meet market standards, and whether it can control expenses so the goods will be sold at a profit. Unfortunately, Chinese business is rife with operating problems that result in shoddy goods and late deliveries. Yet the joint ventures that proved successful did so by by taking several steps to reduce delays, minimize faulty goods and avoid cost overruns.

Successful ventures had good local management. Operational control of the ventures was in the hands of skilled independent managers. joint venture hotels are good examples. Local managers were trained by Western partners in Hong Kong, where they learned how to provide first-class services. When the hotel opened, these skilled personnel trained other workers. The same principle applies to manufacturing ventures, whether they involve constructing industrial boilers or producing Christmas toys. …

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