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The wonderful joint venture contract (or any other
contract in China for that matter). Many a western business
person (who has not yet achieved guerilla status) has come
completely unstuck trying to sort out one of these
contracts. Before we get into our own advice, let's look at
a few excerpts regarding Chinese contracts from some
bestseller "how to do business in China" books:
- "In contrast to the western view, some Chinese still
consider a contract to be a loose commitment to do
business, not a document outlining every aspect of the
business relationship. Some head executives would rather
sign a short agreement on the principle and leave
subordinates to work out the details at a later time.
Avoid this situation if you can, because it increases the
chance of misunderstanding on both sides and necessitates
further negotiations, which can be costly." "Many if not
most Chinese executives view written contracts as
virtually meaningless compared to personal commitments
between associates." China Business, World Trade
Press, 1995.
- "The mere fact that an agreement has been reached and
a contract signed amid a flourish of flags and protocol
does not mean the contract is now fixed and unalterable
and will be implemented in line with the printed
document." Negotiating China, Carolyn Blackman,
Allen & Unwin, 1997.
Get the picture? In other words, they say that contracts
are meaningless in China. (See our
book review page for more books about doing business in
China and our scathing reviews of each).
How To Deal With The Chinese Attitude Towards
Contracts
The way we guerillas see it, when faced with this Chinese
attitude towards contracts, you have two choices and several
possible results as follows:
Choice One: The Traditional Western Way:
You can stick to your western idea of a contract as law
set in stone. Any variations from the contract are extremely
serious and must be negotiated and agreed by both parties.
Otherwise you have solid grounds for legal action and may
claim for losses and damages. Further, you should continue
to feel that any variations from the contract are almost
embarrassing and a sign of unprofessionalism and/or
dishonesty. You should make your feelings about this
extremely clear to the Chinese. You should also
painstakingly go over every detail of the contract and add
contingencies for every possible "what if" scenario that you
can think of. You should also bring in a high powered
corporate lawyer plus one of the big accounting firms to go
over the contract line by line. Make sure to pay a lot of
money for this.
Choice One-One Possible Result:
The Chinese will negotiate you to death on every point.
Every time you bring up a possible "what if" and possible
penalties for the Chinese if they do not perform, they will
require that a similar clause be inserted penalizing your
side for non-performance also. Seems fair but this will go
on and on forever until you are nothing but skeletons
sitting around a table like a scene from the Pirates Of The
Caribbean at Disneyland. Except there will not be piles of
jewels and gold coins laying around your skeleton. Just some
yellow legal pads and cups of tea. Not much of a legacy. And
a lousy amusement park attraction as well.
Choice One-Another Possible Result:
By some stroke of luck, you will successfully finalize a
contract. Beginning the following day the Chinese will hold
you to every single detail of the contract as you so
painstakingly explained to them. But they will not follow a
single line of the contract. In fact, they will usually do
the opposite of what the contract requires. You will have no
choice but to "understand" their "difficulties." (Similar to
"feeling" Clinton's "pain"). If you ever think about taking
them to court, they will "soft kidnap" you (see
our webpage about risks in China) or pay off the
court/judge and have you fined and penalized instead of
them. Sometimes they will not have to pay off the judge
because he will likely want to take some revenge on
westerners for the opium thing also.
Choice Two: The Guerilla Way:
Ahhh, you knew this was coming. The real answer for how
to handle contracts in China is....(drum roll,
please).....treat them like the worthless piece of toilet
paper they are. Learn from China's 5000 years of culture and
completely ignore the contract whenever it suits you. That
is not to say you don't need to sign a contract. Of course
you need to sign one for the Chinese government to approve
your project. Just use the standard Chinese joint venture
contract format. There are a few obvious zingers in this
format that you need to adjust of course. For example, the
clause that says "Chinese are great, and westerners suck"
should be removed. Also a few others but we forget which.
Don't worry. If you miss a few, just ignore them later.
The Chinese side will prepare the contract first. Most
likely they will spell your company name wrong and use the
wrong company address but don't worry about that either. You
can always use this as an excuse later in court to say you
have never heard of this company before. No matter what the
Chinese come up with in the contract, "negotiate it" for a
few weeks, remove the "westerners suck" clause, and then
sign away. Agree to anything as long as it gets the contract
signed and formal negotiations finished.
Once you have signed the contract, put it in a desk
drawer and never look at it again. Start to do business any
way that you like. If the Chinese ever mention the contract,
just pause, breathe deep, and say "It's difficult. You need
to understand our situation."
Specific Terms
OK, we admit it. There actually are a few contract terms
that you need to be careful about. Here is a brief and
incomplete list:
Term Of The Joint Venture
Make it as long as possible. 25 years is good, but 30 is
better. If they say anything about trying to shorten the
period, act upset and emotionally hurt and say you are
surprised that they do not want to continue your "old
friendship."
Pricing
Don't let them specify anything about pricing in the JV
contract. Just say "market pricing."
Numbers
In fact, avoid putting any numbers in the contract you
can. The fewer, the better. This is not to say that the
feasibility study will not have numbers. It will be packed
full of b.s. numbers to make the JV look great and
profitable in the first nanosecond of production. The
feasibility study is usually worth even less than the JV
contract. We suppose the best analogy would be to say that
the JV contract is like toilet paper and the feasibility
study is like used toilet paper.
Investment
Don't fall for the old scam that you the westerner
invests cash and good equipment and the Chinese invest their
dilapidated old building and broken down trucks and
unskilled, unruly labor force. Make them invest cash and
cash only. Rent or lease the production space and any
Chinese tooling/equipment needed in China. And don't rent or
lease anything from the Chinese partner or let them handle
this process. Otherwise you will find the Chinese deputy
manager's brother's uncle's cousin's wheelbarrow on your
leasing list for US$10,000 per month. (See
our investment advice page for more clues).
Ownership Share
If you are really serious about trying to make money with
a joint venture in China, then don't consider anything less
than 51% ownership and control of the appointment of the
General Manager and Financial Controller. These two people
should then do ALL the hiring for the company.
Guarantees To Sell Output
Commit to any sales performance clause they want as long
as there is a phrase included about "providing the product
is of quality acceptable to the buyer." China has yet to
produce one single product up to quality standards that we
set if we do not really want the product or can not resell
it.
Board Of Directors
It doesn't matter how many seats you have on the board as
long as you have at least two thirds. (By the way, that line
was supposed to be a joke). Offer the Chinese the honorable
Chairman of the Board position in exchange for the General
Manager position. The GM is the one that actually runs the
business. But make sure they do not put any special limits
on the authority of the GM.
Next Step
Begin to make lots o' money asap. Think of all the time
you saved on the negotiating phase.
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