Joint ventures (JVs) are a marriage between businesses, and as in any marriage, both partners need to put time and effort into it. Having conducted your due diligence, negotiated your investments, and agreed to get hitched, you now need to work out the management protocol.

This subject is the topic of much debate, with conflicting points of view. Conducting business also is largely time consuming, emotional and stressful. This is only enhanced in a multi-cultural environment. There will be times both parties feel they are correct. Have you identified the potential areas of differing opinions and decided privately amongst your own foreign colleagues which to tolerate and which not to? It may be wise to draw up a blueprint of potential areas of disagreement and work out in which your China partner is more likely to have the expertise, and in which you are. It is common sense.

Many companies leave the entire operations up to the Chinese partner to run. This is a crucial mistake. A new business needs all the support it can get. You need to invest in a foreign manager to keep an eye on things, especially during the early stages. Correct systems, accounting and quality control issues all need to be taken care of. You have standards; ensure these are implemented and operational in your JV. The ideal solution is an expat manager-if not for the long term, then certainly for the initial development stages. However, the general manager is responsible for the operations of the business. It is wise to make this one of your personnel.

Chinese management

For the longer term, it is better for JVs to have strong Chinese management in place. The reason for this is the difference in basic fundamentals of economic understanding between Chinese and expatriate managers. As Jack Perkowski, Chairman of Asimco, one of China's most successful companies, said earlier in the year, Chinese managers have a better appreciation of Chinese costs. Consider the $100 and 100-yuan note.

They have many similarities. They are the highest denomination in their respective countries. Both have pictures of national leaders on them. Yet in America, $100 is not considered a lot of money. However, in China, 100 yuan is considered a lot of money, despite the exchange rate showing it to be worth just $14. Chinese managers therefore have a far greater understanding of the fundamental dynamics of how much 100 yuan is worth than an expatriate manager and this is a key attribute when conducting financial transactions in buying and selling supplies, products and services in China.

Management operational issues

However, for some key positions, it is important to maintain a balance. Usually, for obvious reasons, this is related to the equity position. It should be remembered that influence from other positions of strength externally from the JV (such as technology transfer) can also have a significant impact on the JV management from an international perspective, and that in Chinese management positions we are referring to the decision-making process for the domestic production facilities only.

The chairman

Generally, it makes good cultural sense to position the Chinese side as chairman. This gives him the role of ambassador to the JV, and it can be highly effective to have him be shown is a position of strength when needing to get things done locally.

True management however lies with the composition of the board. If you are in a majority position then you will retain this. If in a minority position, the Chinese will hold the vote. To cater for this there are a number of positions that can be taken.

General manager

The general manager (GM) is responsible for managing the operations, together with a deputy. As discussed previously, it makes sense to take a keen interest in the role, however in terms of duties, it may be conceded due to China's market fundamentals an expatriate may not possess. However, if Chinese, close watch needs to be placed on the GM, and he will need an effective expatriate deputy that he can work with. It is also possible to rotate this position every two years for the sake of balance and development, depending upon the circumstances of the business.

In Issue No.35 we'll look at other areas of JV due diligence