Chengdu is the capital
of the Sichuan province and is situated on the Western edge of the Sichuan
Basin. This capital city serves as the economic, financial and commercial
center of Southwest China. More than 15 million people live in Chengdu. The
province of Sichuan is known to tourists for its spicy food. Chengdu is famous
for their cute habitants: The Panda. Economically, it is ranked as the
15th most competitive city in China. The ranking will probably move up
quickly, as experts estimate that Chengdu will soon be upgraded from a Tier 2
to Tier 1 city. The growth which makes the Tier upgrade possible, is fueled by
infrastructure and connectivity investments like the OBOR initiative and the
Chengdu – Poland railway connection.
For a long time, setting up a Joint Venture was the only option for
foreign investors wishing to enter the Chinese market. A Joint Venture consists
of a Chinese and a foreign investor.
In China two different kinds of Joint Ventures exist: Equity Joint
Ventures (EJVs) and Cooperative Joint Ventures (CJVs).
EQUITY JOINT VENTURES
Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share.
Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share.
Normally operation of a joint venture is limited to a fixed period of time
from thirty to fifty years. In some cases an unlimited period of operation can
be approved, especially when the transfer of advanced technology is involved.
Profit and risk sharing in a joint venture are proportionate to the equity of
each partner in the joint venture, except in cases of a breach of the joint
venture contract.
Share holdings in a joint venture are usually non-negotiable and cannot be transferred without approval from the Chinese government. Investors are restricted from withdrawing registered capital during the live of the joint venture contract. Regulations surrounding the transfer of shares with only the approval of the board of directors and without approval from government authorities will probably evolve over time as the size and number of international joint ventures grow.
There are specific requirements for the management structure of a joint
venture but either party can hold the position as chairman of the board of
directors. A minimum of 25% of the capital must be contributed by the foreign
partner(s). There is no minimum investment for the Chinese partner(s).
COOPERATIVE JOINT VENTURES
In a Sino-Foreign Cooperative Venture (also known as Contractual Joint Venture), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity.
In a Sino-Foreign Cooperative Venture (also known as Contractual Joint Venture), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity.
A cooperative venture may also be registered as a limited liability entity resembling an equity joint venture in operation, structure, and status as a Chinese legal entity. There is no minimum foreign contribution required to initiate a cooperative venture, allowing a foreign company to take part in an enterprise where they preferred to remain a minor shareholder. The contributions made by the investors are not required to be expressed in a monetary value and can include excluded in the equity joint venture process can be contributed such as labor, resources, and services.
Profits in a cooperative venture are divided according to the terms of the
cooperative venture contract rather than by investment share, allowing a more
flexible schedule for return on investment in cases where one investor provides
cash while the other party's investment is primarily in kind.
Greater flexibility in the structuring of a cooperative venture is also
permissible including the structure of the organization, management, and
assets. There is no term for unlimited terms in cooperative ventures, but also
no provisions for the term of the duration. The term of the cooperative venture
contract may be renewed subject to the consent of the parties involved and
approval from the examination and approval authorities. The foreign investor is
permitted to withdraw their registered capital or a portion thereof from the
cooperative venture during the duration of the cooperative venture contract.
Because of the unique privileges and added features offered to the foreign
party in a cooperative venture, trade unions must be allowed to represent the
employees in employment matters to protect the interests of the
employees.
Joint ventures with Chinese companies offer one of the most effective ways for western companies to tap the massive China market. In a sino-foreign joint venture, the Chinese company usually brings the labour, land use rights and factory buildings, while the foreign company delivers the necessary technology and key equipment, as well as the capital. If the joint venture is based on a cooperative contract in which issues like the terms of cooperation, the allocation of earnings, the ownership of property upon the termination of the contract, the sharing of risks and losses, etc are laid down, it is called a cooperative joint venture (CJV). Whereas a sino-foreign Equity Joint Venture (EJV) is a limited liability company, the share holdings in which are usually non-negotiable and cannot be transferred without approval from the Chinese government. Investors are restricted from withdrawing registered capital during the life of the equity joint venture contract.
As the investment regulation and business environment changes in China, less and less foreign investor use joint venture as the investment vehicle. RO and WFOE are now most commonly used JV is fading out because of the practical difficulties in :
- picking the proper China partner
- management
- technology transfer
- profit sharing, etc
There are three primary differences between an EJV and a CJV:
While an EJV is always a legal person, and thus a limited liability company, a CJV can be a legal as well as a non-legal person. The latter option means the partners of the joint venture would be personally liable for any losses the company might make in the future.
While an EJV is always a legal person, and thus a limited liability company, a CJV can be a legal as well as a non-legal person. The latter option means the partners of the joint venture would be personally liable for any losses the company might make in the future.
In an EJV the division of profits has to take place equivalent to the ratio of the capital contributions made by the parties, while the profit division in a CJV can take place according to the parties' wishes. A CJV is thus a lot more flexible than an EJV.
In a CJV a party may, besides contributing registered capital, provide for so-called cooperative conditions, e.g. market access rights. Before applying for the establishment of a joint venture, the following documents have to be at hand:
The necessary work and resident permits for the legal representatives:
The approval and corresponding certificate from various relevant authorities like the Planning Bureau, the Public Security Department, the Foreign Economic and Trade Bureau, etc.The approval from the Industrial and Commercial Registration Office to use a certain company name. A report of corporate capital verification issued by a Chinese public accountant.
Setting up a Joint Venture requires the help of an expert. This is a brief overview of the most important steps:
1. Fill out the application form (sign the agreement);
2. Company name search & confirmation;
3. Pay for the services;
4. Submit the needed documents;
5. Check the documents;
6. Prepare for the statutory documents; Let the investors sign the documents personally, and then submit all the documents to the government
7. Keep clients informed of the processing.
8. Finish processing in 40-80 working days; (it depends on the registered address and business scope)
9. Hand over all the company kit to clients;
10. Sign the receipt.
2. Company name search & confirmation;
3. Pay for the services;
4. Submit the needed documents;
5. Check the documents;
6. Prepare for the statutory documents; Let the investors sign the documents personally, and then submit all the documents to the government
7. Keep clients informed of the processing.
8. Finish processing in 40-80 working days; (it depends on the registered address and business scope)
9. Hand over all the company kit to clients;
10. Sign the receipt.
Setting up a Joint Venture in Chengdu is a big project by itself, which
requires financial and time commitments, business management knowledge and
China expertise. Identifying a competent agent to manage the complex
process will be a cost and time effective way to avoid potential pitfalls
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