Foreign Invested Enterprises FAQ's

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Recently, there has been a lot of discussion regarding the current trend of foreign joint venture partners buying out their Chinese counterparts. What are the major obstacles in these restructurings?

In recent years we have seen a growing number of restructured joint ventures. There is a trend to reduce the role of the Chinese partner in a joint venture by having the foreign partner acquire its shares. In a few cases, the Chinese partner takes over shares from the foreign party. Reasons for these separations vary. Often, the view of foreign investors and their Chinese partners differ in the way business should be conducted, and expectations are often not met. That's not unique to China. Just look at all the problems the German-American merger, Daimler-Chrysler, has had to endure since they tried to bring together their two different firm cultures - and they are both Western companies!

In China, the changing legal framework and business climate is not only more favorable to wholly foreign enterprises than in the past, but also facilitates the restructuring of joint ventures. Typically, the joint venture is restructured into a WFOE or the equity stake of the Chinese partner is reduced to transform the Chinese side into a "silent partner" without significant decision-making powers. Sometimes the equity structure is changed because the foreign investors pour in additional capital, whereas the Chinese partner does not increase its original contribution.

However, it should be noted that any type of equity change must be approved by the Ministry of Foreign Trade and Economic Cooperation. In a few sensitive industries, the Chinese partner must hold a majority and 100% foreign ownership is not permitted. These restrictions must still be observed. But, again, the number of WFOEs and restructurings are still definitely increasing.