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Dec 4, 2011

Solving China Joint Venture Disputes: Maybe without an Lawyer

Conflicts are inevitable, but not unresolvable. Since the circumstances surrounding Asian JV/partner conflicts can vary greatly and since the personalities of the involved parties play a major role in the confrontation, there may not be any ready-made prescription for the solution. There are however, some general ideas that may help in resolving conflicts in the local Asian business environment.

Personal Considerations
Western logic, alone, is not usually sufficient to influence an Asian counterpart. Re-opening or referring to the exact stipulations of a contract is not desirable; it has been said "don't confuse me with facts." Such a factual confrontation will only raise the defenses of the local partner and even block any attempt at resolution. Once again, the matter of "Feelings" plays a subconscious role in the resolution of conflict. Try to appeal to his emotional common denominator.

Control Emotions
Showing one's emotions in a demonstration of anger can only exacerbate the situation; the foreign partner must always keep his own emotions under complete control, while appealing to the local partner's emotions.

Just as wise parents go to great lengths not to bicker in front of the children, it is even more important that the top executives representing the two companies keep a positive façade for the benefit of the other employees. They can still – and should – let their hair down off site or behind closed doors to get conflicting matters, while still small, out on to the table for resolution.

Compromise Diplomacy
In difficult confrontations, the use of some diplomatic procedures such as the give-and-take of a trade-off may prove productive in resolving conflicts. It may require some innovation to generate alternative ideas to try in the resolving process.

A Chinese, Korean or other Asian joint venture partner may agree to concede the majority share in the company to the foreign partner on condition that he will be granted the right to veto the first executive vice-president appointed by the foreign partner. Though not ideal, perhaps it may be an example of tradeoff.

The "tit-for-tat" procedure may never create a win/lose situation. One wins only the battle and not the war. If a deadlock arises, however, a valid alternative may be to consider areas of possible tradeoff in order to reach a compromise.

Home Office Support
A very important requirement for expatriates representing a foreign company is to secure the full support of the head office for what one intends to propose vis-à-vis the local partner. If such support is not firm, it will be more difficult to resolve the differences.

Such consultation and approval from the head office has several benefits. First, it offers the opportunity for counsel concerning the proposal. It also takes the foreign partner off-the-hook so that the proposal is not just his or her own idea that might not work. Finally, it adds backing to the foreign partner in presenting his case to the local partner. The wider the support, the better in dealing with knotty problems in an unresolved conflict situation. Such backing adds confidence that can influence the outcome of the consultation.

Confidential Negotiations
Not an easy discipline in resolving conflicts, but a crucial one, is to keep quiet about the matter.    Word spreads fast, especially if it is undesirable, unfortunate news. In this case the problem of "blab" is not confined to any one segment of society. So it is important to keep one's mouth shut when partners are trying to resolve a conflict. During World War II we were told that "a slip of the lip can sink a ship." If this is true in war, it is also true that loose lips can sink a business partnership as well.

Neutral Moderator
A mediator or go-between has no emotional connection to the situation and can help to reduce tensions and defuse the volatile atmosphere between the partners. Third parties can be used to great advantage. When one is confronted with an uncompromising deadlock, replacing the negotiating party with another may lead to a solution.

Exceptional Conflicts
Sometimes the conflict goes beyond personalities. Fundamental differences in the priorities between the two mother companies can and does take place. When the conflict of interests becomes so obvious that most middle managers and above recognize the problem, it may be a good strategy not to try to futilely hide the matter but to amplify the matter so that ultimately the issue, in an extreme case, may go beyond even the board of directors and over to the next shareholders' meeting. Obviously, this is an extreme case. But sometimes this magnitude of conflict can occur beyond the control of the current representative directors – regardless how adroit they may be in handling the issue locally.

Top 10 Pointers from an Experienced Foreign JV Director:
1. Whenever possible, make sure your firm has the CFO position. Try to avoid giving up control of the position. In the end, no matter how tempting the current situation may be to negotiate away that position, you will regret it.

2. The local Chinese CEO is likely to be a god in the eyes of the Chinese employees. Never underestimate your counterpart's power and be extremely careful not to cause him to lose face. It is not easy but you must determine how to walk the line between not being belligerent and being a push over.

3. The wrong motivation to enter into a JV in China includes forming a partnership simply out of necessity or ease in entering the market. There needs to be a genuine, ongoing and mutual reason for maintaining the JV with the Chinese partner.

4. The expatriate director must have a clear cut mission and genuine backing from his head office to be successful. Too often the overseas head office looses interest in the Chinese operations and the local expat director takes on an attitude of resignation from not making a real contribution. This sort of matter often appears in JVs created out of convenience rather than of shared purpose with the China firm. When that attitude sets in, it is often the beginning of the end of any chance of a successful joint venture.

5. It takes at least 18 months even for a fairly experienced and competent foreign director to become truly effective since it so difficult to understand the game.

6. As soon as a new guy comes in as the new foreign JV representative, almost certainly the Chinese partner will try to revise the relationship with the disappearance of a number of regular meetings, reports and information procedures. It's therefore important that the new  director arrive with a clear agenda as to his role and what information he is to received plus clear delegation of authority such as spending authority, investment authorization, etc.

7. Most Westerners want about a month to ease into a job before putting their foot down. In China, one is not normally given that luxury. Rather it is much better to approach the job as director with even a dogmatic sense of authority. Otherwise, the China organization will likely marginalize the new director and he or she will be endlessly trying to chase down critical information.

8. It is critical into immediately establish your authority to be included on important – particularly negative – information.

9. Networks of relationships are critical. Often the real communication and secrets are shared over beers after work.

10. Hire a bilingual Chinese  who is totally on your payroll but works within the JV. This person can do much more than be an interpreter. 

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SeanHayes@ipglegal.com