By Elliot Gillerman T'15
I recently returned from the China Global Insight Expedition, which took me and 23 of my classmates to four cities throughout China in 10 days. It was a whirlwind of a trip, filled with cultural experiences, deep conversations, and authentic Chinese food. We also spent a good deal of time visiting companies across Beijing, Shanghai, and Xi’an. My goal for this post is to provide a window into our discussions during those visits.
One of the topics that frequently came up during our meetings was the Chinese government’s role in the economy. This was particularly interesting for the foreign firms that are required to do business through a joint venture (JV) with a Chinese state-owned enterprise (SOE). We visited an industrials company (which I’ll keep anonymous here) that currently operates through a JV with a Chinese SOE under an equity-sharing agreement. The SOE has several other JVs with the company’s direct competitors in China and is presumably learning as much as it can from those partners about their core businesses and R&D operations.
One of the big takeaways for me was that the Chinese government is thinking quite strategically about its economic development and the role that JVs can play in that process. The company we visited is a major leader in industrials, and other existing JVs span a range of industries from aerospace to consumer electronics. As China’s economy continues to develop, these JVs will help Chinese SOEs improve their own capabilities as well as the capabilities of future Chinese firms. From the Chinese perspective, this practice is quite understandable. China represents a huge potential market for these firms and its government believes that access to this market in certain sectors should only be granted in exchange for assistance in developing Chinese expertise within those sectors.
The extent to which these JVs will develop future Chinese expertise, however, still remains to be seen. From the foreign firm’s perspective, a JV makes sense because it allows the firm to enter an attractive and growing market. The company we visited expects to continue operating in China through its JV for the foreseeable future, but the manager we met with seemed realistic about the possibility that the JV will not last indefinitely.
At that point, the company seems to be betting that it will have maintained its competitive edge through R&D performed outside of China and the company’s own legacy of innovation. While future access to the Chinese market is far from guaranteed, the firm seems confident that the upside from its present business opportunity far outweighs the downside of losing the Chinese market in the future, or never having had the opportunity at all.
This company’s JV experience leads to many questions about future business policies and practices in China. When will JVs no longer be necessary for Chinese SOEs? Once these SOEs begin to operate independently, will foreign firms still be allowed to operate and compete in China? Will foreign firms that previously operated through JVs lose their competitive edge against Chinese SOEs through the transfer of technology and intellectual property?
While it seems unlikely that China would ever fully close its markets to foreign firms in the future, I remain concerned about both the legitimate and illegitimate transfer of knowledge and expertise that these JVs may facilitate. Given the current and future size of the Chinese market, it is difficult to argue with the short-term business opportunity that a JV presents to a firm in China. The tradeoff, however, becomes less defensible if it results in the loss of that firm’s ability to compete in the future.
Photo: Tuck students experience train travel in China.