CHINA JOINT VENTURE DUE DILIGENCE

 

An American rubber manufacturer asked Silk Road Communications for assistance in the implementation of its joint venture initiative. The manufacturer required greater understanding of a Chinese company's management, operational and financial health. After weeks of talks and a conceptual agreement for a joint venture, Silk Road Communications proposed pursuing a pro forma due diligence on the Chinese company's business. 

Before the due diligence process, we worked with our client’s top management team to understand their objectives in this due diligence report. One primary reason why sometimes the due diligence reports of the Big Four auditors do not add value is that they pay too much attention to the financial portion of the final report to management. We focus on the potential partner’s true intentions, financials, business and management background. We were able to present useful insights for our client by using our relationships with the Chinese government, industry associations, and the professionals with different industries.

We worked closely with the President and executives of the Chinese company to explain each of the pieces of information we requested from them to build a complete picture of their company. After two weeks of starting, we provided the client a due diligence report that addressed Financial, Marketing, Engineering, Manufacturing, Supply Chain, Human Resource, IT, Legal and operating environment information – all of which the Client would have had a difficult time assembling on its own.

The key to determining the success of a joint venture or any other form of corporation in China is to look closely at the “soft” characteristics of doing business in the country, the features that the “numbers” do not readily show: shifting local regulatory environments, regional cultures and procedures. Unfortunately many Western companies have yet to understand the various differences or how to act and react in the China market. With our help, our client was able to understand not only the business portion of its Chinese partners, but also the cultural side as well. 

After completion of the project, the Chinese party told us that it felt more comfortable working with our client, because they believed our client had started to understand and accept the unique "Chinese Way" in which the company worked. Based on our experience, Chinese and foreign companies often feel frustrated after their initial meetings due to lack of knowledge about each other. Many opportunities have been abandoned because of ignorance of the “soft” requirements of each side.  That is one reason why our company considers it important to educate our clients about cultural, behavioral and procedural differences between the outlooks of the sides.

To understand the differences is truly the first step towards ultimate success in the China market.

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