Chinese Auto Joint Venture Partnerships and Avoiding a Wreck through A Local Partner "Bumper"

According to an article that appeared in Caixin, a well-known Chinese business publication, in mid-September, Great Wall Motor Co. Ltd. and two other unnamed Chinese car makers potentially might set up a joint automobile plant in the United States (US) as a means of reducing investment risk. On the surface, a joint venture (JV) is a sensible strategy as multiple firms working together might, in concept, lower design uncertainties, share development and production costs and risks, and minimize the expenditures associated with branding, marketing, and distribution.

Certainly, any responsible firm manager needs to contemplate what he or she might do to eliminate and reduce risks. The logic of partnering purely with other Chinese automobile firms when establishing a factory in the US or elsewhere, though, is far from clear. Indeed, it goes against many of the rationales behind firms partnering with a local partner when they go abroad. First, a local partner can help foreign firms build relations with government and local stakeholders. This is a very serious issue for Chinese firms which often wrongly assume they can operate overseas in the same manner they operate in China. Second, a JV with a local partner can help a foreign firm tap existing marketing, distribution, and service channels. Third, a JV with a local partner should facilitate greater understanding of local tastes and also familiarity with more efficacious methods of handling local workforces. Fourth, JVs can connect their foreign partners into local suppliers networks. Finally, local partners should be able to aid foreign firms in better understanding local corporate social responsibility norms. In the final analysis, to avoid a messy wreck, Chinese automobile companies would be wise to start operations in the US with an American partner until they have solidified their presence and garnered many more years of operating experience.