New breed of US-China JVs going to rise from ashes
Ok, so maybe ‘ashes’ is a bit much. Shanghai is still a mixed picture, and we may all benefit from a ‘wealth effect’ re-rating – our bottom lines were only cut in half during the Millennial Depression (buzzword credit!) – while US and European businesses were slaughtered like hogs in the marketplace. We win.
I think its time for the expat/fie (foreign invested enterprise) to take a look out to the future and see what medium-term business trends we’re going to be working with in a post-recessionary China.
I’ll tell you the end of the story first. There will be a new breed of JVs popping up in Shanghai and other international business centers in China. This time, however, they will be high-functioning service organizations that are able to unlock real value from two sets of counter-parties: On one side are the Chinese entrepreneurs with tested models who have access to parts of the China market but are starved for cash. Their new partners will be established US service businesses that are financially strong enough to survive 2009 – but are looking at a future that will be increasingly bleak if they don’t find a way to boost the size of their potential international market
New Circumstances, Old Biases
US planners hate JVs because of nightmares from the old days. These won’t be the ‘policy JVs’ of previous decades, but rather market oriented combinations that seek true Win-Win outcomes. Most will focus on business entry and marketing for Western firms that can’t expand in the US do to competition, market weakness and the differential in long-term market trends. Chinese partners, on the other hand, will be successful locals or small & medium Sino-Western JVs of the last decade that have survived – and now look to expand to the US or Europe. These new JVs will be focused on B2B services that are higher on the value chain, like design or outsourced back-office services.
In China, B2B service firms already operate with a two-tiered target market. The services provided to MNCs in Shanghai can be offered to SF and NY. But Chinese service companies are going to have to develop growing markets in 3+ (3rd, 4th & 5th Tier) Chinese cities. Some are looking for access to US markets (climbing the value chain from OEM to ODM) and trying out the brands they’ve already built her (or brought in from Singapore or Taiwan). Whatever options they pursue, they are going to require access to credit and marketing savvy to succeed – which means that western JV partners suddenly have a lot more to offer.
US service companies will have to expand to China as a matter of course. This is a ‘market pull’ type of move. We’re about to see MNCs’ global revenue stream go lopsided in favor of China – and as the giant firms revive their cash flow in the coming years, a greater share is likely to be reinvested back into China. Even if smaller service firms don’t want to go international, they’re clients are pulling them there. Meiyou banfa. If you lose the business in Shanghai, that same competitor will soon go after your Chicago or NY business.
Cost cutting will be the new priority on both sides. These new JVs and cooperative arrangements will seek to capitalize on the marketing channels and IP that each side already owns – but will now try to make more profitable through international scale. Look for areas in your own shop where labor and IP blur. Design, print, engineering, IT, research, marketing, and back-office services. New JVs will combine low-cost intellectual labor and market opening on both sides of the Pacific.