Changing the tire on a car without pulling over -- existing entity restructuring in China. Michael Sylvester

tire-change.jpgA large part of our business in the last ten years, as China continues to mature internally, has focused on what we call existing entity restructuring and often feels a lot like changing the tire on a car without pulling the car over to the side of the road.

You are here, you have been doing business for some years and either the law has matured, allowing greater market access, or things you may have been able to get away with in the past are no longer possible -- or any of a thousand scenarios where what happened in the past is no longer sound business strategy for some reason now.  Then what?

Well, we find a long straight road, tip the car up on two wheels without tipping it over, change the flat tire and then help you accelerate away in the right direction again -- that's what.  While that is not exactly what we do, for us and our clients both, we know it often feels a lot like that.

For example, the other day the foreign owner in a joint venture came in.  He has been here for quite a few years and is a mature expatriot business man.  Meaning, he knows things get screwed up sometimes and he has learned to work through many difficulties on his own.   

Just in case anyone out there does not know the vocabulary, a joint venture is a legal or contractual business relationship where a Chinese business and a foreign business enter into a formally registered relationship that forms a third business owned by both of them.  Both of the original businesses stay open and operate on their own + have this weird third business between them too.  Basically joint ventures are a nightmare and should never be used unless Chinese law requires it.  But, that is another story, for another day.

Back to the foreigner sitting in our confernce room the other day...  While familar with many of the details needed to be a success here, this time he needed some help.

His joint venture partner was charging a 30% premium on products sold to the joint venture in addition to a 50% share of the profits of the joint venture itself.  Yeah, yeah I know you are going to say that is counter-intuitive and no sound business would shoot themselves in the foot like the Chinese gentlemen was doing.  Welcome to China, it does not always make sense from the outside looking in.  But, if you know what to look for, it is a hell of a good strategy for the person using that strategy.  Unfortunatly, that strategy was being used against our client.

The joint venture agreement originally drafted between the two of them contained no clause saying one party could not price gouge the other -- so price gouging was the game of the day.

And it was killing the business.  But, it seems that was the plan of the Chinese side of that particular joint venture.  Screw the foreigner until he walks away, restart the business again with sound business principles after the foreigner got tired, gave up and just walked away.

Then the Chinese side would be 100% owner and would most likely be a wild success because he would no longer be price gouging, would therefore be competitive and would not have to share the profits.  Not bad work if you can get it...

Yet, the foreigner owed the Chinese side of the joint venture a lot of money and the Chinese side wanted to be paid.  We advised proposing to the Chinese side that we would pay them and give them almost identical equity in a new company, owned and controlled by the foreign party, but only after dissolving the joint venture first.

Both sides wanted to get paid, neither wanted a bankruptcy, neither wanted to deal with the interference of an unfriendly partner and nobody wanted the car to stop, because it's a good car.

So, how do you change a tire without pulling the car over to the side of the road?  Well, you tip the car over, drive carefully for a little while, then get back on all four wheels and get going again.

All you need is a little creativity, a long straight road and a little nerve...but it can be done.