Schneider was one of the first foreign partners to establish a company in China. (Photo/Xinhua)
Chinese companies are becoming increasingly cautious about the possible dangers of forming joint ventures with multinational corporations or selling majority stakes to them in the fear that their partners could eventually elbow them out and end up dominating the market.
Schneider Electric, based in France, was named among the major such cases by business management consultants and analysts in China, according to Time Weekly, a magazine in Guangzhou.
Management controversies at NVC Lighting Technology, a leading supplier of lighting products, started in late May and show no signs of ending. The ongoing corporate leadership dispute has placed Zhu Hai, who became the first native Chinese to serve as president of the China operations of Schneider in 2009, under the spotlight.
The company, a multinational supplying electrical equipment and energy management solutions, was among the earliest foreign investors to set up a branch in China after the nation began opening up to overseas capital in 1979. The French group has since acquired many Chinese companies in an ambitious and fast-track expansion similar to the formation of mammoth corporations through mergers and acquisitions in many nations including Britain, Spain, Australia, India and North America.
Schneider acquired a 9.2% stake in NVC Lighting to become the company's third-biggest shareholder in July 2011, with its sights set on the Chinese lighting equipment firm's extensive distribution and sales network in the country.
In March, the company also fully took over a company set up in Chongqing by NVC Lighting founder and chairman Wu Changjiang, along with some private investors as a major manufacturing base in southwestern China. Wu abruptly resigned in late May without giving specific reasons.
Many employees and distributors of NVC Lighting have mounted a campaign for bringing the founder back to the board of directors. Sources said the dispute could have risen from a rift between the original management team and Schneider. No one is now sure how and when the management row may end.
Zhu joined Schneider's China operations in 1996 and has become a key figure in its joint ventures with many Chinese companies in recent years. He announced in 2011 a grand plan of expanding business to cover almost 300 Chinese cities in three years from their current presence in 104 cities. Their major strategies include forming joint ventures with Chinese enterprises with major thrust towards zeroing in on the market in central and western areas of China.
Analysts pointed out that Schneider enticed Chinese partners into JVs by providing up to 60% of capital. But the company allegedly set certain restrictions on product development and any successful products made by their partner, which would cause operating losses. It would then take over the companies as wholly owned subsidiaries when the partners refused to inject new capital. The money-losing enterprises were then quickly nurtured back to life in order to generate profits and expand the French company's market share, according to analysts interviewed by Time Weekly.
Chinese enterprises that saw their JVs and markets taken over by Schneider include those manufacturing electric devices for lathes and other machine tools as well as other electric instruments like inverters.
Some pointed to the case involving another French company, Groupe SEB, one of the world's leading manufacturers of small appliances and other household products. It formed a JV with a Chinese producer of electric irons in Shanghai in 1996. It took over the money-losing JV and the Chinese partner's market three years later.
Germany's Schaeffler Group, which has a history of more than 120 years, is famous for its FAG brand bearings. It made an investment to take up a 49% stake in a JV with a Chinese ball bearing manufacturer in 2001. Eventually, it took over the JV after they started losing money into the second year. The venture soon became a market winner in both China and abroad.
Wuxi Weifu High-Technology Group used to control more than 50% of the diesel pumping nozzle system in China and was a major competitor to Bosch of Germany. The company became confined to the low-end market segment after forming Bosch Automotive Diesel Systems, a JV with the German giant that has a 67% shareholding stake, said the analysts.
One expert told Chinese executives attending a machinery industry conference that many of the failed JV and M&A cases expose what is actually a common practice by foreign partners to find ways to send JV business operations into deficit and then pick them up as subsidiaries.
Analysts said records also prove that foreign companies form JVs for the purposes of utilizing their Chinese partners' manufacturing capabilities as well as product distribution channels and market share, but seldom provide technical support. There were especially strict restrictions on similar products and export markets of the local partner that, after instituted, impaired those businesses' survival and development.
The analysts said such business pitfalls show there is a need for improving the rules of the JV game to help ensure fair sharing of profits between Chinese and foreign partners.
Zhu Hai 朱海
Wu Changjiang 吳長江