Why Seek a Foreign Partner?

Motivation of Chinese Partner

Just as important as the reasons that drive a foreign cable company to invest in China is the other side of the equation: Why would a Chinese company feel any need to get involved with a foreign investor? A joint venture between a Chinese company and a foreign partner is only likely to be successful if there are really good reasons on both sides for establishing the joint venture, and if there is a good complementary fit between the strategic objectives of the parties involved.

Need for Technical Assistance …

In product sectors where technology is not a major problem, a Chinese cable company would usually prefer to act independently and would not want to get involved with a foreign partner. In some product sectors, however, where technical know-how is required, Chinese companies would benefit from the experience of a foreign partner. The technical know-how of an experienced partner may be needed to establish successful manufacturing or it may be a competitive advantage in convincing customers that the manufacturer has sufficient technical competence.

… in HV Power Cables, for example

In HV XLPE power cables, for example, in the mid-1990s several Chinese cable groups set up joint ventures with major international players. Even at that time, this approach was by no means universal, as, to give one example, Shanghai Cable actually developed its own capability in HV cables. In more recent years several other Chinese cable companies have acquired equipment for production of HV power cables. The need for a foreign partner with technical experience has become less compelling over the last ten years. Some Chinese cable companies now have confidence that, after installing plant, they will, with some support from suppliers of equipment and materials, be able to produce HV cables that will meet the required standards. One factor that supports this view is that there tends to be more sharing of technical experience between companies in China than would be normal in Europe, the US or Japan, where competitors in the cable industry would carefully guard their technical expertise. But most of the successful companies in the Chinese HV power cable market are joint ventures involving foreign partners. While the expertise of the foreign partner might not be absolutely essential, it certainly allows a much faster market entry, by greatly reducing the time needed to gain sufficient experience to produce good quality HV cable consistently.

Availability of Capital

In some cases Chinese cable companies have sought foreign investors in joint ventures simply as a source of capital when their own funds have been in short supply. If the Chinese company is short of cash due to rapid expansion of its own business, this tactic is credible. If, however, the reason for seeking outside investment is that the Chinese company is short of cash due to weak performance of the existing business, any potential foreign investor is likely to hear alarm bells ringing.

Access to Export Markets

Another common reason for a Chinese cable company to seek a foreign partner is the hope that this can give the joint venture better access to export markets. Even though China is itself a very large market, a Chinese company may quite reasonably perceive that the majority of the world’s demand for cables is outside China! This view is likely to conflict with the aims of a foreign investor whose main reason for establishing a joint venture in China is to gain a place in the growing Chinese market! As there continues to be production over-capacity in many of the mature markets, a global cable player will not want to add to the problem by switching on yet more capacity in China. Where foreign companies are setting up an operation whose main aim is to target export markets, it is likely that they will not need to involve a Chinese partner in the business.