Embrace JVs - They're More Than An Unavoidable Move In Asia

Tom Burroughes

8 September 2014

The term joint venture sounds all very comradely and friendly but sometimes one gets the impression that when it comes to countries such as China, JVs are seen as a necessary evil in getting access to a country's markets. There is a strong impression that such arrangements are seen as a price of entry, rather than much more than that.

According to , the consultants, it is a mistake to overlook the benefits of JVs, however. Non-domestic asset managers trying to penetrate the Asia fund management space should not ignore the advantages of local expertise that joint ventures bring, it says.

“The most successful foreign-local joint ventures in China, India, and Korea typically mostly hire local people, with foreigners kept to a minimum, especially in key positions,” the organisation said in its Asian Business Strategies 2014 report. It covers Asian markets including Japan, but not Australia. Hiring local people means that the joint ventures can be run in a similar fashion to wholly local counterparts, particularly important if a foreign asset manager is new to an Asian jurisdiction, as several are, the report said.

Joint ventures where the foreign partner has little involvement in day-to-day operations (defined by Cerulli as those with a foreign stake of 34 per cent or less) had more assets under management on average compared to joint ventures in which the foreign partner was active - RMB49.8 billion ($1.8 billion) on average against RMB21.9 billion.

The findings come at a time when Cerulli – and others – are predicting further consolidation in the region’s fund management industry, particularly in markets where onshore market presence is needed. The stakes for successful firms are large: Cerulli forecasts that Asia ex-Japan mutual fund assets will grow from $1.34 trillion at the end of 2013 to $2.27 trillion in 2018, with growth fuelled by the Philippines, Indonesia, Malaysia, and China.

In China certainly, JVs are now a commonly understood structure since the Communist-run state opened its doors to Western firms - and capital - in the late 1970s. Big Western pharma firms such as GlaxoSmithKline and Novartis, to name just two, have JVs in China. One issue, as highlighted in a 2010 report by McKinsey, the consultancy, is ensuring that the "home" part of the JV does not transform into a potentially dangerous rival for the foreign party. Another issue is protection of intellectual property. In wealth management, for example, there may be issues around the safeguarding of any sort of proprietary investment process if there is IP embedded in it. Another important challenge is preparing for when a JV comes to an end - an amicable divorce is clearly preferable to a bitter or just plain disappointing one. Last year, Tesco, the UK-listed supermarket giant that has seen performance hit headwinds recently, ended its nine-year JV in China, costing it up to £1.5 billion. There are risks.

The Cerulli report clearly has relevance for private banks with JVs in China, or for those contemplating entering such deals in this country and others. The scale of what is at stake in getting the approach right is highlighted by how, according to a 2012 report by PricewaterhouseCoopers, there are 40 locally incorporated banks in China, ranging from Allied Commercial Bank to Zhengxin Bank Company. These banks have, by definition, made the calculation that they cannot afford not to have a sizeable footprint in such a market and are prepared to take some of the risks and enjoy some of the local expertise.

In other words, joint ventures may sometimes be a necessary condition of entry if regulators – and protectionist politicians – insist on them. But that doesn’t mean firms cannot and should not make a big virtue out of necessity, given the potential winnings.