The vast potential market of China's inland provinces and secondary cities is drawing multinational companies, many of which want to form joint ventures with local firms to enter these consumer markets. But industry players warn that these joint ventures run the same risks that led to the unhappy failures in the past of many multinational partnerships on the mainland.
'When we talk to executives of multinationals, they indicate they want to go to the inner provinces,' and are considering forming joint ventures to crack the local markets by tapping into an established network, said Peter Kung, a senior partner at global accounting firm KPMG. The prospective partner may not be a Chinese firm but an overseas company with local knowledge, he added.
The return of the joint venture is a 'major change' in doing business in China, KPMG said in a recent report. 'Such arrangements were popular in the 1990s, largely because legal alternatives were limited. However, that changed soon after China's entry to the World Trade Organisation in 2001, and many foreign companies took advantage of more liberal laws to set up wholly owned enterprises.'
In the past when Chinese law required joint ventures for certain industries, multinationals had to stick with their partners even if they didn't like them, Kung said. 'Now, the situation is different. Multinationals don't have to be forced into joint ventures, they can choose their partners.'
KPMG China partner Nick Debnam added that 'the shift from cheap China to consuming China means firms will be looking to produce less in the country's factories and sell more to its consumers, a more challenging business model' than making goods for export.
The size of the market in China's hinterland gives some idea of its allure. According to the KPMG report, China's inland economies have an annual economic output of US$3.15 trillion. By comparison, that of Latin America and the Caribbean is US$5.6 trillion, and the Middle East and North Africa's amounts to US$2.77 trillion. For just three categories of luxury goods - wine, chocolate and fresh or chilled fish - mainland China's imports jumped to more than US$1 billion in 2010 from less than US$100 million in 2000, KPMG said.