Commentary

Anatomy Of A Chinese Technology Joint Venture

Tech Market WatchBy Perry Wu
Do you want to know why so many joint ventures fail in China? Take a look at the one just organized by Navteq (NYSE:NVT).

This past week Navteq and Navinfo, two companies involved in digital navigation systems, announced they would set up a Chinese joint venture. The joint venture certainly seems to make a lot of sense. Navteq is a Chicago-based company that is one of the dominant providers of digital maps to global positioning systems (GPS) in the world. For 2003, the company had net revenues of US$272 million and a book value of US$217 million. It currently has a market value of US$3.3 billion. Navinfo is a Chinese company fulfilling a similar business model.

Navteq has done a brisk business in selling its digital maps to auto makers for installation in GPS-enabled devices. Increasingly, it is developing other customer bases such as the mobile phone industry, which uses the maps for cell phones.

To keep up with its ever-expanding coverage of the world's roads, Navteq boasts an army of dozens of employees who make their living by traveling and recording road attributes. The company proudly trumpets the fact that it has most of North America, from northern Canada to southern Mexico, covered in its digital maps. And not just North America, the company has now mapped around 40 different countries.

Success of Navteq's product in a country like China basically requires two things. First, you need a population who use wireless and handheld devices such as mobile phones and GPS-enabled devices. China now has this. The other thing is a strong need for road-based navigational help. Do Chinese consumers need this?

Yes. With the explosion in Chinese personal ownership of automobiles, especially over the last five years, Navteq rightly sees the growing need for its maps in China. No one who has ventured even briefly out of a large Chinese metropolis into the Chinese peasant countryside's backroads can doubt the usefulness of such a navigational product. And even in large cities like Beijing, where streets are re-threaded into major thoroughfares and then re-configured a year later, knowing the latest road routes is essential. Many major taxi companies in cities like Shenzhen and Beijing are already using onboard GPS to show customers the quickest routes via newly created roads. And in a town like Shanghai where the roads tend to remain the same, GPS devices can help weave vehicles around Shanghai's horrendous traffic jams.

Navinfo's (the Chinese partner's) history is more difficult to decipher. Its website (both Chinese and English versions) implies the company was originally started as a state-owned Chinese company in 1997, with help from Japan-based Toyota. Its first car navigation prototype was tested in 1998, and four years later in 2002 it launched its first electronic navigational system product. Toyota was naturally its first customer.

In any case, here are two companies with complementary businesses. Navteq, the big foreign daddy, has money and wants to enter China. The Chinese partner doesn't have much money and wants the foreigners' capitalization. The Chinese partner, in return for the money, will claim that it understands the local Chinese market. This is how most Chinese JVs get started.

Since the early 1980s, when Sino-foreign joint ventures re-started, much foreign money has been burnt with few successes. Given this history, investors should already be on their guard when a company announces a joint venture in China. But a company can at least seek to minimize this investor concern by full disclosure. In this, Navteq has clearly failed. It would be a simple task to release a copy of the joint venture agreement to the public. But Navteq has not provided even minimal information, such as expected investment size or expected equity stake in the joint venture.

And why the need for a joint venture? Even without World Trade Organization promises, a foreign company like Navteq could still arrange a wholly-owned software company in a tech-friendly trade zone like Beijing's Zhongguancun for a mere capitalization of US$80000-200000. And if they wanted to really splurge, they could capitalize for around a million dollars and get additional benefits. Plus, the wholly-owned foreign company would have tax-free status for about three years, with the ability to get a special "Hi-Tech Certification" for an additional two years that would give a 50% reduction on taxes. Does the joint-venture have tax freebies like this? Probably not. But then maybe Navteq plans to make zero profit for its first five years in China–this is actually a reasonable amount of time for a foreign company to stay penniless in China–and therefore needs no tax breaks.

Most importantly, the joint venture leaves Navteq open to the same problems plaguing many other technology joint ventures: the Chinese partner can potentially take the valuable Navteq proprietary knowledge, re-engineer it, and then sell it out the backdoor. Do a quick check on Google and on the "China Business" bookshelves at your local bookstore for sad tales of current and past business relationships like these.

Going it alone, and without a Chinese partner, can make it difficult for companies to succeed in China too. A Chinese partner can provide needed regulatory protection, a (hopefully) able-bodied local salesforce, and ready-made relationships (or "guanxi" in Mandarin) with local authorities. But a company should not expect a windfall within its first 2-5 years, and so setting up a wholly-owned company may be the best long-term protection. After all, if Navteq plans for its company to be resilient in America for the next 30 years, it should take the time to build-up a dynasty in China that can also withstand 30 years of competition, lawsuits, and new technologies. Why sell-out to a partner so soon?

So, at least on paper, this Chinese joint venture between Navteq and Navinfo couldn't make more sense. China has many roads that need to be mapped; Navteq has the expertise; and Navinfo has the local knowledge. Unfortunately, Navteq has already taken a wrong turn by not disclosing the terms to the public. How ironic that two companies trying to make the world more accessible to drivers are not providing a road map to investors.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.

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