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8.2.3 Dissolution of the Joint Venture and the Move to a Wholly Owned Subsidiary

Hefei Mining's operation suffered from poor performance, and profits from the HCMC parts factory were transferred to support the Hefei Mining employees. After completing the JV, Hefei Mining's anticipated performance gains failed to materialize, and due to a mindset that the perception of JVs would be damaged if stateowned firms acting as JV partners performed poorly, it continued to compensate for Hefei Mining's deficits, making the JV non-profitable. This continued through the second and third years of the JV, after which HCMC began to work on dissolving it. However, it was not that simple. Hefei Mining had many employees and, as a powerful local firm, many of its former employees worked as executives in the city government. For example, the head of Hefei's “Foreign Economic Trade Committee,” the Hefei government organization that oversees foreign firms, was formerly the Communist Party Secretary for Hefei Mining. Because Hefei Mining was a large enterprise and there was a danger of its poor performance being reflected over the local economy, the dissolution of Hefei Mining is difficult choice for the local government.

Hirota describes the situation: “The city's Communist Party Secretary, Mr. Zhong saw that nothing was happening even with intervention of the city government, so he began to help us out of our plight.” (Japan Association for the Promotion of International Trade 2004) Thus, Zhong, who was mayor when the JV was created, began to work toward a solution. The solution was finally achieved in July 1998 wherein the board of directors dissolved the JV agreement. Out of concern of a negative effect on the local economy, the two companies agreed on two measures to support Hefei Mining. The first was not only for HCMC to buy back 25 % of the JV's shares from Hefei Mining despite the venture's losses, but to also pay the employee tuition costs. The second was to enter into an agreement to give priority to Hefei Mining for parts to support the company's production volumes. When reflecting upon on the dissolution of the JV, Hirota mentioned of the deep impression that Zhong's words left on him: “You are now free to make your way in the market without any hindrance, but you will find it difficult!”

As Zhong said, after the JV was dissolved the company ran into various issues, including contract defaults. Hefei Mining was dissatisfied with the price-setting rules outlined in the above mentioned agreement and intentionally made late shipments before finally halting these shipments altogether. Because HCMC had entered into an agreement that did not allow procurement from other vendors, it had a tremendous impact on HCMC's production lines. Therefore, HCMC proved that Hefei Mining breached the contract merely 3 months after signing the agreement and cancelled the prioritized procurement agreement. A failure to maintain standard practices in international trade on the part of Hefei Mining, such as not returning equipment, manufacturing counterfeit HCMC parts, and supplying HCMC parts to other manufacturers, led HCMC to take legal measures and the two companies entered into arbitration. There are two methods in China for legally resolving disputes: litigation in court and arbitration via organizations created for that purpose. Litigation in China is mostly similar to civil litigation in Japan. However, arbitration is not done in court, and when disputes arise decisions are handed out by mutually agreed upon arbitrators. Sales contracts in China generally have conditions regarding arbitration of disputes. In the event that no such condition exists in a sales contract, neither company can request arbitration. Disputes between foreign and domestic firms fall primarily under the Chinese International Economic Trade Arbitration Committee (CIETAC), which took 4 years to pass judgment in the HCMC case, handing down its final findings in 2003. However, under the Chinese system, if the conditions of an arbitration decision are not enacted within 6 months of the decision, then the arbitration decision is no longer in effect and litigation becomes impossible thereafter. HCMC's former JV partner used this to its advantage, not abiding by the decision of arbitration before it expired in August 2003. In the end, HCMC recovered the loaned jigs and manufacturing equipment as the city government forced Hefei Mining's top management into taking action. In addition to these direct troubles with Hefei Mining, company employees close to Hefei Mining disclosed confidential information, thus sabotaging production. Resentful terminated employees forced the company into labor arbitration.

Hirota commented, “We thought a joint venture was a good idea because of the Chinese government's policies for foreign capital introduction at the time, and to secure employees and sales channels, but in reality we faced many troubles with our joint venture partner. Also, because companies do not generally know the inside details of our joint venture partners in China, it can be difficult to ascertain their real financial status. For example, it is difficult for foreign companies selling and producing locally to know the actual production cost of the joint venture's products. This is because the accounting system in China is unique, and the joint venture company normally holds accounting information close to the vest.”

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