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Business deals

FamilyMart sues to end Chinese joint venture with Ting Hsin

Japanese convenience store chain cites contract disputes with Taiwanese partner

A FamilyMart in Shanghai, part of the fifth-largest convenience store chain in China. (Photo by Naoki Matsuda)

SHANGHAI -- FamilyMart wants to end a 15-year joint venture with Taiwan's Ting Hsin International Group that has produced the most successful chain of convenience stores in mainland China among Japanese operators, Nikkei has learned.

Parent company FamilyMart Uny Holdings is suing the Ting Hsin food conglomerate to dissolve the partnership, citing contractual disputes.

"There is absolutely no relationship based on trust between us and Ting Hsin group," a FamilyMart source said.

The lawsuit was filed last October in the Cayman Islands, where the joint venture company is registered. The Japanese business alleges that Ting Hsin ceased disclosing pertinent transaction data around 2012, and that for several months the group has withheld fee payments for using the FamilyMart brand.

FamilyMart teamed with the Taiwanese group to launch the Chinese business in 2004. Though FamilyMart owned only 40% of the venture, while Ting Hsin controlled the rest, the Japanese side handled the bulk of the store operations.

The bet on Chinese demand for convenience stores quickly paid off in a rush of store openings. The venture now oversees the fifth-largest chain of convenience stores on the mainland.

But success brought a change in attitude by Ting Hsin, the FamilyMart source alleged.

"The improper joint venture management became unbearable," the person said.

Ting Hsin responded in the lawsuit by saying the brand royalty fees requested by FamilyMart are higher than quotes from competitors. The Taiwanese group won a legal victory in February when a Cayman Island judge issued a stay in the proceedings, finding that the dispute could be resolved through arbitration. FamilyMart appealed that decision in March.

"FamilyMart employees have all but disappeared from the joint venture since a few years ago," said an insider at the jointly held company. "Restoring relations will be very difficult."

The Japanese company seeks to avoid a repeat of what happened in South Korea. In 2014, FamilyMart exited that market after failing to bridge differences with local partner BGF Retail, leaving behind an overseas network containing 8,000 outlets.

China's convenience store market expanded 15% last year to over 120,000 shops. FamilyMart is not expected to relinquish its foothold in a growing market, but "capable talent fed up with the lawsuit and other squabbles are leaving the joint venture," a source at a rival store claimed.

However, the plants that produce most of FamilyMart's ready-to-eat meals are run by companies affiliated with Ting Hsin. If FamilyMart canceled the joint venture, the chain would need to find a new local partner quickly. In a worst-case scenario, the Chinese operation would have to be rebuilt from scratch.

FamilyMart is far from the only Japanese company to claim a troubled experience with Ting Hsin.

Brewing giant Asahi Group Holdings, food company Calbee and major trading house Itochu -- which owns a controlling stake in FamilyMart -- had chosen Ting Hsin as the partner for setting up shop in China, which historically barred foreign entities from pursuing solo ventures. But each of those companies pulled out of their tie-ups with the Taiwanese group between 2015 and 2018.

Other Japanese companies have booked hefty losses due to problems in their Chinese businesses. Home builder Daiwa House Industry took a hit of 11.7 billion yen ($106 million) for the fiscal year ended in March due to accounting irregularities at a Chinese condominium-sales unit. Lixil Group, which supplies building materials, in 2015 logged losses totaling 66 billion yen after an accounting scandal surfaced at a Chinese subsidiary.

"There are many cases of trouble occurring at Japanese corporations that entrust Chinese business operations to local Chinese companies," said Takashi Nomura, an attorney working in the Shanghai office for Japanese law firm Nishimura & Asahi.

These issues often stem from Chinese companies that are loathe to reveal inconvenient information to joint venture partners, Nomura said. To facilitate those aims, the Chinese partners "tend to independently pick accounting agencies that are accommodating," he added.

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