Summary of Key Points
Recently, Shanghai Jahua sold its 19% stake in Sephora China, and Shiseido converted its joint venture into a wholly-owned company. This is not merely a case of the Chinese side disposing of loss-making assets; it marks the complete end of the "equity-for-localization" model that once facilitated the entry of international beauty brands into the Chinese market. Twenty to thirty years ago, foreign companies lacked local channels and consumer awareness, while Chinese companies lacked international brands and technology. Both parties exchanged equity to exchange capabilities and share risks. Today, foreign companies have established their own operations in China, and Chinese companies have developed their own brands and online capabilities. Joint ventures have evolved from a "bridge" to a "restraint." Future cooperation will still exist, but it will no longer rely on equity ties; instead, resources will be combined precisely according to needs.
I. Joint Ventures Were Once a "Necessary Option" for Foreign Companies Entering China: Using Equity to Obtain a "Pass for Localization"
Twenty to thirty years ago, foreign companies could not enter the Chinese beauty market without forming joint ventures. Why?
- Foreign Companies' Challenges: They did not understand Chinese consumers (for example, Europeans preferred matte finishes, while Chinese consumers preferred moisturizing products), lacked local channels (such as how to enter shopping malls or find distributors), and were subject to policy restrictions (for instance, foreign retailers could not own businesses solely before 2004).
- Benefits for Chinese Companies: They could learn management, technology, and retailing practices from international brands and also share profits.
For example, when Sephora entered China in 2004, it formed a joint venture with Shanghai Jahua (with Sephora holding 81% and Shanghai Jahua 19%). Sephora contributed its brand and global model, while Shanghai Jahua helped with employee training, connecting with local channels, and understanding Chinese consumer preferences. That 19% stake was a form of investment for Sephora and a profit source for Shanghai Jahua. Earlier examples, such as Procter & Gamble's joint venture with a Guangzhou soap factory in 1988 and Shiseido's joint venture with Beijing Liyuan in 1991, relied on Chinese partners to solve manufacturing and supply chain issues, which was essential for gaining market access.
II. Joint Ventures Have Become a "Restraint" Now: Both Parties Want to Regain Control
Why do they want to dissolve these joint ventures now? Both sides see them as uneconomical:
- Chinese Companies: Non-core assets that only result in losses. Taking Shanghai Jahua as an example, from 2023 to 2025, its stake in Sephora resulted in a cumulative loss of 235 million yuan. Additionally, holding 19% of the shares meant having only two out of five seats on the board, limiting its ability to influence management. Selling the stake would generate 555 million yuan in cash (with a net profit of 474 million yuan), allowing Shanghai Jahua to focus on its core brands (such as Liushen and BaiCaoJi) and its online strategy (Sephora focuses on offline sales, which differs from Shanghai Jahua's direction).
- Foreign Companies: They want full decision-making power to adjust their strategies more freely. Sephora's increase in stake to 100% is not about gaining control for the first time (it already held 81%) but about having the final say. For instance, Sephora China has recently made changes, such as adding 30 domestic brands to its product line (including Huaxizi and Jioshe), using WeChat for customer engagement, and reorienting its physical stores from focusing on quantity to providing a better shopping experience. With full ownership, such changes can be made without coordination with Chinese partners.
III. Cooperation Has Not Ended; It Has Just Changed from Being "Tied Together" to "Each Getting What They Need"
The end of equity ties does not mean a complete separation; rather, it signifies a shift to a more flexible approach:
- Chinese Brands Can Still Enter Foreign Channels, but Through Market Competition: Brands like Shanghai Jahua's BaiCaoJi and Yuzhe will have to compete with other brands for inclusion in Sephora's product lines, without relying on their shareholder status.
- Foreign Companies Obtain Local Capabilities Through Investment or Project Cooperation: For example, L'Oréal invested in Natrue (without taking over operations, but to access innovation capabilities), and Shiseido partnered with Boyu Capital to invest in a collagen company (to acquire technology). Chinese companies can also directly acquire foreign brands (such as Shuiyang Group's acquisition of the French company EviDenS), eliminating the need for joint ventures to learn from foreign partners.
IV. Trend: The Beauty Industry Enters an Era of "Precise Cooperation"
In the past, joint ventures involved a complete exchange of assets: foreign companies used equity for Chinese companies' local resources, and Chinese companies used their local resources for foreign brands' technology. Now, the approach is more selective:
- Want a Brand? Simply acquire it (for example, USHOPAL acquired Payot).
- Want Technology? Invest or collaborate on research and development (for example, Shiseido invested in Chuangjian Medical).
- Want Channels? Negotiate direct entry (for example, domestic brands entering Sephora).
Equity is no longer a necessary bond; it has become a tool to be used only when needed. Future cooperation will be more like building with blocks—each party adds what they lack, without the need to tie entire companies together.
In One Sentence
The era of "equity-for-localization" is over because both parties have grown. Foreign companies can operate in the Chinese market on their own, and Chinese companies can develop their own brands and technologies. In the future beauty industry, it will not be about one party relying on another; instead, it will be about cooperation based on mutual capabilities.