CHINA

China is an emerging market, and many multinational corporations have

expanded into China or are looking to do so. China is a huge market, has a
population of about 1.3 billion and recently became the worlds second largest
economy. This is partly due to the economic reforms that the government
undertook in 1978, which shifted China from a centrally planned into a market
based economy. Since then it has averaged about 10% GDP growth per year.
However, China is still a developing country, as GDP per capita is still well below
the EU average or the US. Chinas GDP per capita in 2012 was 9,055$, while the
US was 51,704$.

-BULLET 1: Opportunities and threats.

China has an increasing middle class with growing
incomes. That has created a strong demand for western
products and services. For businesses looking to offshore
production, China still offers low-cost labour. However, China has many threats,
such as the capital required to establish a brand and achieve a good market
position. The potential loss of IP is also a great threat; patent laws and other
property rights are far from those in developed countries. Furthermore, there is
a growing domestic competition, which is likely to be able to produce at lower
costs and be favoured by a government that is highly protective towards
domestic firms. The provinces of the East of China, where the population
concentrates in towns are where the greatest opportunities are, due to higher
economic development and disposable incomes. Businesses from abroad have 4
main approaches to China:
-Export to China.
-Buy from China.
-Produce in China.
-Enter into ventures with Chinese businesses.
Opportunities
For firms looking to expand to new markets exporting in China, producing in
China and entering into ventures with Chinese firms will be the best options.
Probably the least risky option is to export to China, however, transport costs
may be very high, and tariffs imposed by the Chinese government to imports
may result in the products/services being uncompetitive.
Producing in China is still a very good way of cutting production costs through
low-cost labour. Businesses in the manufacturing industry are attracted by the
quality and price of Chinas industry. If the products are then to be sold in China,
GDP: $9.8253 trillion (nominal)
GDP per capita: 9055$
Population: 1.35 billion
Population growth: 0.47%


there arent any transportation costs or any tariffs, making this option more
competitive overall. However, it may require a larger initial investment.
Entering into ventures with Chinese businesses gives the foreign firm immediate
consumer base, good market knowledge and experience and potentially
favourable government approach.
JLR has entered into a venture with Chinese car manufacturer Chery to produce
cars in China. Currently JLR sells the cars imported from the UK, with a huge
addition to price due to the tariffs. However, Chinese consumers are willing to
pay that price, so when car are manufactured in China, JLR could either reduce
prices and attract many more consumers, or keep them high as now and increase
profit margins dramatically.
Other Asian countries offer similar opportunities in terms of cheap labour, such
as Indonesia; however, non of those other economies have such great
infrastructures. Meaning that foreign businesses might choose China to produce
in even if wages are a bit higher, due to better quality and infrastructure.
Threats
The main threats created by China, are domestic firms that are expanding
globally, and that have very low production costs and are able to compete on
price with western businesses. Examples of such firms include Lenovo and
Huawei.
The province with the highest minimum wage is Shanghai, and that wage is only
262 $ per month. Compared to the UKs 1790$. Obviously, the cost of living in
each country is very different, however, the UKs salaries are still proportionally
much higher.
However, China is not only competing in price anymore. China excels in many
sectors, especially in energy producing and infrastructure. China has 28 nuclear
reactors operating and 20 more under construction. This is more than any other
country. China is also investing heavily on renewable energy cars. Clean cars are
said to be the future of the car market, and China is working to be a big player.
Lastly, another threat for foreign business, this time those operating in China, is
the development that is taking place. Chinese people now have higher standards
of living and are less willing to work for low salaries. Thus, salaries are rising,
meaning that businesses that have offshored are now seeing their profit margins
weaken.
China is moving into a more freely floating exchange rate. This is important
because it is likely to appreciate the Yen, which has been kept artificially low by
the government to ensure competitiveness and boost economic growth.
IP theft is a huge problem for firms that in their domestic markets enjoyed
supernormal profits arising from patent laws that created barriers to entry to
other firms. Chinese manufacturers are able to copy and produce protected
products at a lower cost, stealing market share from western firms.


In my opinion, the biggest threat is the move to a free-floating exchange rate,
which will offset part of the benefits of offshoring production to China.

-BULLLET 2: Risks and rewards involved in trading with or operating in China:

RISKS: Risk is the possibility of an event, change or occurrence having a negative
or harmful effect on the business. The majority of risks associated with trading
with China arise from major differences in culture, economical, legal, social and
technological.
Cultural: The Chinese culture is one of the oldest and most complex cultures in
the world. The culture of China has been influenced by Chinas long history and
by its diverse ethnic groups, which customs and traditions could vary greatly
between towns, cities and provinces. Despite all of its regional diversity, the
Chinese culture is dominated by the Confucian value system. It has been the
ethical and philosophical system in China since its foundation by Confucius 2000
years ago. It is a complex system of moral, social behaviour, political,
philosophical and quasi-religious thought that has had tremendous influence on
the culture and history of China.
Confucianism emphasizes on self-restraint, good relationship with others and
mutuality to promote social harmony. Confucianism advocates respect for
hierarchy and emphasizes loyalty to authority, to family, spouse and friends for
keeping society in good order. Confucianism also exhorts all people to strive for
being a perfect gentleman and be humaneness to all people.
Confucianism has embedded in peoples behaviour and business culture in China.
Many Chinese business people attach great importance to cultivating,
maintaining, and developing personal relationship (guanxi) before doing
business.
China has 56 ethnic groups. Han Chinese is the major ethnic group, and accounts
for 91.2% of the total population. The other 55 ethic groups are consequently
referred to as minorities.
China is a country of religion pluralism. Religions include Buddhism, Taoism
(Taoism), Islam, Christianity, Judaism and other smaller religions. Confucianism,
by many, is considered as quasi-religious.
In China, much of the business is arranged and negotiated at the dining table.
Since the Chinese prefer to do business with whom they know well, Dining and
drinking are the best media for building relationships and connections - 'guanxi'.
The degree of importance and the depth of the relationship with the guest can be
judged from the food and wine offered.
Corruption?: Emergence of the private sector inside the state economy in post-
Mao China has tempted CCP members to misuse their power in government
posts; the powerful economic levers in the hands of the elite has propelled the
sons of some party officials to the most profitable positions.


The politically unchallenged regime in China creates opportunities for cadres to
exploit and control the rapid growth of economic opportunities; and while
incentives to corruption grow, effective countervailing forces are absent.
Broadly defined, three types of corruption are common in China: graft, rent-
seeking, and patronage.
Business legislation: The law and regulations prohibit or restrict the
establishment of WFOEs in certain industries. The Ministry of Commerce
(MOFCOM) has overall responsibility for approving joint ventures and for issuing
the approval certificates. MOFCOM is responsible for the examination and
approval of WFOEs. Local governments are also authorised to approve these
enterprises, provided certain conditions are met.
As local governments are also entitled to approve WFOEs, this usually results in
inconsistently enforced legislation which can lead to unfair competition.
IP Theft: For the Western firms, the No. 1 problem with Chinas economy is
probably intellectual property theft. Technology companies, for example,
continue to notice Chinese government agencies downloading software
updates for programs they have never bought, at least not legally.
The second effect is that illegal theft of IP is undermining both the means and the
incentive for entrepreneurs to innovate, which will slow the development of new
inventions and industries, it said.
Infrastructure: While infrastructure in the wealthier provinces of China is very
good, infrastructure of inland China is poor, so the market is reduced due to the
inaccessibility of those regions. On paper the markets are huge, but in reality,
large portions of them arent easily accessible, due to geographical and
infrastructural reasons.
REWARDS: The expected return, which is either financial, or other, based on the
risk taken.
International expansion in general can be benefiting simply due to the increase
in output, which in turn can lead to economies of scale. For example, marketing
costs such as advertising will be spread over much larger outputs.
Furthermore, a business that expands to china will also be risk diversificating, as
problems in one market, such as the domestic, can be offset with the profit of
another market, such as China.
Rewards for businesses buying from China: Low exchange rates mean that
goods and services imported from China are proportionally lower. This will
allow firms importing from China to be very price competitive once in their
domestic markets.
Unlike with FDI, the Chinese government will not place any barriers to foreign
firms buying from Chinese firms.


Rewards for businesses producing in China: Producing in China will
significantly reduce labour costs, as well as labour legislation. This gives the
given firm a competitive advantage, as it can compete in price keeping profit
margins.
Furthermore, producing in China will open doors to the Chinese market, as there
will be no import tax to be paid, allowing the firm to compete in China as well.
Rewards for entering into ventures with Chinese firms: Those include a good
knowledge of the Chinese market, as well as better relationship with the
authorities, and possibly an existing customer base. Furthermore the required
initial investment will be much lower, and the risk will be diversified.

-BULLET 3: Factors affecting success or failure involved in trading with or
operating in China:

Market research: Any deficiency can lead to wrong decisions over markets,
entry strategy, marketing mix, or inaccurate forecasts.
Marketing mix: A mix that takes into account cultural, economic and legal
differences is vital for success. M&S did not take into account differences and had
to pull off from the Chinese market due to disappointing performance.
Competitive advantage: Through cost leadership, differentiation, focus. In my
opinion differentiation will be the best option, as it will be very hard to cost
compete with Chinese firms. JLR has very high prices but is still very successful
due to its great differentiation.
Protection of IP: If achieved, provides long-term sustainable competitive
advantage. If not, failure to achieve targeted profits or sales. Some firms may find
it easier to protect IP, such as pharmaceutical companies, due to the complexity
of their products, but some firms such as IKEA (manufactured goods) may find it
really hard to do so.
Due diligence: When appointing intermediaries, partners, managers and
staff. Should the firm import staff from their domestic labour market or should it
recruit locals. It really depends on the industry the firm is operating, if the staff
are to have a lot of contact with customers, then it is probably better to employ
locals, as they will provide better customer service.
GSK doesnt need to employ locals as they only do business-to-business
transactions, mainly with the Chinese government. On the other hand, firms like
JLR or IKEA with actual stores will need to employ locals in order to successfully
communicate.
Incremental approach: To avoid over-trading, firms may try to undertake a
step-by-step approach to the Chinese market. That could be done by exporting
initially, and as the market share grows, maybe enter a venture, or start
producing in China. This reduces risk and enhances the chances of success.


Favourable business environment: Changes in PESTEC can affect success.
If the economy of China went into a recession, many foreign firms that have
expanded would suffer, as the already-low disposable incomes of the Chinese
household would become even lower.
Political instability can also lead to a higher savings ratio, reducing overall
consumption and resulting in a worsened business environment.
Technological improvements can be positive or negative; depending on which
industry the firm operates. If it operates in the technology industry, and another
firm makes the improvements, market share will suffer. However, if the firm
operates in another sector, technological improvements may lead to lower
average costs, increasing profit margins.

-BULLET 4: Advantages and disadvantages of the ways in which a firm may
operate in the Chinese market:

1) Exporting: The selling of goods and services produced in one country in
another country.
2) Indirect exporting: Selling to or through an intermediary, usually agents or
distributors based in your target export market.
3) Direct exporting: Direct exporting involves selling directly to your target
customer in market.
4) Licensing: Agreement entered into by the owner of a property or activity
giving permission to another to use that property or engage in an activity in
relation to that property. The property involved in a licensing agreement can
be real, personal or intellectual.
5) Franchising: Arrangement where one party (the franchiser) grants another
party (the franchisee) the right to use its trademark or trade-name as well
as certain business systems and processes, to produce and market a good
or service according to certain specifications.
6) FDI: An investment made by a company or entity based in one country,
into a company or entity based in another country.
7) Representative office (RO): Representative Offices are non-legal entities
representing their parent companies overseas. They are established to act
as a liaison office of their parent companies.
8) Joint venture: A business arrangement in which two or more parties agree
to pool their resources for the purpose of accomplishing a specific task.
This task can be a new project or any other business activity.
9) Equity joint venture: An equity joint venture (EJV) is an agreement between
two companies to enter into a separate business venture together.


10) Contractual joint venture: A contractual joint venture is an arrangement in
which two parties come together for a particular business project and sign a
contract outlining the terms under which they will work together.
11) WFOE: A Wholly Foreign-Owned Enterprise (WFOE) is a limited liability
company that is entirely funded by one or more foreign entities. WFOE is the
most popular form of foreign invested enterprise (FIE) in China because it
allows for the most freedom in business management.

Exporting to China vs. Investing in China:

Exporting:


Investing:


Direct vs. indirect exporting:

Direct:


Indirect:


E-commerce with Chinese consumers: China already has twice as many
Internet users as the U.S. and Japan combined. That is a huge market, which
offers great opportunities to firms willing to sell online.
Advantage
s
Not much
initial
Less risky
than
Small or
no sunk

Easier to
exit.
Disadvant
ages
May
involve
Import
taxes
Far away
from
Advantage
s
Proximity
to
Higher
flexibility.
Lower
transport

Better
customer

Disadvant
ages
High
initial

Higher
legislation
Hard to
exit.
Advantag
es
Higher
potential
Greater
control.
Higher
consumer
Better
feedback
Greater
flexibility

Disadvant
ages
More
time and
More
expensive

Responsi
ble for
Longer to
develop
Advanta
ges
Less
risky.
Minimal
involve
Allows
to
Limited
liability.
Disadva
ntages
Lower
profits.
Loss of
control.
Further
from the
Intermed
iaries


But this digital population must be approached quite differently than in the West
and even other big emerging markets, such as Brazil, India, Russia, and
Indonesia. China's leading Internet companies know their habits well.

Licensing:


Franchising:
Foreign franchises face opportunities:
Many trends indicate that the China market is ripe for franchises.
-The consumer class is expanding fast.
-Western brands are highly regarded. Many consumers perceive Western
brands as providing quality, convenience, and customer service. This is true
especially in the retail and food sectors.
-Western franchises bring new and modern business systems.
-Second- and third-tier cities are open to franchising.
Successful western franchises in China include: McDonalds, KFC, Burger King,
and Papa Johns

Representative office:



Advantage
s
Less time
and
Limited
liability.
Not much
work

Instant
market

Disadvant
ages
Loss of
control of

Not as
profitable
Hard to
properly
Advantages
No registered
capital required.
Easy to control. Quickest and
cheapest way to
set up.
Disadvantages
Limited business
activities that it
can perform.
Unable to
employ staff
directly.
Higher office
running costs.
Advantages
Franchisors
offer

Franchisor
has a
Existing
consumer

Overall less
risky
Disadvanta
ges
Lower
profits.
Partial loss
of control.
Initial fee
and

Dependant
on other
Can be
closed by