Research

Point
Theory, Examples and Evidence
The extent to
which China
creates
opportunities
and threats for
businesses
Opportunities

China accounts for over 20% of global demand for luxury goods

China accounts for 97% of global rare earth trade

The worlds second largest economy

Forecasted to overtake the US in 2014 or 2015

Economic growth is still fast - The worlds fastest growing major

economy

Average of 10% over the last 30 years

Forecasted to grow by 7.5% in 2014

Rise in middle class

Increase from 175m in 2011 to 500m in 2020

May be 1 billion middle class consumers by 2030 - over a third of global

middle class population

Average disposable income in China has risen from $280 in 1980 to $3000 in
2010

Urbanisation - over 160 cities with over 1 million people

Rapidly emerging market segments

Threats

Rising production costs

Wages risen from $280 in 1980 to $3000 in 2010

Chinas labor costs in the urban manufacturing sector reached $4,579 per
employee per year in 2010, more than doubling from just $1,534 in 2003

Rising labour power - creation of trade unions

Risk of IP theft / counterfeit goods

Threat from cheap substitutes - EJ Payne

Many knockoff barbie dolls in China - target market do not care

AMSC - software stolen from customer

Dyson - copycats costing the rm 10m a year in legal costs

However - The number of successful lawsuits have gone up from 27000 to

83000 in 2012

Growing competition from domestic rms

Alibaba, China Mobile

Competition may not be fair - biased Government

Chinese Government allocate the best plots of lands to domestic rms

The risks and
rewards
involved in
trading with or
operating in
China
Risks

Risk of loss

Tesco - 9 years of losses and eventually had to sell into a joint venture

Ebay - invested $100m into China strategy with little return - only

Risk of IP theft / transfer

Dyson - Spent $3m on legal costs against Chinese rms who had stolen IP of
their Blade products

BMW lost their lawsuit against a Chinese car company who they claimed
copied their X5 model

AMSC - Sinovel were their largest customer with over 80% of its revenues
from them. Stole their design and stopped purchasing from AMSC - 40% of
shares gone in one day, 80 within 2 months

Reputation risk - lack of CSR

GSK caught up in allegations of corruption in the Chinese healthcare system

Nestle and Danone accused of price xing in the Chinese baby-milk market

Nestle forced to slash prices by up to 20%

Competitive risk - domestic competition

Alibaba - beat Ebay and Amazon - sales total more than both companies
combined

Rewards

Revenue and prot growth

Yum! brands now generate more than 50% of global revenues and 35% of
prots from China

Starbucks - by 2015 China will be their ins largest market behind the US

BMW and Jaguar Land rover - China is now their largest market

JLR sales grew 71% in 2012

P&G - revenue from China has grown 50% in the last 3 years and one billion
Chinese consumers currently use their products

Samsung - revenue form China grew 80% in 2013

Source of high quality and low cost supply

Wages are still lower than developed markets although they are rising

Productivity in China is increasing hugely

Base for further international expansion

Evaluative points

The risks of China can be reduced by the method of entry

e.g. joint venture, exporting etc

Depends if the business relies on China

Ebay - only 2% of revenues from China

AMSC - two thirds of revenue from China

Depends upon how well the risks can be limited

How effective is the strategy?

Tesco - changed to a joint venture

KFC - strategy of no franchises was successful

Is there an opportunity cost ?

Expansion in other emerging markets?

The unpredictability of the political and legal environment only adds to

the future risk


The factors
affecting the
success or
failure of
businesses
trading with or
operating in
China
Success

Localisation - adapting the product or strategy to meet needs of Chinese

consumers

IKEA made slight modications to its furniture to meet local needs, and store
layouts reected the typical sizes of apartments and also included a balcony

Wal-mart adapted their strategy to become wholesaler instead of retailer

KFC - adapted their menu to meet needs of the local area

Choosing a suitable JV partner

JLR Chery

Contrast - Danone Wahaha joint venture failed because of conict between

the executives

Brand reputation

Intangible benets that the rise in the middle class aspire to have -
aspirational

e.g Cars

JLR sales rising massively - even though the price of their cars is
extremely high, the consumers are willing to buy because of the intangible
benets of owning the brand

e.g luxury goods

China had 28% of global demand for luxury goods in 2009

Is likely to surpass Japan has the largest luxury goods market in 2014

Prepared to invest for the long term

This means building scale and developing market understanding gradually

and accepting initial losses in order to grow market share

IKEA, Starbucks and Unilever all spent time building brand awareness and
thinking about the long term

Contrast:

Mattel - went for rapid expansion and opened high store in Shanghai with
no brand awareness - closed within 2 years

eBay - invested $100m with the aim to dominate the market. Did not adapt
to meet the needs of their target market and lost out to Alibaba, who met
the needs of their consumers

M&S - poor market research into the market and no localisation of their
products

Failure

Loss/theft of critical Intellectual property (IP)

AMSC did everything right but still failed due to IP theft (see Risk of IP theft /
transfer, bullet point 2 above)

Failure to localise products to suit the domestic market

Mattel with barbie

M&S didn't localise products

Not using local management and expertise

Underestimating domestic competition

eBay and Amazon with Alibaba

Insufcient market research

M&S

Underestimating the Chinese government

Evaluative points

Can the potential potential rewards justify the subsequent risks?

Is it too late to succeed in China or can you learn from those who
succeeded or failed?

Which market entry strategy is best to reduce risk?

The
advantages
and
disadvantages
of the ways in
which
businesses
might operate
in the Chinese
market
Joint ventures
Advantages

Shared risk and investment

Partner should provide some benet

JLR and Chery - Distribution network and now a new production plant and
R&D facility - important because production costs will be cheaper for JLR -
increase prot margins on cars sold

Local market knowledge and insight

May help gain government approval for market entry

Foreign banks were only allowed to enter China with a joint venture

HSBC and Bank of Communications

Disadvantages

IP could be at risk

Could create a domestic competitor if JV goes wrong

Danone and Wahaha - Wahaha became huge because of JV but then they
had a commercial dispute

More difcult to exit, particularly if relationships with partner become

strained

Local production
Advantages

Flexible and many options

Closer to end-user/customer

Faster delivery time to customers

Distribution and cost benets

Jaguar Land Rover are opening a factory in China through their joint venture
with Chery automobiles.

No import tax which makes up most of the cost of their cars - prot margins
hugely increase
Disadvantages

High initial investment

Higher operating costs

Exporting
Advantages

Lower operating costs - no overheads due to property in China

Best way to protect IP

Easier to exit / stop

Disadvantages

Important restrictions

There are currently high important tariffs and quotas when exporting to China

JLR price of their cars are much more expensive than in the UK due to
higher costs




The ethical
and
environmental
issues
involved in
trading with or
operating in
China
CSR / Ethical issues
Corruption

Rife at all levels of Chinese society, particularly in Government

Fine line between corruption and Guanxi- the Chinese model of

relationships

The Government has recently announced an anti-corruption campaign

Nestle and Danone - investigated into alleged price xing in the Chinese baby-
formula market

GSK under investigation into using travel companies to bribe hospital doctors
and ofcials with almost 300m or 3bn yuan

Foxconn

In 2010, an estimated 18 workers attempted to commit suicide with a

minimum of 14 deaths

In 2012, there was a mass suicide protest when 150 workers threatened to
jump off their factory roof, for 2 days

At their agship store in Longhua, 5% of their workers quit every month

Apple, as one of their customers, requested immediate audits on Foxconn

factories

JP Morgan under investigation for allegedly hiring the children on elite Chinese
bureaucrats in return for access to the market

The luxury goods markets in China is the 2nd largest in the world, after Japan,
and has been hit hugely by the anti-corruption campaign because many of the
sales were to buy goods for government ofcials. Since the crackdown, sales of
wristwatches have fallen 96% and sales of suits have fallen 60%
Environmental Issues

Growing air and other pollution

Respiratory and heart diseases related to air pollution is the biggest cause of
death in China

About 40% of the water in the countries river system is unt for human
consumption

Coca Cola had were ordered to shut down one of its plants in China after
nding its products were contaminated with chlorine

Water scarcity

Evaluative points

Chinese people are increasingly concerned about income equality and

sustainability

The concept of trust is crucial in China

China is still an emerging market so ethics and CSR in China is still

developing
How business
strategy might
be affected by
developments
in China
Key developments to consider
Political

China still needs to become more open in order to sustain economic

growth but is still committed to protection and support of domestic rms
and markets - still communist

Regulations (see legislation below)

Economic

Growth is slowing because of the more rebalanced economy focusing

more on consumption and less on infrastructure development

China is now looking to expand its investment outside of domestic

markets

Social

Increasingly urbanised population

Ageing population

Rise in middle class

These three factors may affect the type of products that businesses sell in
China - target the changing demographics

Technological

Signicant increases in R&D by domestic Chinese rms will drive

innovation from these companies

Multinationals will have to raise innovation in order to compete - will affect

their strategy

Legislation

Greater legal and regulatory control from the Chinese Government

May have to adapt strategy to meet the new regulations

Ethical

CSR in China is becoming much more important

More anti-corruption laws

Environmental

Pollution - much more closely supervised and monitored by the

Government

Will rms have to adapt their strategy to become more environmentally

friendly?

Competition

Domestic rms in China increasingly able to compete against

multinationals both in China and in international markets