China Market Opportunity - Term Paper Example

?Executive Summary This report considers possible factors that an European based refrigeration company would want to consider when setting its production base in a new country. The two proposed countries, namely China and Brazil are examined in terms of the existing market conditions as well as in terms of Porter’s diamond analysis. After looking at all the factors, China has finally been selected as a place for the new setup. The decision is made considering many factors but major factors included cheap labor, cheap electricity and the existence of supporting industries. Setting up a foreign subsidiary has been decided as a mode of entry. Key Findings Regarding Market Opportunities in China China is one of the strongest economies of the world. According to statistics on the Chinese market, the number of urban households owning a computer stood at 27.8% in 2003 compared to just 2.6% in 1997. Speaking of white good manufacturing, it’s something that’s being carried out on a very grand stage in China for a vast amount of time now (Access Asia Limited 2006). White goods like washing machines and refrigerators have been possessed by most of urban Chinese population since the mid of 1990s. However, as such they haven’t been found in much quantity in the rural areas of China even though the according to the recent studies, the rate of such purchases by rural households has witnessed a sharp increase. The Porter’s diamond is often used to explain why certain countries enjoy an exceptional reputation for certain goods and services they produce. We all know Germany is famous for car manufacturing, Japan for its cameras and game stations the UK for its financial services. The Porter’s diamond helps us explain why all this happens. One of the determinant factors of the Porter’s diamond is factor conditions. China is an over populated country. The population of the country has increased so much that there are a lot of people roaming around jobless. In such a demand supply mismatch, labor can usually be hired at cheap rates. Refrigerator manufacturing usually requires labor to interconnect parts and oversee the running of machinery. A lot of money can be saved in term of hiring cheap labor. Another of the factor conditions that favors the production of electronics like refrigerators in China is the weather. The warm Chinese weather is perfect for the condensed gas found in the refrigerator’s condenser. Too hot or too cold weather often causes problems in the condenser and extra cost has to be incurred to refill the leaked gas. Demand conditions are the second factor in Porter’s diamond. There would be obviously no reason to produce goods and services where there isn’t a demand for such products. China is the most populous country in the world and with an ever increasing population, the demand for refrigerators can be foreseen to be high in the future. In such circumstances setting up a refrigerator manufacturing plant directly in China would result in an increase in profit and lowering of costs. Cost would be lowered as they refrigerators be manufactured locally and therefore wouldn’t have to imported and hence cost reduction could be experienced in the form of saving on import related duties and taxes. Hubei is a probable location for our European based company to set up a refrigeration plant. The Hubei province is located in the middle of China and is also referred to as the natural distribution hub of China. The province of Hubei has slightly more skilled labor as compared to other parts of the country and has already well-established supply chains. The province is already home to a lot of companies ranging from telecom sector to electronic appliance and computer equipment makers (Joint Environmental Markets 2000). Another factor from the Porter’s diamond is whether there are related or supporting industries or not. It is a generally well known fact that that industries often benefit from each other if they are located in the vicinity of related and supporting industries. In the Chinese province of Hubei, electronic suppliers overall are of a smaller size and have a limited production capacity. However this province has been in the rapid phase of development as can be seen from the government’s initiatives. Hubei is characterized as a new battleground for white good electronic appliance makers to set up an upstream supply chain and compete with others for part and component orders. Other than Hubei, Bohai and PRD regions are also clustered with electronic appliance makers in China. There are loads of companies in Bohai that produce refrigerators as per the market demand. Another good point to be noted here is that there are inland enterprises in these provinces that produce electronic parts and supply services that are needed to meet the ever increasing input demand for electronic appliance makers including refrigerator makers (Aldrich M & Rooth A 1999). Loads of foreign companies have decided to set up their plants in China owing to many different factors. Some are attracted to the local supply market, some to the cheap labor prices and some to cheap overall operational costs. All this has increased the credibility of China as a major electronic appliance producer. The final point from the Porter’s diamond focuses on firm structure, their strategy and rivalry. Rivalry is a very important concept here. Had there been a monopoly over refrigeration making, then surely prices would have been high as the monopolist would seek to make maximum profit. However, a little bit of rivalry / competition is always good. Such a competition encourages suppliers to maintain quality and keep prices low so that they can thrive easily. There are loads of refrigerator making companies in China and there is a slight amount of rivalry between them. That’s the reason why prices are kept low and high quality of production is maintained. Key Findings Regarding Market Opportunities In Brazil Brazil is one of the few countries that have continued to prosper in the current times despite the major economic recession throughout the world. The electronic industry in general and the refrigeration industry in particular experience a highly competitive environment in Brazil. If we pay attention on the import and export sector of the Brazilian economy, Brazil’s imports of consumer related goods accounted for 17% of its overall import. The country is need of a local refrigeration setup base as it the import figures show that bulk of its electronic parts and components were imported from abroad to fulfill its local requirements. If we look at the current refrigerator related part procurement in Brazil, then it can easily be figured out that most of the spare parts are imported from Hong Kong. One of the main factors to be considered in the Porter’s diamond is the existence of related and supporting industries. Clearly, there is no supporting industry in Brazil that could help in the manufacture of refrigerators. Research shows that a lot of internationally recognized electronic appliance making companies have set up their production related activities in Brazil. Some major business players with production setups in Brazil include Sony, Motorola, Samsung and Huawei. However, the overall production level is done is a huge level with many other small suppliers coming into play. A possible reason why international electronic giants seek to set up their manufacturing concerns in Brazil could be linked with the government’s initiative to increase the overall digitalization level in the country. This is the reason why the country has witnessed an increase in telecommunication and computer related equipment over the recent years. A lot of saving cum profit making could be done if refrigeration unit makers do set up their production bases in Brazil. The costs of the final product would be obviously low as import duties would not have to be paid when production is done locally and hence the final product price would go down. And then basic economics comes in, when prices are low customers would obviously prefer a cheap product over en expensive one provided proper production quality has been maintained. Local production of almost every good is encouraged in Brazil. More than fifty percent of Brazil’s total electronic and machinery related items are imported in the face of components as there are unimaginably high rates of taxes on import of fully made machineries and equipment. The common trend all across Brazil amongst electronic appliance makers including refrigerator makers is, to import minor parts from abroad, carry out assembly lone procedures onto them and put them in the finished product state to be all ready for sale. After such a process is carried out by Brazilian factory owners, the products can be labeled “Made in Brazil”. Brazil also offers lots of protection to its local production industries. It has imposed excessively high import duties and anti-dumping charges on import of household appliances to deter the imports of household appliances into the country (Joint environmental markets 1999). This is a very positive signal for our European refrigerator maker to setup a base in Brazil as this would mean that the existing laws would produce competition from foreign refrigerator makers and hence we would only have to compete with the already existing refrigerator makers in the country. Main Conclusions On the basis of the information gathered and listed under the Key Finding heading above, the following recommendations can be made for our European based refrigerator making client: A local production plant should be setup in China as early as possible. The plant should be set up in the Hubei province which has lots of natural resources. Refrigerator making units require a mix of labor and automation (Parker & P.M. 2006). Hubei would be the most sensible place throughout China as it has a vast supply of skilled labor. Compare this to other areas of China and we will only be able to find unskilled or semi-skilled labor which is almost useless for overseeing the refrigerator making process. As far as automation is concerned, it requires loads of electricity power which definitely costs a lot. However, owing to its location, industrial units all throughout Hubei are supplied low cost electricity which is produced by the dams situated in the Hubei which are fed by the rivers flowing into the province. It is easy to repatriate bulk of the profits make by the European based refrigerator maker in China to its home country. Compare this with Brazil which has very strict laws for repatriating money back to the European home base. Corporate tax rate in China is way less than that compared to its Latin American competitor, Brazil. Low tax rate in very simple words serves as in incentive to make more profits as in such a case bulk of the profits would be retained by the company rather than given away to tax authorities. There are a lot of ways through which we can set up our production base in China. Possible options include: Licensing Joint Venturing Mergers Acquisitions Wholly owned foreign subsidiaries All of these modes have their advantages along with their disadvantages. However, setting up a wholly owned foreign subsidiary would be the best option. There are many reasons for this selection, but few important ones are: As with franchising and licensing, there would be no risk of change in production quality. Quality could be controlled and production remains with the parent company. No trade secrets or profits would need to be shared as have been in the case of licensing, joint manufacturing and mergers. There would be familiarity with the new operation as the company already has one plant of the same category. Problems would’ve arisen in the case of acquisition where new technology would first have to be learnt and then used. Bibliography Top of Form ALDRICH, M., & ROOTH, A. (1999). China: Market Opportunity; Investment Threat. Telecommunications. 33, 168. Top of Form JOINT ENVIRONMENTAL MARKETS UNIT (GREAT BRITAIN). (2000). China: market opportunity brief. Joint Environmental Markets Unit. Bottom of Form Top of Form JOINT ENVIRONMENTAL MARKETS UNIT (GREAT BRITAIN). (1999). Market opportunity brief: Brazil. Joint Environmental Markets Unit. Bottom of Form Top of Form PARKER, P. M., & PARKER, P. M. (2006). 2007 report on manufacturing major household-type appliances excluding cooking equipment, refrigerators, upright and chest freezers, and laundry equipment, the: world market segmentation by city. ICON Group. http://www.myilibrary.com?id=162932. Bottom of Form Top of Form ACCESS ASIA LIMITED. (2006). White goods in China: a market analysis. Shanghai, China, Access Asia Limited. Bottom of Form Bottom of Form Read More