Perspectives of the British Clothes Wholesaler in China - Case Study Example

A report on the possibility and possible problems of doing business in China CONTENTS Page Executive Summary 3 1.0 Introduction 4 2.0 How to enter the Chinese market 4 2.1 Joint Ventures 2.2 Wholly Foreign Owned Enterprises 2.3 Representative Offices 3.0 PEST analysis 6 4.0 Conclusion 7 5.0 Recommendations 7 Bibliography 8 EXECUTIVE SUMMARY Due to the extraordinary growth rate of China, and with the fact that it now has the chance of being the next economic power, many foreign investors have found their way there. It is because of this growth that a UK clothes wholesaler, Visage, has made plans to move their manufacturing company to China in hopes to cut the costs of production, yet still hoping to increase their sales overseas. There are only a few ways that a foreign company can achieve an establishment in China, and those include joint ventures, by means of representative offices, and enterprises that are already foreign-owned. Out of these, Visage would best benefit from involving themselves in a joint venture with their Chinese business partners, as this would allow them to exploit their knowledge in regards to the market. They would also be capable of using the connections that they have made with influential partners. Within this report, we examine the macro-environmental factors that have played a role and influenced the success of Visage. The factors at play here are political, technological, economic, and sociocultural. While the political aspects of it can affect the running of the business, it can also help to establish good business relations, which is the key to the business having support and success. Concerns can also be found within the stability of the economy, despite recent rapid growth. It is something that Visage should stay wary about. Fortunately, one of the benefits that Visage could see if they moved their manufacturing company is that resources can be bought at a lower price. Should Visage choose to have investment in China, they would also need to create a greater research scale into the economy to avoid the aforementioned problems. Entering into a joint venture with an already local Chinese company is the best way to go about doing appropriate business in China. If this should be the case, then heavy research must be done to assure that they are getting the best partner, one who already has strong connections with government officials and has already established a trusted company. Should Visage choose to do their trade in China, they would need to consider targeting the middle class, as they have the purchasing power and the will to spend money on quality items. 1.0 INTRODUCTION A UK clothes wholesaler, Visage, is interested in expanding its business prospects by moving to China. Deciding to follow the footsteps of their competitors, Visage, which currently domestically manufactures their goods, has decided to look into the possibility of outsourcing in China. As China has become one of the greatest economic powers, it would be a perfect place for Visage to consider investing. In this report, the possible problems that Visage may face if they moved to China will be outlined. It will also cover the macro-environmental factors that could also affect the outcome of Visage’s success. With the aid of research compiled from journals, official government data, advisory websites, and textbooks, this report will compose of the findings and conclude with a recommendation of the actions that Visage should take. 2.0 How to enter the Chinese market There are three ways that a foreign firm can do business in China: 2.1 Joint Venture A joint venture is when a partnership is created between a foreign firm and a local Chinese business. A joint venture allows both parties to have access to the benefits that come to them, though they are also capable of exploiting the knowledge that the other firm may have. The foreign firm can benefit from the fact that their Chinese partners will have a better understanding of the Chinese economy, and will already have strong connections with government officials, allowing them to receive preferential market treatment. It is through the government that joint ventures are able to get funding. While there are great benefits to a joint venture, there are also certain risks. Before fully agreeing to a joint venture, a thorough check should be made on the Chinese companies. Though it is tedious and difficult to obtain the wanted information, it is still possible to get advice from specialist organisations. One other risk of being involved with a joint venture is that there is the chance that the company may lose control and possibly lose profits. Participating in a joint venture is a good option for medium-sized firms, as less capital is required and there will be supervision as the company enters an unknown market. 2.2 Wholly Foreign Owned Enterprise (WFOE) A wholly foreign owned enterprise is entirely owned by foreign companies, and there are no knowledgeable exchanges, but numerous legal procedures. Despite the fact that there are great benefits in having complete ownership of a business, the process involved in establishing a presence is time and money consuming. This method is best used in regards to larger businesses that have a lot of capital to invest and expand. The extra costs would accumulate around the required external expertise. 2.3 Representative Office (RO) A representative office consists of agents that act as representatives of the foreign company while in China. It is, technically, an office located in China that is run by representatives and the work is done in an administrative manner. The company can benefit from this as research and marketing can be tended to for that company. 3.0 PEST Analysis In order to understand the possible problems that Visage may encounter when going to China for business, it is vital to conduct an analysis on the external factors that may negatively affect it. 3.1 Political Factors China, being a democracy that is run by the Communist Party, consists of a government that is infamous for its being corrupt and having huge, and often negative, influences on business practices. While China is a politically stable country, it still has the ability to change the business laws as the needs of the economy change. The corruption begins as soon as a business is set up, and only those who are close with government officials are able to benefit from preferential treatment. Before setting up a business, one must get permission from the Party and they should also become dependent on the connections that they have, including those with Guangxi. By the influence of the government, the regulations are constantly being changed in the world of business. Unfortunately, the businesses have very little say in what happens, and must put up with some of the negative effects that they encounter, which may hinder growth plans. Furthermore, organisations that are backed by government support often have an advantage over the organisations that do not. 3.2 Economic Factors If China’s current growth rate (11.4%) continues as it has been, then by 2040 it would become the next economic power. Unfortunately, this can be viewed as possible unemployment to foreigners (6% in urban areas), which may continue to have poverty remain a problem. While unemployment may be good when looking for a ready and available workforce, many of these unemployed are also unskilled in the needed tasks. In order to keep Chinese goods cheap and affordable, the Yuan is kept weak in regards to the US dollar. This can help to cut costs if foreign companies decide to use Chinese resources, and can be a great asset. Unfortunately, domestic products would become cheaper than the foreign goods actually sold in China. If the activity of borrowing continues and is not monitored closely enough, the level of NPL’s decreases and the economy is put more at risk for recession. The aforementioned factors show that, despite China having some strategy to success, the economy is still too dependent on the decisions set forth by the government. 3.3 Sociocultural Factors As the Chinese are extremely cultural-oriented in everything that they do, including business, a foreign company must learn to adapt to their culture also. Some of the differences between foreign companies and the Chinese can vary from how one shakes hands to how negotiations are made. To ensure that no offence is possibly caused, it is vital that the foreign party understand and learn these differences. Language is another vital factor in play with the Chinese and a foreign establishment. The main language of the Chinese is Mandarin, though many businesspeople are fluent in English. All the same, the foreign party should still have a representative that is knowledgeable in the main Chinese language. Not only does this make dealings easier, but it shows respect for their culture. Foreign investors must be aware that the wealthy middle class is steadily growing and is becoming the most influential of the other classes. This factor is the most vital to keep in mind, especially during the forming of contacts. China takes greater care with their business ethics than people in the Western world, and it is clear to them what a real relationship is compared to a fake one. 3.4 Technological Unlike in the west, the technology of the Chinese is not as advanced, causing the productivity to be low, almost as much as 4% of the production in the west. If a company were to move their manufacturing to China, they would have to invest in greater technology to stay on top of their production. 4.0 Conclusion The most sensible choice for Visage to take if they want to expand their productivity in China and still be able to keep things at the lowest cost possible would be if they involved themselves in the joint venture. Though it would take them time to create working relationships with their Chinese partner, it would be worth it in the end as the Chinese partner would help processes to be sped up. A WFOE is not a good option for Visage as it costs too much for a company of Visage’s size. This is only increased by the lack of understanding they have with China. Advisory costs would have to be added if this option were to be picked. An RO would be even less of a benefit for Visage. One of the most important things that Visage has to take into consideration is that the Chinese government has all of the power it needs to affect the success that a business can have, using regulations that they set up and by doing favours for others. Visage would first need to make sure that they have the government’s approval before doing anything else. Despite the fact that the Chinese economy may seem to be in a high position with equally high growth rates, it still wouldn’t hurt to practice caution and to not have so many expectations. The organisations that are backed up by the government are more easily funded and this can be a downside to the future of the economy. Though things may seem at a negative position, opportunity can still be found in China. The growing rate of the middle class is constantly being hit by the luxury market and would be able to handle it if products were charged at a high price. The main thing is making sure that the right partner is chosen. Picking a partner that has good connections with the government is the best way to go, as the government controls a lot of what takes place with businesses. 5.0 Recommendations Do heavy research into the China market and if things look like they would work out, move out there. Find the perfect Chinese partner to become involved in a joint venture with. Make sure that this partner has plenty of connections with the appropriate government officials and work off of that partnership. Thoroughly understand the Chinese culture and the importance of business relationships. Avoid possibly insulting their culture by doing something that goes against how they work things. For this same reason, it would be smart to have a representative that is bilingual. Before jumping straight into trading, begin with manufacturing to help gain an understanding of the market. BIBLIOGRAPHY Changing lanes in China: foreign direct investment, Local governments and auto sector development Thun, E. Cambridge University Press, 2005. China and Britain: the potential impact of China’s development De Burgh, H. The Smith Institute, 2005. Doing Business in China, 2nd Edition Ambler, T. Witzel, M. Routledge Cuzon, 2004. International investment strategies in the People’s Republic of China Luo, Y. Ashgate, 1998 www.kwintessential.co.uk www.cbbc.org www.china-window.com www.cia.gov www.wikipedia.com Read More