Doing Business in China - Case Study Example

Doing Business in China Table of Contents Terms of Reference 2 Country Analysis 2 Conclusion 6 Bibliography 7 Terms of Reference The proposed idea to my employer, Global Ventures PLC, is to establish a furniture company in the furniture industry. My idea is to offer the customized contemporary furniture items. The aim of this company will be to meet the needs of the customers who get bored of furniture items very soon and want to frequently change furniture items. The furniture will be ready-to-assemble, ready-to-carry and low cost. In consideration to the growing environmental concerns, my proposed company will be launched as a socially responsible organization in China, which will discourage the frequent replacement of furniture by offering a variety of customized options in each furniture product. From the criteria set in the industry analysis, some essential and desirable characteristics have been identified for the selection of the country. The first essential characteristic of the country is availability of skilled labour because of the labour intensive nature of furniture industry. Second, to establish the production units closer to the customers, the raw material should be easily available. Third, to offer competitive furniture prices, access to cheap labour is another essential characteristic. Fourth, access to automated technology is essential in the selected country to enhance the efficiency of operations. Another essential characteristic is the availability of a number of suppliers in the market to keep the bargaining power of suppliers low. The first desirafuble characteristic identified for the selected country is the stable economy to cushion the impact of recession. Second, the country with high spending power of consumers and quality of living style will be preferred. Third desirable characteristic is the less competitive market structure or less number of international brands. Finally, a country with no protectionist policies will be a suitable option. This report has been designed for Global Ventures PLC and it aims to justify the launch of proposed venture in China. Country Analysis The country in which I have planned to start the proposed venture is China. I have found that China actually fulfils most of the essential and desired characteristics which I have identified. As discussed previously it is essential that the selected country has highly skilled labour, labour in China in furniture industry is highly skilled. The macro-economic analysis of China has been done to analyse the impact of political, economical, social and technological factors. The government control is significantly dominant both on international and domestic companies in China. Government influences the operations of wooden manufacturers in China for example, when government banned on chain-sawn lumber, the prices of wood in china increased. Chinese government aims to establish a competitive furniture industry by discouraging the monopoly of few firms. The government of China strongly discourages the mergers and acquisitions to avoid the monopoly in the China furniture industry and to promote a competitive structure (Gdshenhao, 2010). Moreover, the entrance of a number of international furniture brands in the Chinese market threatened the local furniture industry. According to the Ministry of Trade and Industry, the government is supporting the local furniture producers to increase their competitiveness and government believed that quality, price and delivery are the key factors which can improve competitiveness of local furniture producers (Furniture Global, 2005). One desirable characteristic of the chosen country is “No protectionist policies” and in China, although the government control is significantly high however, there are no protectionist policies. The economic conditions in China offer favourable conditions to start a furniture business. The population growth rate of China is positive and in 2008, the country’s population was 1.3 billion and it is 20 percent of the total world’s population. Every year, the population of China increase by 10 million and efforts are being made to control fertility rate in China (Economy Watch). One of the characteristic of the chosen country was the positive population growth. Secondly, as the trendy furniture is more popular among the youth population therefore, it was also identified that chosen country might have significantly large youth population. The figure (Appendix – Figure II) shows that a major portion of population in China falls in the age groups of 20-24, 35-39 and 40-44 (China-profile). One desirable characteristic of the chosen country was the stable economy to cushion the impact of recession. According to World Bank statistics, the real gross domestic product (GDP) of China grew by 11.5 percent in the first three quarters of 2007 and the gross domestic product growth of China in 2007. The real GDP growth in 2007 was 13 percent and because of recession the real GDP growth rate declined to 9 percent in 2008 (Appendix – Figure I). The estimated real GDP growth rate of China in 2009 was 9.10 where the estimations for other countries, like Japan (-5.2 percent), United Kingdom (-5 percent), UAE (-2.7 percent) and US (-2.6 percent), were very low (Central Intelligence Agency). China has always been able to cushion the impact of recessions and crisis and during the Asian financial crisis 1997-1998, China showed its economic capabilities by not deprecating its currency in the recent global financial crisis 2007-2009, China helped the world to recover and aided the economies like Taiwan, Hong Kong, Macau (Lin, 2009). An essential characteristic of chosen country is the availability of raw material. The raw material requirements of the furniture companies in China were previously fulfilled through the first zone of Da and Xiao Hinggan Ling Mountains in Heilongjiang province however, now because of the expanding demand the reliance of China on timber imports is increasing. Because of the increasing costs of raw materials, the furniture manufacturers in China are planning to increase the prices of furniture products in 2011 (Business China, 2010). However, unlike other economies, the access to raw material in China is easier because the major exports of furniture raw material are Asian economies. One of the desirable characteristics of the chosen country is the high spending power of consumers. According to Pearl Research Report (2007), the youth in China between age 16 and 30 adopt new products and life experiences and has an estimated spending power of $135 billion. The World Bank report suggests that China is the second largest economy in terms of purchasing power and it is ahead of Japan whereas, the United States, Germany and India remain in first, third and fourth place respectively (China Economic Review, 2008). Considering GDP per capita is very important as it impacts the purchasing power of consumers. A 22 year old college student showed her desire to buy a black Verta sofa that was available for $1,197 (7999 Yuan) which was one-third of China’s annual GDP per capita (Wei, 2010). The idea is that only the wealthy families in China are purchasing luxury furniture whereas, the average people in China have the spending power to buy reasonable and affordable furniture products. The social factors and cultural trends play a very significant role in influencing the demand of furniture. With the availability of luxury brands in China, the wealth consumers in China are demanding more high-end furniture products. Changing furniture and using luxurious furniture has become a status symbol in China (Yang, 2010). Therefore, furniture trends in one of the top trends in China. The technological analysis of China shows that significant technological developments are taking place in China. Many furniture manufacturing companies in China use limited technology and equipment and depend on labour to avoid the cost of complex production lines and automated technology. Although it has given the low cost initial investment advantage to Chinese companies, however, the efficiency of these companies have affected. In order to adopt new processes, the Chinese furniture manufacturers are moving towards automated technology and it has been experienced that increased use of technologies has resulted in the cost saving of raw materials by 30 to 40 percent alone (Bryson et al, 2003). In the Chinese furniture industry, thousands of local and small companies are operation with variable standards, construction techniques and automated assembly operations (FAO). Cao and Hansen (2006) conducted a research study, in which they gave participation to 18 Chinese furniture manufacturers. Their findings suggest that furniture companies in China are focusing on product, process and business systems and rather than pursuing radical innovation they focus on incremental innovation. With the expanding demand of Chinese furniture in the international market, the production capacity is increasing and new technological developments are taking place (Appendix – Figure IV). The period 2009-2012 is considered very crucial for the development of China furniture industry and industry has moved from 11th Five-Year Plan to 12th Five-Year Plan. Under this plan, a number of new policies on technology developments and production capacities extensions have been presented (Chinacir, 2009). For industry-specific analysis, micro-environment analysis has been done. The furniture industry of China is flourishing and expanding very quickly. Chinese exports of home furniture to the United States (Appendix – Figure III) is increasing and around 40 percent of all household furniture products to the United States come from China and U.S. market is forced to outsource production from China because of the low cost advantage, low wage rate improved quality and on-time delivery (Bryson, Lanzillotti, Myerberg, Miller & Tian, 2003). From 1995 to 2004, the Chinese furniture exports have increased from $682 million to $8,679 million (A. G. Raymond and Company, 2006). Therefore, there is a huge potential of further increase in demand in future. The average Chinese manufacturer has a throughput rate of 600 containers per month and according to Wachovia Securities, the Chinese manufacturers are increasing their capacities for UK markets by 25-30 percent each year and because of the increasing demand from the U.S. and European market, the capacities will further extend within next few years. The analysts have also predicted that China furniture industry is moving towards over-expansion because of increasing furniture demand which will result in price erosion (Bryson, Lanzillotti, Myerberg, Miller & Tian, 2003). Two essential requirements of the chosen country are the availability of cheap and skilled labour. Cheap labour in China has made it a dominant player in the furniture industry because cheap labour allows American companies to incur less than 30 percent costs as compared to U.S. companies (Hays, 2010). Another desirable characteristic of chosen country is the less competitive market structure and less number of international brands, however, in China, the number of international furniture companies is increasing rapidly. Based on the macro-environment and micro-environment analysis, I have identified a few opportunities and threats which my proposed venture can face in the Chinese market. The opportunities that have been identified are as below: Productive and cheap labour is available in China Low cost entry because of less initial investment Government supportive policies to make furniture industry more competitive Availability of raw material both from local and overseas suppliers Increasing automated mechanisms in the furniture industry Growing demand of luxurious and trendy furniture in China The threats that have been identified are as below: Increasing competition and because of increasing international furniture brands the market structure of furniture industry is becoming more competitive Rising costs of raw materials in China and increasing reliance on imports from other economies such as timber Conclusion The analysis of China based on the predefined criterion shows that the proposed idea of doing furniture business in China is a feasible option. China meets all the essential and desirable characteristics that have been identified except that the availability of raw material is limited in China because of increase production. Therefore, based on the analysis, it is suggested to Global Ventures PLC that plan of doing furniture business in China is a feasible plan. Bibliography A.G. Raymond and Company, 2006. Why Has China Become a major Furniture Producing Nation? [Online] Available at: http://www.forestprod.org/internationaltrade06raymond.pdf [Accessed on 2 January 2011] Bryson, V., Lanzillotti, G., Myerberg, J., Miller & Tian, 2003. The Furniture Industry Case Goods. [Online] Available at: http://www.kenan-flagler.unc.edu/assets/documents/furn_paper.pdf [Accessed on 1 January 2011] Business China, 2010. China’s Furniture Manufacturers Planning to Raise Prices in 2011. [Online] Available at: http://en.21cbh.com/HTML/2010-12-30/wNMjQ3XzIwOTEwNw.html [Accessed on 1 January 2011] Cao and Hansen, 2006. Innovation in China’s Furniture Industry. [Online] Available at: http://www.entrepreneur.com/tradejournals/article/157098555.html [Accessed on 2 January 2011] Central Intelligence Agency, n.d. Country Comparison GDP. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2003rank.html [Accessed on 1 January 2011] Chinacir, 2009. Annual Report on China Furniture Industry 2009-2012. [Online] Available at: http://en.chinacir.com.cn/report/2009113160828.shtml [Accessed on 1 January 2011] China Economic Review, 2008. China’s Economy is Number 2 by Purchasing Power. [Online] Available at: http://www.chinaeconomicreview.com/dailybriefing/2008_04_14/Chinas_economy_is_No2_by_purchasing_power.html [Accessed on 1 January 2011] China-profile, 2010. Population by Age and Sex, 1950 - 2050; Proportion Elderly, Working Age, and Children. [Online] Available at: http://www.china-profile.com/data/ani_pop_1.htm [Accessed on 1 January 2011] Economy Watch, n.d. China Population Growth. [Online] Available at: http://www.economywatch.com/world_economy/china/population-growth.html [Accessed on 2 January 2011] Economy Watch, n.d. China Population Growth. [Online] Available at: http://www.economywatch.com/world_economy/china/population-growth.html [Accessed on 2 January 2011] FAO, n.d. Main Determinants of Consumption and Trade. [Online] Available at: http://www.fao.org/docrep/w8304e/w8304e05.htm [Accessed 2 February 2011] Furniture Global, 2005. China - Furniture Industry Under Threat. [Online] Available at: http://www.furnitureglobal.com/news/news.asp?newsid=1525 [Accessed on 2 January 2011] Hays, J., 2010. Facts and Details. [Online] Available at: http://factsanddetails.com/china.php?itemid=1107&catid=9&subcatid=61 [Accessed 3 January 2011] Lin, K. T., 2009. Let’s Embrace China’s Rising Spending Power. [Online] Available at: http://biz.thestar.com.my/news/story.asp?file=/2009/7/14/business/4313518&sec=business [Accessed on 2 January 2011] Pearl Research, 2007. Young Chinese Consumers Wield $135 Billion in Spending Power, Says Pearl Research. [Online] Available at: http://ce.tekrati.com/research/9469/# [Accessed on 1 January 2011] Wei, M., 2010. In IKEA’s China Stores, Loitering is Encouraged. [Online] Available at: http://www.businessweek.com/magazine/content/10_45/b4202022164114.htm [Accessed 3 January 2011] Worldbank, 2007. China Quick Facts. [Online] Available at: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK:20680895~pagePK:1497618~piPK:217854~theSitePK:318950,00.html [Accessed on 1 January 2011] Worldbank, 2009. Key Indicators. [Online] Available at: http://siteresources.worldbank.org/INTEAPHALFYEARLYUPDATE/Resources/550192-1238574864269/5976918-1239010682147/update_april09_keyindicators.pdf [Accessed on 1 January 2011] Yang, H., 2010. Top 10 Consumers Spending Trends. [Online] Available at: http://www.chinadaily.com.cn/business/2010-12/01/content_11639091.htm [Accessed on 2 January 2011] Appendix Figure I: China Key Macro-indicators Source: World Bank Figure II: Population by Age Group in China - 2010 Source: China-Profile Figure III: Chinese Furniture Exports to US Source: A.G. Raymond and Company, 2006 Figure IV: Production Capacity Forecast of China Furniture Industry in 2005-2012 Source: Chinacir Read More