Inaugurating a New Business Branch in China - Case Study Example

International Business Project Case Study: Potential Investment in China Table of Content Executive Summary ……………………………….………………………………………….. 3 Introduction …………………………………………………………………………………… 4 The Retailing System in China ……………………….……………………………………….. 4 Transport Infrastructure and Logistics Infrastructure in China …….…………………………. 8 Trade and Investment Policies ……………………………………………………………….. 10 Ethical Issues in China …………………………………………………...………………….. 13 Conclusion ………………………………………………………………...…………………. 17 Bibliography ……………………………………………………………….………………… 19 Executive Summary: After conducting a thorough analysis of the business environment in China, our company decided to enter the Chinese market and open a new branch there. As a start, the company conducted a study about the situation analysis of the Chinese market, and discovered that the new environment in China encourages the entrance of foreign investments, despite the existence of some human rights violations. As our company decided to inaugurate a new branch in China, we decided to develop a marketing plan for the products we serve. So, we have researched the Chinese taste, and the pricing strategy appropriate for the Chinese market, and which would be profitable for our company. At the end, our company decides to operate its own branch in China, rejecting the franchise marketing strategy. Introduction: While China is seen by many analysts as a promising nation and expected to be one of the future superpowers, it practices some human right abuses, which may hinder it from achieving its desired position in the world (Hans). Human right abuses in China constitute a major element for the spread of Sinophobia in many democratic countries, including the United States. The extreme forms of suppression and control practiced by the Chinese government over its citizens are of major concerns to democratic countries. This sinophobic fear people hold against China hinders them from seeing China as the next superpower. The suppression practiced by the Chinese government can be seen in the limited amount of freedom allowed to the citizens. As noted by political analyst David Plotz, "persecuting Christians, destroying Tibet, oppressing dissidents, and mistreating workers" are examples of serious human right abuses that are practiced by the Chinese government (Plotz). If compared to open and democratic societies such as the United States, China can be seen as an autocratic regime, which is characterized by the severe control over the flow of information and the suppression of minority groups. The censorship of media, suppression of minority groups, and mistreatment of minor religious groups are examples of the human right abuses that arouse a sense of Sinophobia among democratic countries of the world, discouraging them from believing that China might be the next superpower. The Retailing System in China: Moving to the analysis of the retailing system in China, it can be said that the Chinese market is working hard to absorb foreign investment and multinational corporations. For example, there are various large U.S. corporations, which seek to reorganize its distribution network in China. Manufacturer products very high value, these companies see demand in China grow at a rate of 15% per year. China already accounts for her two thirds of Australian application and exceeded sales in Korea in 2005. The strong revenue growth business in The Middle Kingdom is country's central to any strategy Asia today, especially for products with high added value which the Chinese do not compete not yet our customer. Growth goods with high added value is faster than the growth of the economy Chinese (9.9% officially) and will be sustained for several years (Cameron). Inherited a network our client is organized around four separate divisions which supply supplementary is often to the same end customers. Implanted for several years in China and given the strong growth of this market, clients has asked to help redefine its strategy local distribution, conscious defined as the organization there are six years is more appropriate now. The company has only one unit subordinate to manufacturing in China (Rohde). Its manufacturing facilities, highly specialized, are scattered around the world entire supply and distribution center Shanghai. Given the high value products, they are transported exclusively by aircraft from factories scattered around the globe (Europe, United States, Brazil, India, Australia ...). For reasons of legal obligations, part of the production as well as specific transactions (labeling ...) must be carried out Mainland China. The company had therefore set up its hub arrival and the production line to Shanghai, which was then a ideal platform to serve the China market: economic zone special (free zone ...), rich ecosystem of foreign companies, logistics platform in scope the global distribution network ... China continues to rely on this hub of Shanghai where the products are shipped by air to the 400 retailers regional. A model that is in trouble, however, this model presents many drawbacks: Shanghai is no longer a region as economically advantageous. The FTZ regime goes out, concentration of multinational foreign operations resulted in a very strong rising costs of labor, of real estate costs and a saturation certain infrastructures. Demand Chinese (in green on the map) currently focused around Beijing, where it is twice that of the Shanghai region. Of request new poles emerge around Guangzhou, south of the country. The customer does not benefit the development motorway infrastructure along the coast as it relies too systematically to the aircraft stopped evaluated from the NCE society, the value of products and assumptions of rotation of stock from the situation analysis current (for technical computing, cost BFR = NCE * FluxStock / RotationStock, stock rotation function = (RSS), piecewise linear). The taking into account costs of working capital tends to concentrate products high value and low demand to a single center distribution (Cameron). If the savings on transport by the transfer of the plane to the truck is easy to quantify, we also measure the impact on stocks generated by this new distribution point and validate the initial assumptions of rotation stock taken into account to assign clients in a center or another, in addition transport costs. To do this, we modeled the distribution network on the same software not only replicating Chinese physical distribution network, but also the management rules distribution: Selection Rules of using Transportation: by air or road distance, the lead time variable transport and the due date of the order (Hans). To cite an example, the packaged food industry in China has seen retail sales worth 111 billion U.S. dollars (758 billion yuan) in 2008, and the value of sales expected to reach U.S. $ 168 billion (1.14 trillion yuan) by 2014. Given the average size of less and less household income levels and increasingly high demand for food-packaging strips from Chinese consumers is growing, these foods offer convenience and accessibility of the fact expansion of distribution channels throughout China (Hans). In terms of growth of the retail value, the baby food products are those whose growth has been greatest, recording an overall increase of 185% between 2003 and 2008 and an annual growth rate (CAGR) of 20.6%. Then there are oils and fats (154.8% total, CAGR of 20.6%), milk products (120.5% total, CAGR of 17.1%) and meals (77.4 % in total, CAGR of 17.1%). The growth of hypermarkets, both supermarkets and department stores, has been phenomenal over the last decade and they are in the retail sector, the channel to the fastest growing (Hans). Between 2003 and 2008, the growth of supermarkets and hypermarkets has allowed them to become the main distribution channel for packaged food in China, 50.8% of sales are being harvested in 2008 compared to 42.8% in 2003 (Rohde). Foreign retailers have obtained much better results in the subsector hypermarkets than in any other retail network. Carrefour is the leading player in the industry hypermarkets, there were 156 stores in China in late 2009. Wal-Mart, Tesco, Metro Cash & Carry and Lotus are the other major supermarket chains. The foreign hypermarkets in China are more open to the idea of ​​offering imported products as convenience stores and supermarkets. Hypermarkets usually deal with a small group of preferred distributors, and exporters sell their products on the shelves of supermarkets should focus their efforts with some of these distributors. Although rarely found imported products in supermarkets, there are still significant opportunities for Canadian exporters in some key food categories: breakfast cereals, sauces and seasonings. These products sell well in supermarkets generally located in neighborhoods where large numbers of expatriates. Transport Infrastructure and Logistics Infrastructure in China: Transport infrastructure and logistics infrastructure in China are still underdeveloped and inefficient, but major repairs were begun several years ago to increase efficiency. Between 1990 and 2000, the motorway network was extended by 36% in China, and major improvements were carried out on existing highways. The network of railway lines, already the longest in Asia, has been increased by 19%. Savings have also been achieved through the introduction of double tracking, electrification rail and entry into service of faster trains. Connections to networks in Southeast Asia, Central Asia and Russia are developing, which will pave the way for other business opportunities. The trend towards health and well-being is widespread in most regions in China, and this trend is growing. Packaged foods low in sugar, low fat and low sodium are increasingly popular, and demand for smaller packages is growing among Chinese consumers. Recent food scares such as the scandal of melamine contamination, have led to greater awareness in regard to food safety in China. Concerns regarding food safety translate into opportunities for Canadian exporters, who can help meet the demand of safe food. The increase in income levels has reduced the price sensitivity of the average Chinese consumer. This change in spending patterns offers an opportunity for Canadian producers to compete with other producers in terms of quality rather than on price. The recent growth in oils and fats, baby foods, soups and dairy products could represent an opportunity for Canadian producers to increase their market share in the packaged food industry in China. Among the products included in these high-growth categories include cooking oils, butter, margarine, baby food, infant formula, canned soups, instant soups, milk, cheese and yogurt. In eastern China in 2008, packaged food sales totaled 28.7 billion U.S. dollars (198 billion yuan). Products of high quality and healthy products are the two main drivers of growth in the value of packaged foods in this region. For example, the brands premium-Tiki Tartlet Tuc and Shanghai Danone Biscuits Foods Co. Ltd. posted strong sales in the bakery of midrange and high end. Christie and Manhattan have added nutrients to their baked goods, such as carotenoids in the whole wheat bread, the price of these products is higher. Baby food and dairy premium have also gained market share (Rohde). Costs higher and higher milk, sugar and packaging have reduced profit margins, and manufacturers have responded to these rising costs by running more value-added products. For example, Inner Mongolia Yili Industrial Group Ltd has launched a range of high quality dairy products including milk and regular organic milk (Cameron). Inner Mongolia Mengiu Milk Industry (Group) Co Ltd has followed suit, launching its own range of high quality dairy products, including organic milk, low fat milk, fortified milk quality protein and rich dairy products calcium. Bright Dairy & Food Co Ltd has also launched a range of high quality dairy products, the range U +, marketed as premium drinks milk (Cameron). Recent food scares such as the scandal of melamine contamination, have led to greater awareness in regard to food safety in China. The strictest standards of food safety in Canada, long-established, constitute a guarantee of food safety for Chinese consumers. Gradually, as the Chinese producers revise their practices in food safety, opportunities will be possible for Canadian exporters, who can help meet the demand of safe food. The increase in per capita income almost everywhere in China has led to changes in spending patterns and reduced price sensitivity of consumers (Hans). This change provides the opportunity for Canadian producers to compete with other producers in terms of quality rather than on price. As costs associated with transportation and logistics are still high, competing with other producers in terms of prices on the Chinese market for packaged foods may be difficult. As for the Chinese markets, following the accession of China into the World Trade Organization (WTO) in 2001, the Chinese government undertook a series of reforms aimed primarily at open Chinese markets to foreign investment and allowing companies to manage their own activities (Hans). This is one of the largest markets in the world and, although very competitive, it is now more readily available to Canadian exporters. Strong growth in oils and fats, baby foods, soups and dairy products could represent an opportunity for Canadian producers to increase their market share in the packaged food industry in China. Among the products included in these high-growth categories include cooking oils, butter, margarine, baby food, infant formula, canned soups, instant soups, milk, cheese and yogurt Trade and Investment Policies: As a move to liberalize trade, China has continued to reduce administrative barriers to trade by increasingly switching to the use of tariffs and exchange rates adjustments. Beginning January 2005, the categories of import commodities subject to licensing controls were reduced to 3 (including 83 8-digit product codes), down from 5 in 2004 and 8 in 2003.  Since its WTO accession, China has basically fulfilled its tariff reduction commitment.  The tariff rates of more than one hundred items were further reduced beginning 2006 and the average tariff rates was 9.9% in 2006, progressively down from 15.3% in 2001. For exports, beginning from January 2006, the categories of export products subjected to licensing controls were cut to 46. In addition, China has introduced a bidding system for export commodities quota to manage the exports of 20 categories of commodities (Hans). The Chinese government has gradually abolished the state monopoly of foreign trade and liberalize its foreign trading system.  According to the amended Foreign Trade Law which went into effect from July 2004, all types of enterprises, including private enterprises, can register for the trading right.  Individual Chinese are also allowed to conduct foreign trade under the amended Foreign Trade Law (Lemon). Starting from 1 January 2004, China's rates of VAT rebate for exports are lowered by an average of 3 percentage points.  The new rates of rebates will comprise five levels, i.e., 5%, 8%, 11%, 13% and 17%. Products that were previously entitled to 17% rebates include clothing, electrical appliance and electronic products, transport vehicles, instruments and meters are lowered to 13%.  Beginning November 2004, the rates of VAT rebate for certain information technology items, such as integrated circuits, are raised to 17% from 13% (Hans). In a bid to encourage overseas investment in the central and western regions, beginning from September 1996, local authorities of the central and western provinces were empowered to give approval to overseas-funded projects with total investment capital under US$30 million, up from the previous amount of US$10 million. Since the Chinese government started to implement a strategy of developing the western region in late 1999, more preferential treatments are extended to foreign investment in inland provinces and regions. Upon expiration of the preferential tax polices, foreign-invested enterprises may enjoy 50% reduction of corporate income tax for another three years (Cameron). On 31 October 2000, the Chinese government officially amended the Laws on Wholly Foreign-owned Enterprises and Sino-foreign Cooperative Joint Ventures to comply with the WTO accession requirements. At the Fourth Session of the Ninth National People's Congress, the Chinese government also passed the amendments to the Law of Sino-foreign Equity Joint Ventures (EJVs).  After the amendments, foreign enterprises enjoy greater autonomy in sourcing raw material either in the Chinese Mainland or from elsewhere and are no longer subject to the domestic sales ratio restriction (Cameron). Besides, they are no longer required to file their production and operation plans to relevant authorities.  Workers and staff members of EJVs can establish trade union organizations to carry out activities to safeguard their legal rights and interests. As a WTO member, China has to extend "National Treatment" to all FIEs. While certain preferential tax treatments enjoyed by FIEs will be eventually phased out, China has brought into lines the fees and charges between domestic enterprises and FIEs. A new version of the "Catalogue for the Guidance of Foreign Investment Industries" came into effect on 1 January 2005.  Foreign-invested projects under the categories of "encouraged" will enjoy tariff-free imports of machinery and equipment for their own use and the import value-added tax will also be exempted.  The catalogue also reflected China's WTO commitment by specifying the liberalization schedule of foreign ownership of different sectors. In addition, the central government has also introduced tariff-free and VAT-exemption imports of capital equipment for projects within the hi-tech and priority sectors such as energy, agriculture, transport, infrastructure, production of raw materials, and tertiary industries, as well as in the pillar industries (Lemon). These moves are targeted to attract high-quality overseas investment, introduce high technologies and know-how to rationalize the country's industrial structure. At the end of 1999, the State Administration of Taxation and Ministry of Finance jointly issued the "Circular on Tax Collection Regarding the Implementation of the Decision Made by the State Council on Strengthening Technology Innovation and High Technology Development".  According to the circular, equipment imported for the production of goods listed in the "State Catalogue of New Technology Products" and supporting technology, accessories and parts are exempted from customs duties and VAT on imports.  For the import of advanced technology listed in the "State Catalogue of New and High Technology Products", software fees payable outside China are exempted from customs duties and VAT on imports (Rummel). All foreign-invested export-processing enterprises are required to pay VAT on imported raw materials, parts and components. Upon exports, the amount of VAT paid will be used to offset the VAT payable for the part of domestic sale goods. Excess will be rebated ("exemption, deduction and rebate"). Starting from 1 October 1999, a new export processing trade management system is implemented. Under the new system, enterprises engaged in processing trade are required to pay a deposit when importing 11 major categories of commodities, which are classified as "restricted products". At the same time, all enterprises involved in outward processing trade will be classified into four categories of A, B, C, and D on the basis of their law-abiding records and business results. Enterprises classified as "C" are required to pay a deposit when importing raw materials, while enterprises classified as "D" will be suspended from outward processing trade business (Hans). Ethical issues in China: As one of the remaining biggest socialist societies in the world, the Chinese government practices extreme forms of suppression and control over its citizens. This suppression can be seen in the limited amount of freedom allowed to the citizens, if compared to open and democratic societies such as the United States, China can be seen as a theocratic regime, which is characterized by the severe control over the flow of information. An extreme case of control on information can be found on the censorship the Chinese government practices on the Internet. Unlike most other democratic societies, the Chinese people are not free to access any kind of information they want via the internet. Jonathan Zittrain and Benjamin Edelma from Harvard Law School points out that the Chinese government is currently blocking "thousands of sites offering information about news, health, education, and entertainment, as well as some 3,284 sites from Taiwan" (Zittrain and Edelma). This control over Internet access in China makes it hard for the Chinese people to be enlightened about any topic they want. In fact, internet censorship in China is a real obstacle in its way to become the future superpower because this censorship limits the scope of knowledge of the Chinese people, prevents media from practicing its watchdog role on the government, and hurts the image of China in the international community (Lemon). The severe control which the Chinese government puts over the internet negatively affects the cultural diversity in the country. As a closed society, the Chinese officials seem to be inimical to the representation of various cultures in media. They mistakenly believe that cultural diversity could hurt the unity of the Chinese society; so, they only allow the internet web sites that introduce the dominant culture, ignoring other cultures and ethnic groups in the society. As realized by Los Angeles Chinese Learning Center, "the Chinese government seems to block websites that contains information about Chinese culture" in order to introduce itself to the world as a culturally-unified country. This control on cultural sites on the Internet in China leads to lack of mutual understanding among the various ethnic groups and cultures in China. Also, minority ethnic and religious groups would feel that they are not adequately represented in their media, and so, they may develop a feeling that they are second-degree citizens in the country. Possible long run consequences of this control over cultural information in the internet include the emergence of tension, insecurity, and demonstrations (Rummel). Actually, many social and political analysts traced a strong relationship between freedom of media on one hand and peace and securityon the other hand. In his article, "Freedom of the Press-- A Way to Global Peace," R.J. Rummel argues that "to foster peace, foster freedom of the press" (Rummel). Hence, extreme control on media can lead to uncontrollable disturbances in the future. This could present a warning for China, whose severe control on the internet and other forms of media could be the root of future tension and demonstrations. Obviously, internal instability and conflicts are real hindrances for any country to become a superpower. Accordingly, control over cultural information in the internet in China constitutes a real concern for the country in its effort to become the future superpower in the world (Hans0. A great portion of the censorship that is practiced on the internet in China is directed to political material. Politics is one of the areas that represent a red tape for the Chinese people. That's why most of the censored web sites in China are those which tackle sensitive political issues or present direct criticism for the government. In particular, issues about democracy and Taiwan seem to be extremely censored by the Chinese government. As mentioned by Zittrain and Edelma, "of the top 100 sites returned by Google in response to a search for 'democracy china,' 40 were found to be blocked, while 37 'dissident china' sites were blocked, 32 were blocked for 'freedom china,' and 30 for 'justice china.'" As for the issue of Taiwan, "more than 60% of Google's top 100 "Tibet" sites were found to be blocked, and more than 47% of the top 'Taiwan' sites were blocked." (Zittrain and Edelma). Accordingly, it seems that the Chinese government selects what should and should not be viewed on the internet by the Chinese people. This makes it extremely hard for the citizens to supervise their government and practice the watchdog role on the political performance of the Chinese officials (Rummel). The more censorship practiced on the internet in China the less political participation will be enjoyed by the Chinese. In other words, the extreme censorship over the internet sends a clear message to the world that China is far away from being a democratic country; thus, loosing its opportunity to be a possible superpower of the future. As the Chinese government is severely controlling its media, especially the internet, the international community is directing harsh criticism to the lack of political freedom in China. According to the USA Today, "democratic nations and their companies should not help China's Thought Police turn the Internet into a platform for Orwellian Newspeak and Doublethink ("Internet Thought Police"). So, unless the Chinese government lightens its grip of internet information, the world would not show any signs of support for China's efforts to become a superpower (Lemon). The image of China is completely hurt in the international arena by the way it severely controls the internet and punish those who violate the harsh laws that limit internet access in China. Actually, China practices severe control over the internet via two means: a strong and sophisticated filtering technology, and exaggerated punishment for the violators of internet censorship laws. It has been realized that "China’s Internet filtering regime is the most sophisticated effort of its kind in the world" because it "censors content transmitted through multiple methods, including Web pages, Web logs, on-line discussion forums, university bulletin board systems, and e-mail messages ("Internet Filtering in China…"). As for the laws that control internet access in China, they are extremely harsh, aiming at making the Chinese people reluctant to search for information that may make them subject to imprisonment or fine. According to Laura Rohde, from IDG News Service, "those Internet users in China caught violating the regulation are to be fined for $625 to $1875 for a minor violation. For more serious offenses, computer and network access can be denied for six months" (Shaw). This extreme severity with which the Chinese government deals with internet navigator sends a negative message to the whole world that China deprives its people from being enlightened and informed. Accordingly, China is harshly criticized by many countries of the world for this human right abuse. Even the companies that assist China in its effort to filter the internet are criticized and condemned by international organizations, and that's why those companies are trying their best t defend themselves "against charges made by human rights group Amnesty International that they are assisting the Chinese government's efforts to censor the Internet" (Rohde). Therefore, filtering internet information in China seriously hurt the image of the Chinese government and makes it subject to severe criticisms from the international community (Lemon). Conclusion: Although emerging economies may be able to look forward to brighter opportunities and offer new areas of investment for foreign and developed economies, local officials of EMEs need to consider the effects of an open economy on its citizens. Furthermore, investors need to determine the risks when considering investing into an EME (Rummel). The process of emergence may be difficult, slow and often stagnant at times. And even though emerging markets have survived global and local challenges in the past, they had to overcome some large obstacles to do so.  In China, internet censorship in China is a real human right abuse that hinders the efforts of China to become a superpower (Rummel). While the internet could be a chance for adequately informing the people of any society, it represented an obstacle for China due to the control practiced over it. In this concern, it is adequate to refer to the opinion of Sumner Lemon, the well-reputed analyst and journalist in PC World Magazines. He argues that "the Chinese government's attitude towards the Internet is split between a desire to control the information available to Chinese Internet users and a recognition that the Internet is a critical tool for the country's economic development and modernization (Lemon). Consequently, if China fails to free the internet from censorship, its efforts to introduce itself as the world next superpower will not succeed (Shaw). Bibliography Cameron I. (2003)., "Emerging markets reform" marketing journal 2003. CIA World Fact-book. Hans O. (2002). "Emerging Market Economy " Marketing Journal 2002. < http://www.china.org.cn/e-company/index.htm> "Internet Censorship in China." Los Angeles Chinese Learning Center. Mar. 17, 2006. "Internet Filtering in China in 2004-2005: Country Study." Apr. 14, 2005. Mar. 17, 2006. "Internet Thought Police."   USA Today, 07347456, Sep. 28, 2005. Mar. 16, 2006. Academic Search Premier. AUC Library. Lemon, Sumner. "China Finds Freedom Behind Great Firewall." IDG News Service. May 27, 2004. Mar. 16, 2006. Rohde, Laura. "Amnesty International Report Claims Site-blocking, Monitoring Tools Aid Human Rights Violations." IDG News Service. Dec. 02, 2002. Rummel, R.J. "Freedom of the Press-- A Way to Global Peace." Nov. 28, 2006. Mar. 16, 2006. Shaw, Joy. "Internet Censorship in China." Apr. 04, 2006. Mar. 17, 2006. Online Journalism Review. Zittrain, Jonathan and Edelma, Benjamin. "Documentation of Internet Filtering Worldwide" Harvard Law School. Mar. 20, 2003. Mar. 17, 2006. Read More