MNC Enters China: International Business - Case Study Example

MNC Enters China: International Business Introduction Today the global economic power is getting concentrated to Asia where China is a fast emerging economy and a major contributor the Asian GDP. China has already achieved the position as the largest economy in the world, outshining the United States. As a result, companies worldwide are eager to invest in China in order to take advantages of the country’s huge market size and other favorable economic situations. This paper will evaluate BlackBerry’s feasibility of entering the Chinese market and establishing a market for its products/services there. Overview of the Company BlackBerry Limited is a Canadian telecommunication and wireless equipment company best known for its smartphones and tablets marketing under the BlackBerry brand. The company is also known worldwide for providing secure and high reliability software that support industrial applications and Mobile Device Management (MDM). The term BlackBerry commonly refers to a line of wireless and handheld devices and services produced and marketed by the BlackBerry Limited. The most recent BlackBerry devices include Z3, Z30, and Z10. BlackBerry smartphones are widely used by government forces and transportation staff. It is interesting to note that the US President Barack Obama used a BlackBerry device for communication during his 2008 Presidential campaign. However, the BlackBerry’s dominance in the smartphones market has been declining for the last few years as the company often fails to defend the intense competition from Google’s Android and Apple’s iPhone. It seems that China would be a potential market for the BlackBerry Limited for several reasons. According to the International Monetary Fund (as cited in cited in Duncan and Martosko, 2014), China achieved the position as the world’s largest economy in October 2014, surpassing the United States. Hence, the Chinese economy can offer a range of potential business opportunities to the BlackBerry Limited. In addition, today companies worldwide are confident in the Chinese-centered manufacturing economy, and hence many leading MNCs have heavily invested in China. This favorable market situation in China would give BlackBerry better exposure to emerging global market opportunities. Finally, China is a hot global manufacturing destination where materials and labor are available at cheap prices. This potential market feature may assist the BlackBerry to cut down its production costs and offer more attractive prices to its customers. Exchange rate comparison The following chart reflects the exchange rate of US Dollar and Chinese Yuan over the last 24 months. (Source: XE Currency Charts) As of 8th December 2014, one dollar equals 6.16661 Chinese Yuan (CNY). From the figure, it is clear that the exchange rate between US dollar and Chinese Yuan underwent marked fluctuations over the last two years. As of 1st January 2013, one US dollar equaled 6.23774 Chinese Yuan. However, the value of Chinese Yuan against the US dollar fell to 6.04370 by 14th January 2014. Within next four months, the exchange rate hit two years high of 6.25927. Since then, the value of Chinese Yuan has been declining despite a notable improvement achieved during the last month (November 2014). According to Walker and Chow (as cited in Rapoza, 2014), the CNY has been appreciated over the last two years as the Central Bank of China promised. They point out two reasons such as the carry-trade and new thinking at Central Bank, for the Central Bank’s decision to weaken its currency. On the strength of risk-adjusted carry falling elsewhere, investors increasingly relied on the “Dollar-Yuan trade to swap their currency positions for higher-yielding and longer duration onshore alternatives” (Rapoza). This has the advantage of introducing more two-way risk into the currency, which is sensible from a long-term financial markets reform perspective. In addition, this polity is beneficial to regulate the future growth of carry trade-related inflows that otherwise may become an obstacle to the Chinese government’s objective of deleveraging some parts of the economy. In addition, the Chinese Central Bank adopted a shift towards a more neutral policy in the context of poor growth momentum and growing problems in the financial sector (Rapoza). Major Exchange Rate Risks According to Madura (2014), transaction exposure may be simply defined as the risk faced by MNCs as a result of changes in the currency exchange rates after they have already entered into financial obligations. Under translation exposure, the changes in the currency exchange rates will lead to change in value of the company’s equities, assets, liabilities, or income (pp.393-394). This is also called accounting exposure. Undoubtedly, both the transaction exposure and the translation exposure may cause the company lose millions of money in case of severe exchange rate fluctuations. In the context of transaction exposure, a decline in the value of Chinese Yuan would incur financial losses because under this situation the company’s revenues in terms of dollars will also decline. In other words, the company needs to earn more amounts of Yuan to maintain the same profitability. In the case of translation exposure, the company will face a decline the value of its equities and assets due to adverse currency rate fluctuations, and the situation in turn would weaken the firm’s financial position according to Balance Sheet. Referring to the view of economists, the Chinese Yuan is likely to strengthen over the next two years and the recent exchange rate trends justify their claims. The Chinese Central Bank is now taking measures to strengthen and stabilize its currency in the global financial market. Such a favorable situation can stimulate the business scope of BlackBerry in China. How to Eliminate Exchange Rate Risk? While analyzing the exchange rate fluctuations over the last two years, it is identified that CNY is not a very stable currency. Hence, the BlackBerry needs to take appropriate measures to address this situation and to eliminate the chances of huge financial loss. Hedging and netting are two popular approaches used to reduce exchange rate risk. Madura (2014) states that under the hedging approach, a business house buys or sells a forward exchange contract so as to cover all liabilities or receivables arising out of unexpected exchange rate fluctuations. Foreign exchange contracts are capable of offsetting the gains or losses related to foreign receivables or payables (p.355). According to Kong & Weng (2014), interest rate swap is a very popular form of hedging whereby two business organizations located in two different countries mutually agree to exchange or swap debt-servicing obligations. This swap is beneficial for both the companies to avoid the risks associated with fluctuations in the currency exchange rate. Considering the increased popularity of interest rate swaps, most of the leading international banks offer this hedging service to MNCs and the cost charged for this service is relatively low. Similarly, netting can be simply referred to the practice of keeping an equal level of foreign receivables against foreign payables. Under the netting approach, the net position will be zero and thus the risk of currency loss is eliminated. It is advisable for the BlackBerry Limited to use the over-the-counter method with derivates so as to mitigate or eliminate exchange rate risks. Kroll (2005) states that using this technique, the company can directly contract with a dealer and therefore over-the-counter transactions are straightforward. It is the better way to trade products such as swaps, forward rate agreements, and exotic options. Hedging Technique Long-term forward contracts may be recommendable for the BlackBerry to manage the economic, transaction, and translation exposure in the Chinese market. As Ko and Moon (2012) purport, under long-term future contracts, a party agrees to exchange a specified amount of particular currency at a predetermined rate to the other (generally involving timer period above one year) on a future date regardless of the current rate at which currencies are exchanged on that date. This hedging technique is really beneficial for the BlackBerry because its transactions would involve a large amount of material, supplies, or component parts. One of the most notable advantageous features of future contracts is that they can better address the time period as well as the cash size of the exposure. In addition, this hedging tool is suitable in a regulative market environment because forward contracts can be written for any amount and term. Above all, long-term future contracts offer a complete hedge against all possible risks associated with economic, transaction, and translation exposure. Since forwards are over-the-counter products, the BlackBerry management can eliminate intermediaries and directly make deals with parties involved. Management experts indicate that forward contracts can enhance price protection. Last but not the least; this hedging tool is not a much complicated one like others. In the highly regulative Chinese market economy, long-term forward contracts can better serve the business interests of BlackBerry. Country Risk Assessment According to Transparency International’s Corruption Perceptions Index 2013, China was ranked 80th out of 177 countries selected with a drop of 1 score point from the previous year (Transparency International). Hence, it seems that corruption is a crucial issue that BlackBerry would face in the Chinese market. According to the economy rankings prepared by World Bank Group’s ‘Doing Business’, China has 3rd rank in terms of ease of doing business. Similarly, it is good for BlackBerry to see that the country is ranked 1st and 2nd in terms of dealing with construction permits and trading across borders. The country’s rank is 8th for starting a business. However, it is observed that registering property is a difficult task in China (rank 96) (Doing Business). The analysis of economy rankings suggests that China is a potential destination for new investments. According to the Country Risk Classification chart prepared by OECD, China is ranked rated 2 on a 0-7 scale (OECD, 2014). It also adds to the feasibility of the proposal for BlackBerry’s entry in the Chinese market. A factor that limits the scope of this proposal is that the freedom of the press is very restricted in China. As leading social websites like Facebook and Twitter have been banned in China, it would not be possible for the BlackBerry to use social media promotion effectively. Based on Geert Hofstede’s six dimensions of culture (as described in The Hofstede Centre), it is identified that the cultural differences between the BlackBerry’s culture and the Chinese culture pose three major challenges in terms of social interdependence, uncertainty, and indulgence. The BlackBerry’s culture is based on individualism whereas China follows a highly collectivist culture where people act in the interests of the group. In addition, China has a low score on uncertainty avoidance and Chinese people are comfortable with ambiguity, but it is not the case of BlackBerry culture. Finally, China has a low score on indulgence and hence it is a restrained society. “Restrained societies do not put much emphasis on leisure time and control the gratification of their desires” (The Hofstede Centre). This situation would pose some significant challenges to the BlackBerry management. Conclusion From the above discussion, it is clear that China is a potential destination for the BlackBerry Limited to consider its new market entry. Currently China is the world’s largest economy and the Chinese currency demonstrated a strong performance over the last few months. In addition, there are many favorable situations existing in the Chinese market such as ease of doing business and obtaining construction permits and trading across border. However, corruption is a major issue in the country. In addition, the cultural differences between the BlackBerry’s culture and the Chinese culture limit the feasibility of BlackBerry’s operations in the Chinese market to some extent. References Duncan, H & Martosko, D. (2014). America usurped: China becomes worlds largest economy - putting USA in second place for the first time in 142 years. Mail Online. Retrieved from http://www.dailymail.co.uk/news/article-2785905/China-overtakes-U-S-world-s-largest-economy-IMF-says-economy-worth-17-6trillion-America-falls-second-place-time-1872.html The Hofstede Centre. China. Retrieved from http://geert-hofstede.com/china.html Ko, H & Moon, W. J. (2012). Contracting foreign exchange rate risks: a behavioral law and economics perspective on KIKO forward contracts. European Journal of Law and Economics, 34(2), 391-412. Cong, J., Tan, K. S., & Weng, C. (2014). Conditional value-at-risk-based optimal partial hedging. The Journal of Risk, 16(3), 49-83. Kroll, K. M. (2005, Jan 1). How To Minimize Risks With Derivatives. Business Finance. Retrieved from http://businessfinancemag.com/tax-amp-accounting/how-minimize-risks-derivatives Madura, J. (2014). International Financial Management. US: Cengage Learning. OCED. (2014). Country Risk Classifications of the Participants to the Arrangement on Officially Supported Export Credits. Retrieved from http://www.oecd.org/tad/xcred/cre-crc-current-english.pdf Rapoza, K. (2014, Feb 22). Why The Chinese Yuan Is Weakening Against The Dollar. Forbes. Retrieved from http://www.forbes.com/sites/kenrapoza/2014/02/25/why-the-chinese-yuan-is-weakening-against-dollar/ Transparency International. Corruption perceptions Index. Retrieved from http://www.transparency.org/cpi2013/results World Bank Group. Doing Business. Retrieved from http://www.doingbusiness.org/rankings XE Currency Charts. Retrieved from http://www.xe.com/currencycharts/?from=USD&to=CNY&view=2Y Read More