Doing Business in Asia - Case Study Example

Doing Business in Asia Name Professor Institution Course Date Doing Business in Asia Executive summary This report is prepared to assess geographical facts about China. Such facts will focus on the macro-economic, political and social and technological changes that have taken place in the last four decades of the country. Also, this report will focus on legal and bureaucratic environment, managerial and labor environment, industry and policy factors, and customer and competitive factors. Today, it’s very hard to mention economy without talking about China. The country has grown greatly since the start of civilization in 2000 BCE. In Asia and in the world China has become an economic giant ranking number two with US$9.3253 trillion of GDP and competing the largest economy, the US. However, many people would ask what led this country to such status and why it is favorable to conduct business in China. Table of Contents Doing Business in Asia 2 Executive summary 2 Table of Contents 3 1.0 Introduction 4 2.0 Overview of China 5 3.0 Political Challenges 5 4.0 Economic environment 7 5.0 Social and Cultural environment 8 6.0 Legal and bureaucratic environment 10 7.0 Managerial and labor environment 12 9.0 Human resource environment 13 10.0 Industry and policy factors 13 11.0 Customer and competitive factor 14 12.0 Conclusion 15 13.0 Reference 16 1.0 Introduction Globalization and technology have greatly increased business activities in the recent times in a great way. Andrew (2010) argues that people who are crossing borders to work in another country have gone up tremendously due to increase in air travels and ocean vessels. Multinational companies now manufacture goods in numerous nations and market and sell them to clients across the world (Czinkota et al 2013). Technology, raw materials and money move faster across borders more than before. Cultures and ideas present circulate in and out of China freely as never been seen before due to increase in trade activities. As a result, China as a country also get worried about its young industries and goods which they government does not want to be overshadowed. Hence, they have set laws to help protect their economy. Therefore, this report will assess geographical facts about China. Such facts will focus on the macro-economic, political and social and technological changes that have taken place in the last four decades of the country. Also, this report will focus on legal and bureaucratic environment, managerial and labor environment, industry and policy factors, and customer and competitive factors. 2.0 Overview of China Today, China is regarded the industrial unit of the globe. According to Jayaraman (2009, p.55), the country registered 13.2 percent of the total manufacturing industry within the world in 2009, and some economic analyst argue that China set to surpass US to become the favorable place for manufacturing. This claim is backed by the fact that China provides access to cheap labor and raw materials at lower cost which will be able to attract western manufacturing firms (Bradsher 2012). Outsourcing services or products to this country by western corporations can be done by means of contract producers or fully owned subsidiaries of the parent company from western nations. However, China also holds different challenges for companies which intend to do business there. Such challenges can be envisaged in the World Bank annual report on countries suitability for the business. Jayaraman (2009, p.55) claimed that in 2009, that report poorly ranked China at position 83 out of 160 countries. It portrays China as a worst destination to do business. To clearly understand China in terms of environment for business, this report will analyze the macro-economic, political and social and technological changes that have taken place in the last four decades of the country. 3.0 Political Challenges The political temperatures for business in China have improved much better than it was in the last decade. Pletcher (2011) contends that China has ruled for a very long time one party called the communist party rule. In the early years, the government in power through in communist party ideology was in full control of businesses and institution. Business experts claim that the regime adopted autocratic and political corporatist mechanism and controlled each aspect of human lives (Vogel 2011). The situation made the business environment unsuitable to invest. Maddison (2007) holds that Western multinational companies which intended to enter in this country were few, and the few who dared do so through partnerships due to risks that was associated with direct entry. This was criticized for its differences with western markets in which the government created a positive climate for conducting business. With times, the situation has changed a great deal. The government has moderated its regulations to allow international companies to export their products into Chinese market. The competition created has uplifted Chinese industries to make it a business hub in East Asian and beyond (Vogel 2011). This competition is however limited to the extent that the Chinese government is still rooted socialist market economy in which stated owned companies dominates the market. The government also provides political patronage to its young and upcoming companies and also promotes various sectors of the economy to compete with the rest in the world. This has been shown in hearing implant manufacturing sector. The government considered Cochlear, an Australia hearing implant manufacturing company as a threat and started to promote its own industries. Einhorn & Khan (2013) contend that in 2013, Hangzhou Nurotron Biotechnology received a huge boost when state-owned hospital and Chinese Academy of Sciences provide funding of up to 75 percent of initial start-up for the company to improve its producing and marketing of cochlear implants. Vogel (2011) state that today China deals in every sector of the economy making the competition very stiff and threat to foreign businesses. Nevertheless, investors can still be attracted due to political stability the government has enjoyed over the years. 4.0 Economic environment Czinkota et al (2013) affirm that China is ranked as the second largest economy in the world based on nominal GDP after the US. Currently, it is regarded as one of the fastest rising economies globally. Before this, China has a faced a cycle of decline and growth. Such fluctuations can be attributed to lack of proper reforms and policy in place. From its establishment in 1949 China operated as a planned economy up to 1980’s when it changed to mixed market oriented economy under the leadership of Deng Xiaoping (Jacques 2009). With a planned economy system in place, products and any other business decisions were made by central authorities mainly the government or its agencies. Such decisions were rigid and did not create favorable atmosphere for foreign companies to freely export their products to China. Vogel (2011) posits that the reforms after 19890 led by Deng Xiaoping made the turnaround growth of China to where it is today. Despite the growth, the economy is more favorable for the than the foreigners. When multinational corporations enter into Chinese market, they must take into consideration the stability of the economy and be conscious of different business risks because of shifts in trade policy, monetary and fiscal policy, and other factors of macro-economy (Jayaraman 2009, p.59). The economy of China is majorly relies on exports coming from manufacturing sector, which also relies on raw materials from other countries and therefore China has been trying to sustain a stable peg of its Yuan to match US dollar. International economists argue that Chinese currency, Yuan is lowly rated by up to 40 percent (Hodge & Schachter 2006). Therefore a shift in Yuan is capable of creating profitability of multinational firms operating in the Chinese market. Because higher economic growth over the years since 1980s, a strong demand has increased greatly for both semi skilled and skilled labor in that country. Bradsher (2012b) pines that the costs of labor have gradually risen in the past 5 years while the government also has increased the level of minimum wage. This is already affecting operation costs in Chinese companies. Such costs will much affect companies intending to conduct business in Chinese markets since they will be forced to factor costs as risks. In 2001, China joined the World Trade Organization, and then improved its laws and legislations with its trading partners to increase investment in that country (White 2013). Since then, the trade has increased, leading to the growth of the country. Such growth has also improved life of individual Chinese citizens. Czinkota et al., (2013) pine that over the years the middle class population has increased, hence increase disposable income creating a great opportunity for luxury products. However, fast economic growth in China has resulted to relentless consumer inflation contributing to the frequent government regulation. Regulation on business is bad for economic health of foreign business. As stated earlier, competition both internally and externally has become stiff, making protect its internal companies through protectionism (Conway et al. 2010). 5.0 Social and Cultural environment Research holds that China has a deep rooted history of traditions and culture which still manifest itself in business deals today (Meng 2011). Such cultures have shaped the behavior and negotiations of business deals with people from other parts of the world. For instance, a chief executive officer from the West is often viewed as a more of a consensus builder or debater of strategies with company workforce, which leads to execution of strategy, while in China negotiator is viewed just decider and a sole implementer of the strategies (Liu et al., 2010, p.3). Chinese business culture also has strict hierarchies different from that of other countries especially the west. Regulations in China are also not transparent as the west; a situation which could cause conflict between the government and a foreign country. Chinese have always been rooted to their culture called Guanxiwang which has lasted for decades. Derived from the word Guanxiwang, Guanxi means creating a strong relationship with other entities or rather businesses and customers in form of a network (Huang, Davison & Gu 2010, p.559). The result, such of such network is a mutual relationship. With this system, the company must be able to create a high level of satisfaction in order to make the customers loyal. The problem with this form of relationship is that foreign may find it hard to attract customers who are already loyal to Chinese businesses. Not similar to the west in which creating relationships with other companies is of less significance because of strict legal issues and politics, which promotes contractual commitments, in Chinese market businesses depends on network created by Guanxiwang (Huang, Davison & Gu 2010, p.563). One social factor which favors foreign business operation in China is the increase in population over the years. Today China is ranked as the most populous nation in the world with more than 1.35 billion people (Czinkota et al., 2013. With this huge population, foreign companies are always keeping an eye on China and consider such population can improve their customer base. However, the truth is that China is a multifaceted market because more than 850 million Chinese citizens reside in the poor countryside (Wing 2007, p.385). This market segment is hard to penetrate, more so with luxury goods, because they considered a basic need to be more important. Other social and cultural factors which are likely to affect people who are planning to do business in China include attitude and behavior. According to McEwen et al, (2006, p.69), once an individual attitude is created it becomes very difficult to change it. This should worry new businesses who enter Chinese market because Chinese citizens are known to be deeply rooted in their culture and it is that aspect that drives their attitude. Chinese shoppers, particularly younger generations residing in cities relate products from western countries with individualistic values, achievement and pleasure (Willis 2008, p.275). So they will only buy them when satisfy such needs. All together, they will prefer local or products from the East when pursuing values such as harmony and loyalty (Liu et al., 2010, p.12). 6.0 Legal and bureaucratic environment Technicality and complexity in law and legal issue which are loosely defined in China pose serious risks to foreign businesses (Douglas & Craig 2011, p.156). This is much different in western economies which have strict laws which protect local and foreign firms. The accession to the World Trade Organization has brought China in the inclusion of the global business legislations and policies, and amendments of patent rights (Heilig 2007). However, this has not brought much change since it needs the good will of the people themselves. Currently, it is still widespread to notice technology or intellectual property being stolen by the staff a foreign company operating in Chinese or by the local competitor in China (Jayaraman 2009, p.56). Meng (2011) asserts that China has a copycat culture called “Shanzhai” which plays an integral role in the Chinese society and is aligned to Confucian which encourages individual sharing hence promoting greater harmony. However, such culture is not good for foreign businesses in that it infringes their intellectual property rights. The culture has seen business men duplicate all product models including shoes, clothing and electronics among others and sell them both locally and abroad. China is considered as the leading manufacturer of counterfeit goods globally (Jayaraman 2009, p.56). Chinese wordings even in the laws are normally vague and may be understood in several ways. Maddison (2007) argues that legislation on general trade, taxation, labor and intellectual property rights are frequently not well defined which results to difficulty in interpretation. This can also leave room for manipulation by legal experts against foreign businesses. Coca-Cola has been accused of ignoring language as a culture in its advertisements. For instance, the name of Coca-Cola in Chinese was initially referred to as “Kekoukela”, implying “female horse overfed with the wax”. However, after the contest with Chinese women, the company renamed the product “kokoukole”, meaning “happiness in the mouth” (Blanding, 2010). Although, laws are in place to prosecute those who infringement intellectual property rights, such laws are not effective enough and can be manipulated. Heilig (2007) claims that the Chinese perceive their market just as a battleground; this is typified by their well–known statement “shang chang ru zhan chang”. This creates a stiff competition created by foreign companies have made local Chinese companies to compete strongly against them are recognized to employ art of war approach which is domestically known as from the “Bing Fa” (Jayaraman 2009, p.56). The confusion created by this ideology encourages the “rule of man” as opposed to the recommended “rule of law” and thus patent violators, particularly in the drug sector perceive duplication and violation of patent as good for their business and country in general. They justify this by copying drugs of foreign companies and market at reasonable prices to their people. Hence, foreign firms which are keen to conduct business in China must be wary of the legal loopholes and challenges they may face. One method of reducing these challenges is to create a stronger Guanxi with domestic companies and Chinese citizens or ensure that more sensitive technologies are not outsourced to this country (Huang, Davison & Gu 2010, p.560). 7.0 Managerial and labor environment Over the decade, China has been known a place of cheap labor (Bradsher 2012). As such, countries have been scrambling to acquire such labor so as to reduce the cost of operations. In the process many foreign companies have been accused of violating both international labor laws and human rights. Criticisms are loud due to poor working conditions, longer hours of work and low wages provided by these foreign businesses. One of the companies which have been accused for violating the rights of workers is Apple through its producer contractor Foxconn (Bradsher 2012). The situation has made the government to tighten its laws to stop such acts. However, much need to be done. Currently, China stands as the leading manufacturing country in the world (Jacques, 2009). The status has increasingly made companies in that country scrambling for workers. This has made many foreign and even local companies to increase their wages to lure more workers. Bradsher (2012) claimed that a survey done by Standard Chartered bank in March 2012 about wages with participants’ of 200 companies, revealed wages have gone by 10 percent. In another case, Foxconn has increased salaries by up to 25%. Therefore, companies with the intention to do outsource its production this market must consider the risk of wage rise (Bradsher 2012). 9.0 Human resource environment Available and cheap human resource over the years made led to China’s growth to leading manufacturing power worldwide. Pletcher (2011) contends that China has many semi skilled workers, which are highly needed in the manufacturing sector. In the past, western companies have been employing on low salary so as to lower the production cost. Bradsher (2012) established that the costs of labor have gradually gone up in the past 5 years. Similarly the current government has also raised the level of minimum wage making companies to increase their wage bill. This will affect the costs of operations in the country, thus a company from the West planning to enter into in Chinese must factor in the risk of high cost of operations (Jayaraman 2009). Several foreign investments businesses understand that their major challenge to success in China is the severe dearth of experienced and high quality management. Companies want to invest in China has increased in the recent years, increasing the need for qualified management (Douglas & Craig 2011, p.157). As established companies have soared, the demand for new management responsibilities has emerged that China never had. To meet the human resources requirement, the foreign companies will be compelled to increase their budget for training new employees. 10.0 Industry and policy factors A recent debate in business arena has always emphasized on the viability and challenges of investing in China. According to Pletcher (2011), an analysis of long history of China reveals that shows that government have almost often relied on some form of industrial policy in managing economic growth. The industrial policies in the times of imperial dynasties could have looked somewhat different from the current but the fundamental grounds as always been the same. The government has usually aimed at promoting industrial advancement and economic growth in a coherent and strategic manner for the gains of the nation (Pletcher 2011). From the past industrial policy has been so different from other countries which would want to invest in China. Conway et al. (2010) argues that in the past, every policy was controlled by the state under the planned economy. Reforms have been enforced, but have little has changed because still remains as one of the socialist countries openly supporting communism (Conway et al. 2010). In this aspect, most state-owned companies are allowed to dominate an industry. This can easily create a monopoly while looking foreign companies from competition. Today, the government has aligned transparency as one of the key policy for businesses operating in China (Jacques 2009). This is a major improvement from in the past decade. Legal transparency remains a major key risk to foreign firms in that country (Heilig 2007). Experts claim that transparency is considered big issue in country which companies have to conform to. Also the government has facilitated easy access to government documents to the public more than before. This is a positive opportunity for foreign companies quickly enter Chinese market. 11.0 Customer and competitive factor To perform well in China has become is a big challenge which not all global companies can handle (Douglas & Craig 2011, p.158). The competition has become stiff as every company both domestic and foreign scrambles for a large share of the market. In the last ten years, almost 300,000 foreign-based companies have made an entry into China, attempting to capitalize on the nation’s manufacturing strength and get to its customers. Conway et al. (2010) maintain that Firms like computer manufacturer Lenovo, products company Haier, and telecommunication gadget producers ZTE and Huawei Technologies and other companies are present in China creating a lot of competition. Similarly, China is ranked as the biggest counterfeit producer in the world. This means majority of products are present in this market. This situation is bad for foreign companies which are likely to find a copy of their product being sold at a cheaper price. Czinkota et al., (2013) contend that over the years, the middle class population has increased, hence increase of disposable income creating a great opportunity for luxury products Even though, china has a large population which companies struggle for to increase their customer, the truth is that there still a big population still lives in poverty. Jayaraman (2009, p.58) said that out of 536 million individuals who reside in urban centers, 300 million people are regarded as middle class people with disposable income. According to Jayaraman (2009, p.58) Chinese middle class earns more than $5000 per person within the period of one year but foreign companies planning to conduct business in China ought to also reflect on the reality that Chinese Citizens are the world’s largest savers compared to Western nations like the US in which consumers posse a culture which encourages spending and are in fact have immense spending power. 12.0 Conclusion The report has identified several opportunities which managers who form partnerships with Chinese can exploit. On the other hand, the challenges are also there in equal measure. Chinese are also rooted deeply in their culture that managers targeting the market must possess cultural intelligence and have a strong brand superior to Chinese ones in order to penetrate that market. The foreign companies also face regulation from the government and competition from established companies. As such, managers must up their strategy to unlock this lucrative market; the appropriate mode of entry into the market will greatly help managers. 13.0 Reference Andrew, J 2010, Globalization: Key Thinkers, Cambridge, Polity Press, John Wiley & Sons. Bradsher, K 2012, Two Sides to Labor in China, New York Times. Blanding, M 2010, The Coke Machine: The Dirty Truth Behind the World’s Favorite Soft Drink, New York, Avery. Czinkota, M.R, Ronkainen, I., Sutton-Brady, C, Beal, T & Stegemann, N 2013, International Marketing: Asia Pacific Edition, 3rd Edition, Cengage Learning, Conway, P. et al. 2010, Product Market Regulation and Competition in China, OECD Economics Department Working Papers, No. 823, OECD publishing, viewed on September 20, 2014 from http://dx.doi.org/10.1787/5km32vmgmfbx-en Douglas, S & Craig, C 2011, The role of context in assessing international marketing opportunities, International Marketing Review, Vol. 28, No. 2, pp. 150-162. Einhorn, B & Khan, N 2013, A Chinese Hearing Implant Takes Aim at Cochlear, Bloomberg BusinessWeek, Viewed on September 9, 2014 from http://www.businessweek.com/articles/2013-03-28/a-chinese-hearing-implant-takes-aim- at-cochlear Heilig, G 2007, China Bibliography – Online, China-Profile.com Hodge, R & Schachter, L 2006, The Mind of the Customer, McGraw-Hill Professional Publishing. Jacques, M 2009, When China Rules the World: The End of the Western World and the Birth of a New Global Order, Penguin Books. Huang, Q., Davison, R & Gu, J 2010, The impact of trust, guanxi orientation and face on the intention of Chinese employees and managers to engage in peer-to-peer tacit and explicit knowledge sharing, Information Systems Journal, Vol. 21 No.6, pp.557-577. Jayaraman, K 2009, Doing business in China: A risk analysis, Journal of Emerging Knowledge on Emerging Markets, Vol.1, No. 1, pp.55-62. Liu, S, Smith, J, Liesch, P. W, Gallois, C, Ren, Y & Daly, S 2010, Through the Lenses of Culture: Chinese Consumers’ Intentions to Purchase Imported Products, Journal of Cross Cultural Psychology, pp. 1–15. Maddison, A 2007, Chinese Economic Performance in the Long Run, Development Centre Studies, viewed on September 20, 2014 http://browse.oecdbookshop.org/oecd/pdfs/product/4107091e.pdf McEwen, W, Fang, X, Zhang, C & Burkholder, R 2006, Inside the Mind of the Chinese Consumer, Harvard Business Review Vol. 84, No.3, pp.68-76. Meng, F 2011, Phenomenon of Chinese Culture at the Turn of the 21st century, Singapore, Silkroad Press. Pletcher, K 2011, The History of China, Britannica Educational Publishing. Vogel, E 2011, Deng Xiaoping and the Transformation of China, Harvard University Press. White, G 2013, China trade now bigger than US, Daily Telegraph (London). 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