International Economic, Political, Financial, Legal and Socio-Cultural Analysis of China - Case Study Example

Contents Introduction 2 Potential market 2 Market demographics 5 Political risk in China 6 Industry and competitor analysis 8 Modes of entry 11 Social responsibility 11 Conclusion and recommendation 12 Appendices List of figures Figure 1 Television viewership in China by age groups 6 Introduction China is one of the largest markets in the world with one of the fastest growing economies that continues to attract new marketers keen in expanding their international presence. The Wiggles is hypothetically considering entering the Chinese market as part of their international expansion strategy. The execution of this move though cannot be made blindly as it needs to be considered strategically informed by a reliable feasibility study. The following report provides the findings of an integrated International Economic, Political, Financial, Legal and Socio-Cultural analysis of China. From the findings, the report will also make informed recommendations to The Wiggles on whether to enter, ignore or postpone entry into the Chinese market. Potential market China provides the right economic environment for any foreign firm desiring to explore the huge market. The economic growth trends in the last ten years and predicted trends in future show a promising economic environment good for conducting business. Such a robust growing economy ensures that consumers have enough disposable income to buy products and services being offered in the market. The purchasing power in China is very encouraging and so is the GDP per capita which stands at US$ 4 421 as of 2011 (DFAT 2011). A number of authors identify exporting as one of the many foreign market entry strategies employed by expanding firms (Strickland 2004). Global operations create opportunities to expand the market and deal with lucrative large-business customers operating in the global market. The Wiggles has the opportunity to explore the Chinese market by utilizing skills learned in operating in the domestic market and foreign markets. The firm needs to identify a niche market that is not saturated with many players. This is because the Chinese market consumers have the financial and economic capacity to consume a huge amount of entertainment. While China offers a good market by economic and financial standards, there is also the issue of willingness to buy what is offered in the market based on the perceived value and benefits. While China’s TV programming is strictly controlled by the state, the people of China have remained relatively unreceptive to western TV programmes based on the moral and ethical standing of the Chinese people. An article by Barboza (2006) in the New York Times discusses the scenario of children TV programming citing the Chinese culture and parents as the greatest impediment to children entertainment marketers as opposed to the government. The author writes that the Chinese culture is very conservative and that parents stick to culture and academic oriented children entertainment. “Parents here may be even more restrictive than the government, viewing Western-style television as too unruly” (Barboza 2006 ¶). One Chinese parent, as cited by the author, said, “I'm not against cartoons. But I try to encourage him (11 year old son) to watch documentaries on dinosaurs and the Second World War. These programs are useful to his study” (Barboza 2006 ¶). The author adds that there is not much difference between children’s TV programmes in China and the classroom. Exposure to the international market will enhance knowledge, technology and equip The Wiggles with better knowledge on operations and marketing in the Asian market. Eventually, this will enhance competitiveness in the new market and also improve quality. Operating in the Chinese market will also empower innovation and technology transfer in that the company will seek to manufacture products that befit various geographic regions. Salomon (2006) encourages firms to go global to maximize on the benefits of a more globalised global economy. In particular, the author suggests exportation as the most logical mode of entry into a new market. For this Salomon (2006) says that ‘exporting strategies differentially influence innovative productivity. In particular, firms that participate in more export product markets experience greater innovative productivity’ (p. 104). For The Wiggles, exporting to a foreign market is not wholly a new concept as the firm has employed the strategy in some markets in terms of DVDs, CD’s and merchandise (The Wiggles). The fact that there are many players in the children entertainment industry in China and in the global market implies that product differentiation is a very significant issue for The Wiggles. Players wishing to outdo competition have to develop better quality products than the competition can offer. For The Wiggles, it means operations in China exposes the firm to more competition and higher demands for product differentiation in response to market needs. An export strategy exposes the firm to global competition and hence there is a higher need for differentiation. In the case of China, entry into this particular market brings in another challenge in handling counterfeiters given that 20% of the products sold in the Chinese market are counterfeit (Worldsavvy 2012). Salomon (2006) suggests that the best way through which firms achieve differentiation is through technology, unique product design or attributes, brand image, superior customer service and efficient distribution channels. However, developing this level of uniqueness to compete on an international level creates a challenge in form of added costs. Therefore, The Wiggles has to choose between the options of generalizing the global market including China or developing new products specific to the Chinese market. For The Wiggles, the firm has to stick with the option that offers the highest benefits depending on whether it is focused on cost leadership or product differentiation. Market demographics With a population of over 1.4 billion people, China is the fastest growing and largest potential market in the world (Chan & Cheng, 2002). One of the leading leaders in children entertainment already operating in China, the former vice chairman of MTV Networks, Bill Roedy, stated that there “there's no such thing as a global strategy without China” (Barboza (2006 ¶). That is how huge the Chinese market is that every multinational firm keen on going global is first seeking a place in China. By 2006 estimates, China was home to over 300 million children aged 4-14yrs (see chart below). This implies that for The Wiggles, this market segment alone is larger than the entire US population. As such, it holds enormous significance in the operations of The Wiggles. Furthermore, the fact that the brand also targets other age groups inclusive of parents in Australia and other markets implies that the Chinese market could be way higher that the predicted 300 million. Supported by the one-child policy in China, it means that the market can more than double. Figure 1 Television viewership in China by age groups Source: ChinaKnowledge.com Political risk in China The fact that China is a communist country is one of the many issues that firms seeking to enter the Chinese market must contend with. Such a form of government poses a very high political risk to businesses especially for foreign owned ones. Jakobsen (2011) defines political risk as possibility of government interference in business affairs of persons or businesses doing business in a particular country. In essence, political risk is loosely categorised into three groups namely; judicial protection, legal structure, social unrest and activism. Jakobsen (2011) analysed 332 reported instances of political risk and found out that 48% related to government intervention, 39% to war and social unrest and 13% to activities and unfair competition. Essentially, Communism dictates that government shall own all forms and means of production while citizens provide labour only in exchange for social amenities and basic needs. Prior to the 1970’s, Chinese people were not allowed to engage in entrepreneurship. However, with reforms under Jintao’s administration, the government instituted constitutional changes that allowed people to engage in business. Government-owned companies in various industries were privatized. Improved efficiency in management and general operations in these industries after privatization were recorded. This greatly improved and prepared the Chinese market for better competition and modern business practices. Along the way, other reforms opened up Chinese border to foreign investors. While privatization and a market economy are iconic ideals of capitalism and western civilization, China was keen to retain some of its key communist ideals. As such, the government retained a firm grip on some industries such as banking, railways, and telecommunication in order to control the economy and influence other industries. Communism, as a key ideal of the Chinese government implies that privately owned businesses are at a risk of nationalization and confiscation by government authorities. Furthermore, the Chinese government is famous for contract repudiation for private businesses conducting business with the Chinese government (China Risk Management 2012). The Wiggles is not exempt to such political risks. While the risk of nationalization of The Wiggles assets in the country maybe minimal, the risk of government involvement through strict content regulation is relatively high. Barboza (2006) reports that the field of film and TV programming is strictly regulated. Moreover, the Chinese government is very keen on promoting local content in the country which is primarily geared towards promoting local culture at the behest of foreign players. Therefore, The Wiggles operations in China can be disrupted by a government that is keen on promoting local content and culture through film and TV programming, a major product that The Wiggles plans to market in China. Industry and competitor analysis Majority of the foreign players in the Chinese children entertainment industry are American owned. These include DreamWorks Animation, The Walt Disney Company, Cartoon Network and Jim Henson Company. Viacom, through its two major brands, MTV and Nickelodeon has also been aggressively marketing in China. The Jim Henson Company entered into a partnership with Nine Eyes Stone and Shanghai Animation Film Studios to produce the Sid the Science Kid: The Movie (Barboza 2006 ¶). This is line with the market conditions in China which seems more receptive to education oriented children entertainment as opposed to plain entertainment. While The Wiggles produce connect that promotes learning, the move by Jin Henson Company shows that there is except competition in The Wiggles niche market and also that there exists a market for education oriented children’s entertainment market. With a huge market size of over 300 million, there are high chances that with the right marketing mix and right approach to cultural matters, The Wiggles will be successful. The Walt Disney Company, China holds a significant share of the children’s entertainment industry in China. Its success in the market is largely owed to its partnering with the Communist state in content development for state owned media houses. Earlier in April 2012, the Walt Disney Company entered into a partnership with China’s largest internet provider, Tencent and the Ministry of Culture’s China Animation Group to co-found The National Animation Creative Research and Development Cooperation (Dickson 2012). The new entity is poised to develop content for TV broadcasting, movies and online gaming. If the Walt Disney Company can replicate its success in the US in China, then the new entity has a capacity to dominate the industry in China. DreamWorks Animation entered the Chinese market in a big way even before Disney world. Given the firm’s popularity and experience in movie production, DreamWorks Animation ventured into a joint partnership with China Media Capital and Shanghai Media Group. The new venture created established a state of the art production studio in Shanghai where various types of movies including children entertainment programming are produced. These two partners have enormous experience, knowledge and resources to compete well in the industry (Bowerman 2005). The Theme park industry in China, which is a branch of the Children’s entertainment industry, has registered one of the highest levels of growth in China. As of 2005, there were about 380 amusement parks which by 2011 had grown to around 2500. Almost every medium city in China has bee pushing to develop an amusement park or theme park. Although the industry is highly regulated by the Chinese Association of Amusement Parks and Attractions, the ‘Theme Parks and Amusement Parks 2006 –2010’ report by PricewaterhouseCoopers warns lack of controlled development of themes parks and amusement parks in China could harm the profitability of the industry in the long term (Bowerman 2005). Such calls for stricter control of the theme park industry have been acted upon through the National Development and Reform Commission (NDRC). This authority issued a decree in 2011 which requires that all theme parks larger than 20 hectares or worth over US$78 million in investment must get national level-approval. Furthermore, the predictions of PricewaterhouseCoopers way back in 2005 have come to pass. The China Economic Review (2011) writes that out of the 2500 theme parks in the country, only 10% are profitable, 20% break even and 70% operate in losses. Again, 90% of theme parks developed close business within the first three years. In spite of such gloomy statistics, the industry attracted a whopping than 19 million visitors to its parks in 2010. Poor performance for private theme parks is largely attributed to stiff competition from state owned parks which sell tickets at prices way below their market value and corruption from government agencies involved in licensing (China Economic Review 2011). The prospects for the children entertainment industry are mixed. This is because increased government involvement in regulating the industry through NDRC creates more barriers for potential industry entrants. Further, government’s involvement in the industry by running theme parks and its pricing strategy hurts business. However, there is hope for the industry provided by the growing middle class which is keen on spending on entertainment. Data from the statistical yearbook of the republic of China (2011) shows there is hope for players in the entertainment industry shown by growing expenditure in individual expenditure on entertainment. As of 2005, expenditure on recreational and cultural services and facilities and attachments stood at NT$ 5239 and grew to NT$ 5314. PricewaterhouseCoopers (2012) says that the global entertainment industry is growing as indicated by 4.9 percent growth in 2011 and 4.5 percent increase in 2010. With China being a significant player in the industry may be posed for growth in coming years. Modes of entry Going by the trends in the market, joint venture seems to be the most popular mode of entry for recognised players in the global children’s entertainment industry. This mode of entry is best suited to foreign players who do not have strong distribution networks in the host market or those who seek to attain local product appeal in highly patriotic cultures such as China (Tong 2011). Though The Wiggles have not been very keen on making joint venture in other markets, it is important that this option is explored in China. This is because the cultural distance between China and Australia as informed by the Hofstede’s cultural dimension comparison between the two countries shows is relatively high (ITIM 2003). Furthermore, the fact that The Wiggles characters are developed around western culture and personalities makes them inappropriate for the Chinese market. For The Wiggles to understand best the Chinese culture and develop specifically Chinese content to compete effectively in the market, partnership with an experienced player in the industry is paramount. However, creation of a theme park in China should be halted. The Social responsibility Modern marketers have turned to corporate social responsibility as a marketing tool. While such activities may greatly be driven by the need for a firm to play an active role as responsible corporate citizen, it might be also one of the key areas of a firm. The Chinese people are very keen on preserving their culture and maintaining high moral and ethical standards which is also expected of the people. According to the Hoftsedes cultural dimension, the Chinese people have high regards to culture and social units (ITIM 2003). This means that The Wiggles can capitalize on this aspect by developing a unique relationship with certain sections for the society. For instance, The Wiggles can make their presence known in the market by donating The Wiggles branded toys to a number of special schools in China. This can be followed by performing shows directed at disabled children. Conventionally, this will give The Wiggles much needed free publicity in a country where the media is tightly controlled by the government. This concept will work in diverse ways for The Wiggles. For instance, linking with special educational institutions in China works well with the society that is very keen on blending children entertainment with learning and at the same time positioning its brand as a people centred product from a socially responsible corporate citizen. However, to gain the local appeal, The Wiggles will need to do this with the aid of a local partner through a joint venture. Conclusion and recommendation It is highly recommended that The Wiggles enter the Chinese market to cement its global presence. With a population of over 1.4 billion people, China offers even a larger market that the US, UK and Australia combined considering that The Wiggles business strategy focuses on children and their parents especially for live performances. These live performances might be the best alternative to theme parks and cartoons. Furthermore, live performances are harder to counterfeit. However, there is need for aggressive marketing relying on The Wiggles traditional marketing experience and that of a competent Chinese partner. This will ensure that The Wiggles brand is relevant to the Chinese culture in terms of language, characters and also the country’s educational curriculum as a part and parcel of entertainment. The same way that The Wiggles will formulate an entry strategy, the firm must also formulate an exit strategy. This might be necessary when the political climate in the country becomes unbearable to the business. References Barboza. 2006. Retrieved March 1st Sept, 2012 Bowerman, G. 2007. Is Asia the ace in the pack? Theme Park China (part 2). Retrieved March 1st Sept, 2012 Bremmer, I. (n.d.) Political Risk: Countering the Impact on Your Business. QFinance. China Economic Review. (2011). Retrieved March 1st Sept, 2012 China to More Than Double Entertainment Industry. http://online.wsj.com/article/SB10001424052748704615504576171743080635356.html China Risk Management http://www.chinariskmanagement.com/Political.html Chan, K. 2006. Children’s Television Programs in China: A Discourse of Success and Modernity. Retrieved March 1st Sept, 2012 Dowlings et al. 2009. The Wiggles: Company and industry overview. Dickson, J. (2012). Chinese animation industry gets boost from Disney. Retrieved March 1st Sept, 2012 ITIM International. (2003) Geert Hofstede™ Cultural Dimensions: Australia, Canada, China, and the United States. Retrieved March 1st Sept, 2012, from Jakonsen, J. (2011). Political risk for multinational companies: Empirical evidence from a new dataset Strickland, A. (2004). Winning in the marketplace: core concepts, analytical tools, case. London: Pearson. The Wiggles (2012). Retrieved March 1st Sept, 2012 Tong, J. (2011). Finance and society in 21st century China: Chinese culture versus western markets. London: Gower publishing. World Savvy. (2012). Accessed online on 5th August 2012 from, Retrieved March 1st Sept, 2012 Appendices Appendix A. Summary of China environment The business environment in China is very encouraging for any aspiring foreign firm. GDP growth rates stands at US$ 7.29 trillion and GDP per capita at US$ 5 414. Inflation remains relatively stable at 5.4% in 2011. The government has set up Free Trade Zones, Special Economic Zones. Since 2008, tax on profits for all foreign and domestic companies was set at 25%. Joint ventures and WFOE are subject to 14 different types of taxes. However, foreign investors in special economic zones are exempted from tax for the first two to three years and enjoy a discounted rate thereafter. As of July 2012, the base lending rate was set at 6.31% and the one-year deposit rate at 3.25%. Between 1996 and 2012, China interest rate averaged 6.4600%. Although the government controls the banking sector through six major banks, foreign financial institutions have commenced operations in China. Again, there are Chinese banks in other countries such as Australia to ease up international trade. From a legal perspective, China is making strides to match the rest of the developed world. To start with, China is a signatory of the Patent Cooperation Treaty hence recognizes patents. A patent in China is served on a first filer basis and lasts 20 years from the time of filing the application with the China’s State Intellectual Property Office (SIPO) which has provincial offices. There are other numerous statutory laws that have been enacted over time that apply to all business in the country. Alternatives to legal redress especially for businesses include petition system, mediation, and protests. The labour Contract Law enforced in 2008 requires that employment contracts be put down in writing. The contract must address issues such as severance pay, probationary periods, lay-offs and collective bargaining. The large population in China offers a ready market and the presence of factors of production make it easy to start up a business. However, for foreign firms entering this market it is not that easy. The government is keen on encouraging FDI from export oriented firms and not foreign firms just keen on exploiting the local market. This is a strategic move by the government that seeks to create employment for the local people and earn government revenues through taxes and levies while at the same time protecting local industries. Joint ventures basically replicate the requirements of WFOE. The first step is to ascertain whether the business of the firm is approved for foreign investment as some local industries are protected from foreign competition. The second step is assessing the investment field of the investor by providing Articles of Incorporation, national business license, Certificate of Status, Bank endorsement letter and a description of the investor’s business activities. Step three is government approval. However, foreign investors planning of making joint ventures are encouraged to seriously vet their partners and ensure that the partners are in legal business in an industry that permits foreign investment. The largest threat to The Wiggles operations in China could be high level of bureaucracy, competition, corruption, poorly developed intellectual property rights law, piracy and counterfeiting. It is estimated that the 20% of all consumer products in China are counterfeit. This high rate of piracy and counterfeiting is fuelled by corruption, limited resources, local provincial protectionist policies and staff training and poor public awareness. Read More