Opportunities, Risks, and Strategies for the UK-Based Companies to Start Business in China - Essay Example

?Business Management: Opportunities, risks, and strategies for the UK-based companies to start business in China Introduction One of the greatest stories of the economic success from the last three decades is of China that has seen a transition from a soviet-style planned economy to a much more market-oriented and vibrant economy. Since the start of reforms in the year 1978, China’s economy has shown remarkable growth that is driven by numerous factors including growth in the physical and human capital (Ojiako, Maguire, and Guo, 2009). China is known across the globe for its excellent manufacturing capability and is indeed, the larger producer of a vast range of things that include but are not limited to textile, gadgets, and toys. Presently, the focus of a vast majority of the British companies that are either doing or intend to do business in China is a small number of cities that are large and familiar including Shanghai, Beijing, Shenzhen, and Guangzhou. Nevertheless, the conditions of business in most of these cities are quickly evolving. A lot of British companies have encountered increasingly saturated and mature markets in these cities of China. The opportunities for development are only niche whereas the pressure from the sophisticated Chinese companies and other foreign companies is being increasingly competitive. In these large cities, the factor input costs are the maximum. As a result of this, most of the British companies in these cities opt for fresh opportunities of business in the regional cities of China. China offers tremendous opportunities of establishment and growth of business to the British companies. The government of China is currently making intense effort to improve the social welfare, and the infrastructure of the country, and is also targeting resources for the development of the vast interior and rural regions of China. Presently, the industrial structures in China are rapidly moving inland and dozens of coastal areas and new cities are surfacing on the map of China and are developing into the urban clusters, thus providing immense opportunities for the British companies to arrive and establish their business there. One of the main concerns for the UK based company is where to start its business in China. While there might be a saturation of the fast food chain in the large and popular business cities of China as Shanghai and Beijing, there is plenty of room for growth in the newly emerging coastal areas and cities in China. Challenges of expansion of business in China for a UK-based company In some ways, expanding a business in China is more challenging than doing so in any other country. The protection of intellectual property and an astute comprehension of the cultural protocol are integral to the success of any company expanding in China. Meticulous research and preparation can help the company avoid most of the pitfalls in business. It is advisable for the company to also seek legal guidance before establishing its business in China. The biggest challenges of China are also some of the biggest advantages China has to offer. The market population of China is 1.5 billion which makes the country likely to become the world’s second largest market of consumers by the year 2015 (Startup Overseas, n.d.). Since most of the businesses in China are owned by the local families and the Chinese people place extreme emphasis on promoting their local businesses, it is challenging for an external company to come and gain the support of the local community without building relationships with them. Political risks for the foreign investors in China Management of political risk in China is very important. Since the last two decades and a half, the economic reforms of the Chinese Communist Party have paved the way for foreign investment, and have shown rapid growth. It has helped alleviate poverty in China and has provided the Chinese companies with a global platform. “But the country’s economy and the foreign companies that depend on its vitality are especially vulnerable to external shocks, such as spikes in global commodity prices (particularly energy), epidemics, regional political unrest, and protectionist sentiment in the Western world” (Bremmer and Zakaria, 2006). The political unrest on the domestic scale is also a source of great risks that include but are not limited to public anger over the redistribution of land, rapid growth, industrial accidents, toxic spills, and widening of the wealth gaps. This volatility creates room for the government to disrupt the supply chains, erode the confidence of the investors, crackdown the systems, and endanger the fixed assets. Apart from these shocks, the foreign companies doing business in China operate in an investment climate that is not only uncertain but also politically influenced. The local competitors in China are more experienced and better equipped to navigate the labyrinthine business environment. Although there are laws and regulations formed by the government, yet their enforcement is poor and the protection of copyrights is also inconsistent. The murky financial system supports the state-owned entities that account for 40 per cent of the economic activity in China in spite of the growth of the private sector (Bremmer and Zakaria, 2006). In addition to that the UK-based company faces the risk of the biased retaliatory protectionist policies toward the local companies in China at expense of the foreign companies. Economic risks for the foreign investors in China As China is presently contributing to the global growth as much as the combined G7 group of the developed countries, major implications for the rest of the world could result from any slowdown. The lower income groups and the middle class Chinese are severely affected by inflation in the prices of food. There is severe need of a campaign against inflation of the prices of food in China. According to the Professor Dali Yang from the University of Chicago Center based in Beijing, “Food price inflation is severely affecting the middle class and lower income groups… Chinese parents are facing a lot of pressure in providing food, a roof and an education for their children” (Yang cited in Liu, 2011). Public anger over inflation in the prices of food has spilled out also because of increase in the cost of such other necessities as fuel. Lessons from past case studies Fired Up Corporation Ltd The CEO of Fired Up Corporation Ltd, Richard Kaye has shared the secrets of his successful expansion of business from the UK to China. Fired Up Corporation Ltd is a China and UK-based company that manufactures products for hospitality industry and home improvement. Success in the international business of Fired Up can be fundamentally attributed to the synergies between its Chinese and UK operations. The products manufactured in Hudderfield in the UK are exported to the market in China. According to the company’s CEO, “We recently enhanced our share in the Chinese domestic market through the launch of our “Endeva” range of kettles and rice cookers, now stocked in a chain of 85 supermarkets and more than 40 B&Q stores … We couldn’t have maintained our turnover and doubled our profits in 2011 without our presence in China” (Kaye, n.d., p. 9). Kaye attributes the success of the company to the resources and time it has invested in the expansion of the company’s factory and the development of relationships “guanxi” with different brands in China. There is an aura of “Englishness” about the brands of Fired Up Corporation Ltd which is equated by the Chinese consumers to craftsmanship and quality. Kaye says that the top management assumes a very important role in successful establishment of business of any UK-based company in China, “Growing our business in a market over 5,000 miles away has been challenging but worthwhile. Be prepared to invest significant personal time in China, this can’t be delegated and the drive must always come from the top” (Kaye, n.d., p. 9). McDonald’s China McDonald’s is one such fast food restaurant that has played the role of a cultural change agent in China. In China, McDonald’s started its initial strategy by advertising to the upper class and the middle class citizens (Mujtaba and Patel, 2007, p. 57). The Chinese do not want to queue in line like most of the East Asians. In the Western perspective the counter service situations are not much more than the unorganized free-for-alls. The Western travelers are often surprised by the lack of apparent civility since they expect high level of politeness and civility from the Asians that the Asians tend to maintain for the in-groups that have a similar habitus. The younger customers in China have readily adapted to the egalitarian practices of self-seating. At the macro level, “McDonald’s Beijing has also been credited with raising the expectations of cleanliness in food service preparation at competing Chinese food outlets. A tour of the McDonald’s kitchen is available on request, even to local competitors, of which there are now many” (Murray, n.d., p. 23). Chinese customers tend to transform their neighborhood outlets into the leisure centers. MacDonald’s has created a unique atmosphere of Chinese style family to accommodate to the contemporary urban Chinese family’s new habitus. Since not many parents in Beijing live with their married children, so MacDonald’s has advertised itself as a location ideal for family dining in an attempt to embody the harmony and solidarity of the extended family in China. This is evident from the slogan McDonald’s has used for its promotion, i.e. “Get together at McDonald’s; enjoy the happiness of family life” (Cai, 2003, p. 6). Recommendations for the UK-based company considering internationalization in China In light of the aforementioned risks and challenges of establishing business in China, the following recommendations are made to facilitate the integration of the UK-based company in China and the establishment of a successful business: The not-to-dos To start with, there are certain things that the UK-based company should abstain from; the UK-based company should not overlook the challenges of the China’s market because of the opportunities that are foreseeable and at the same time, the company should also not think that the risks are hard to assess and therefore China is not a suitable market to invest in. The risk assessment should not be based on the evidence provided by case studies and employees with insufficient experience of working in the China’s market. Keeping this not-to-dos in mind, the UK-based company should employ certain hedging strategies. First of all, the company should try to convince the British government to press the government of China to institute the fundamental economic rules, enforce these rules, and implement a better system of protection of the intellectual property rights so that the government of China may honor its commitment to the foreign investors. Corporate social responsibility Secondly, the UK-based company should establish the standards of corporate responsibility and show firm adherence to them to minimize the reputational risks. The top management should have a clear idea of what they will accept and what they will not accept to get the permission of admission to the China’s market from the Chinese government. Business etiquette “Asian thought and management is fundamentally characterized by “both–and” dialectical thinking and change mentality” (Fang, 2010, p. 159). One of the essential components of doing business in China has traditionally been banquets. “ If your host makes a toast to you, lower your glass to “chink” the rim of it lower than the rim of their’s and say “gan bei” (literally “dry glass”, so be prepared to drink up!). This is a sign of respect and burgeoning friendship and will make the Chinese think you’re a real insider” (Powell, n.d., p. 8). Corporate leaders of the UK-based company should provide the managers with the opportunity to learn the cross-cultural business etiquettes in the international assignments so that they can easily develop interpersonal relationship overseas (Okoro, 2012, p. 130). The UK-based company should carry out a comprehensive research of the cultural norms and values of the Chinese consumers and society as a whole. “[M]arketers need a better understanding of culture as a dynamic process that relates to the forces of globalization” (Murray, n.d., p. 16). A firm understanding of the culture of China would enable the company to train its workforce accordingly and inculcate the right skills in them including the Chinese language, the negotiation and communication style of the Chinese people, their likes and dislikes, and their business etiquettes. Only with a fair understanding of these cultural aspects would enable the company to develop strong bonds with the people of China in as less time as possible. Food prices Considering the prevailing inflation in the prices of food in China, it is recommendable for the UK-based company to start over with lower prices of food particularly fish and chips as compared to its contemporaries in China. This would provide the UK-based company with an edge over other fast food chains in China. Once the restaurant gains public attention and appreciation, elevating the prices of food items should be considered. Miscellaneous Kaye (n.d., p. 9) reveals five fundamental secrets of doing a business successfully for the UK-based companies in China that are mentioned below: 1. The company should try to establish and sustain strong relationships with the stakeholders in China; this is known as guanxi in China. 2. The company should choose the most appropriate individual to head up the operation and the some equity should be shared with that individual. 3. The company should attract the most competent workforce by paying better than average wages to them. 4. The company should make products that have an international appeal and that can be shipped across the world from China. 5. Guanxi is a central concept in the Chinese society and explains the basic dynamic in the influence’s personalized networks. Conclusion From the case study of Fired Up Corporation Ltd, this becomes clear that there is immense room for successful internationalization of the UK-based businesses particularly when they have to expand in China. The Chinese consumers have an inherent respect for and confidence in the quality of service provided by the UK-based companies which would make it easier for the company to integrate into the Chinese society. One of the most fundamental requirements of doing successful business in China is to establish relationships with the consumers and stakeholders in China. Guanxi is amongst the main drivers of business in China. Starting a business from scratch in China requires local protectionism since the businesses that are non-local are usually unfavored. The UK-based company also needs to seek local protectionism against the intellectual property violation. Since the UK-based company has a large chain of fish and chips restaurants, it should draw lessons from such fast food restaurants as McDonald’s who have not only successfully established themselves in China but have also brought about a revolutionary change in the cuisine, taste, and the culture of food in China. Following McDonald’s in the same footsteps, the UK-based company should emphasize on the preservation and sustenance of the extinguishing family values from the Chinese culture in its promotional strategies. References Bremmer, I, and Zakaria, F 2006, Hedging Political Risk in China, Harvard Business Review, [Online] Available at http://hbr.org/2006/11/hedging-political-risk-in-china/ar/1 [accessed: 8 January 2013]. Cai, D 2003, West Meets East: The Evolution of McDonald’s Marketing in East Asia, [Online] Available at http://wps.ablongman.com/wps/media/objects/10585/10839294/Cai.pdf [accessed: 8 January 2013]. 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Okoro, E 2012, Cross-Cultural Etiquette and Communication in Global Business: Toward a Strategic Framework for Managing Corporate Expansion, International Journal of Business and Management, Vol. 7, No. 16, pp. 130-138. Powell, L n.d., Explore Asia: A World Of Opportunities For UK Companies. UK Trade and Investment, [Online] Available at www.ukti.gov.uk/uktihome/aboutukti/item/257360.html [accessed: 8 January 2013]. Startup Overseas n.d., China >Expanding a Business, [Online] Available at http://www.startupoverseas.co.uk/expanding-a-business-in-china [accessed: 8 January 2013]. Read More