Employee of a Large Multinational Corporation Producing Consumer Goods - Case Study Example

Briefing Document to the line manager Executive Summary: The Chinese market has shown great economic success through the past few years and with over1.3 billion potential customers it has gradually become a lucrative option for the global investors. (“Profiting from China’s Capitalist Revolution”, N.d). Investors and entrepreneurs through out the world has observed this potential size of the market of China and now making reasonable investments to exploit the profit potentials of the market. The unexpected growth of the Chinese economy in the last two decades have created a huge amount of expectation investors and most of them are believe that they will get assured return if they make any kind of investment in the Chinese economy. . (“Profiting from China’s Capitalist Revolution”, N.d). There enough reasons to support this belief of the global investors as in only twenty years China has successfully transformed itself to an investor friendly country. According to the analysts the Mainland China of today somehow reflects the picture of industrial revolution in the year 1870 in the United States of America. (“Profiting from China’s Capitalist Revolution”, N.d). This growth can be considered as almost a miraculous one as within very little span of time China has converted itself from an agrarian economy to almost the manufacturing workshop of the world. (“Why China is an attractive market”, 2009). Previously there were hardly any private sectors in the country but now the situation has changes so much that foreign investors are targeting almost every industrial sector for making their investments. A research report concludes that the Chemical, Commodities, Oil and Steel industry is showing tremendous growth in the nation, along with telecommunication and software industry which is also contributing to the growth factor. (“Profiting from China’s Capitalist Revolution”, N.d). Advancement in consumer goods market is fairly limited and the analysts believe that this limited growth is only due to the lack of reasonable foreign investment. For that matter there are enough visible scopes in the market, which a consumer goods company can exploit. If we take an overall picture of the economy we would observe that the GDP of the country has grown with an average of 9 percent per year and with an estimated growth of 10. 4 percent in the year 2007. (“China”, 2009). As the economy is doing well there must a large section of the population whose purchasing power has also increased. The strength of the economy and its upward trend was well proven as the country despite being slowed down in the year 2008, has shown tremendous potential to continue its expansion and development in the following year. (“China”, 2009). The health of the economy can also be measured by the tremendous growth in the demand of energy sources, infrastructure, technology and even consumer goods and services. (“China”, 2009). Most importantly this economical upturn is not limited to the main business centers like Beijing, Shanghai, Guangzhou and Shenzhen but also had its effects in many of the merging regional business center of the country. This is also a critical for which many foreign investors are taking bold decisions of investing in this particular country. But the situation is not altogether welcoming as there are few levels of obstacles present in the political structure of the country. The companies have to take suitable precautions to protect the intellectual property rights and the due diligence before making considerable investment decisions. The Briefing Document: The Chinese economy has surely undergone a tremendous transformation since the year 1978 as they have eventually opened up their economy thereby welcoming foreign investments. (Lee, Lee, 2002). This rapid change was possible for the transformation that took place in the countries socio-political outlook, which led to the opening up of the economy. The introduction of the foreign investment backed by the privatization of the state-owned enterprises and the rapid development of regional economies are all parts and parcel of this rapid transformation process. (Lee, Lee, 2002). Since the change China is regarded as the most successful story of economical achievement as its real GDP has recorded a higher growth rate not only compared to other socialist economies but even more than most of the other developing economies in Asia. The GDP growth of China in these two decades is comparable to the economic developments of Japan from the year 1960 to the year 1974 and also to the economic upturn of South Korea between the years 1965 and 1978. (Lee, Lee, 2002). The success story of China is basically based upon two main pillars. One is the export-oriented industrialization and the other is of course the emergence of foreign direct investment in the country. The progress of Foreign Direct Investment in China provides enough reasons for the other foreign companies to invest in the region. It is the increased amount of Foreign Direct Investment that has increased the GDP of the country. The share of Foreign Direct Investment in the country’s economy has increased from 0.9 percent of the total GDP in the year 1984 to about 16.1 percent in 1996. (Lee, Lee, 2002). The amount of increase actually reflects the level of acceptance of the foreign investors in the economy and this figure is bound to increase with time. After opening up its economy the country enjoyed the maximum share of Foreign Direct Investment among all the socialist states and the developing nations. (See Appendix A). Apart from the growth in the GDP there are other contributing factors as with the increase of Foreign Direct Investment the amount of foreign trade of the country increased. The percentage share of Foreign Direct Investment in the total exports has increased from only 1.1 percent in the year 1985 to exactly 20.4 percent in the year 1992 and by the year 1996 the percentage almost doubled as it reached a 40.7 percent of the total share. (Lee, Lee, 2002). The third benefit arising out of this change in dynamics is of course the increase observed in the level of employment in the country. In the year 1996 about 5.4 million Chinese citizens were working in the foreign companies who have made reasonable inward investments in the country. (Lee, Lee, 2002). Though this amount only represents 2.7 percent of the total amount of urban workforce of the country but the trend shows that there has been significant increase as this percentage was only 0.05 in the year 1985 and 0.39 in the year 1990. (Lee, Lee, 2002). The positive factor, which will encourage the present investors that this trend has continued for many years and eventually, has made the workforce steadier. With more people earning from the economic development their disposable income or in other words spending power also increases. For that matter the newer investors will consider China to be an economy that has large scope both in the aspect of population and also income generation. The previous foreign investors had made the path for the current investors to exploit the lucrative and reformed Chinese market. To put it in other words it can be considered to be the ideal time to invest in the nation. (“Successfully Position your company in China”. 2009). If we make an industry wise analysis we would see that most of the foreign investors are now acknowledging the potential of the country to be become the most important retail market in the world in the current era. (Chan, Perez, Perkins, Shu, 1997). According to the investors China is definitely a good market for the basic consumer goods. Although the market has some difficulties especially regarding the fragmented retail channels but there is a broad range of opportunities for this industry as now almost forty cities have opened to foreign investments and there are others who are ready to join them. (Chan, Perez, Perkins, Shu, 1997). The total value of the Chinese retail market has increased from US $ 170 billion in the year 1991 to about US $ 250 billion in the year 1995 with a compound annual growth of about eleven percent. (Chan, Perez, Perkins, Shu, 1997). The country is the second largest retail market of Asia only after Japan and is ready for another leap in this segment. Estimates shows that due to the effect of this tremendous growth potential there would be around two hundred and thirty middle income consumers in the country which will boost the sales of consumer goods. (Chan, Perez, Perkins, Shu, 1997). Even in some specific cities and regions of the country the real affluence class is emerging and in these particular spots it is being estimated that there would be a double-digit growth of the amount of retail spending. (Chan, Perez, Perkins, Shu, 1997). This provides a tremendous boost for the consumer goods industry of the world as like the other industries the Chinese economy have paved the way to increase its consumer goods market through Foreign Direct Investment. Analysts predict that this increase in spending power of individuals will definitely increase the demand for several consumer goods like clothing, consumer durables like home appliances, personal care products and other goods needed for households. (Chan, Perez, Perkins, Shu, 1997). This shows the opportunities that a consumer good producing country can bank upon. The data represented that it is the right time as well as the right sector to invest in the Chinese economy. With the emergence of affluent middle class in the economy the consumer product companies now have the greatest opportunity to exploit the condition and extract the greatest return from the economy. (Ford, 2007) It is quite evident that unlike the main stream industries like power, oil, chemicals etc, the consumer durable industry needs to consider few more factors and development parameters.( Research Report on China Chain Store & Franchise Industry in 2009, 2009). The industry analysts think that China as an economy has emerged to that point where they can now welcome foreign direct investment in their retail and consumer goods industry. Apart from the industry specific reasons there are other reasons for which the global investors are choosing China over all the other developing economies. With subprime crisis hitting the United States market almost each and every economies of the world found themselves in troubled waters. Many economies have declared recession while few tried to maintain their stability, but none in the record has shown growth figures, with the only exception of China. Disregarding the financial turmoil of the world the Chinese economy has shown a growth rate of 8 percent in the year 2009. (Miller, 2009). The country has over US $ 2 trillion in the foreign exchange reserves and banking on this amount of money the Chinese government can definitely look forward to increase the growth rate of the countries economy. (Miller, 2009). Taking a step ahead from rest of the countries China has already declared plan for spending a sum of US $ 586 billion which amounts to about 20 percent of the GDP of the country. (Miller, 2009). Whereas in the United States of America the spending plan of US $ 1 trillion is only focused on bailouts and comprises only about 8 percent of the total GDP of the country. China’s attempt to stay in the fast track gets evident as to further increase its growth rate the government has reduced the interest rates to almost five times and also loosened the lending regulations. (Miller, 2009). These facts reveals the actual strength that the economy posses and also in fact acts as an assurance to the investors who wants to invest in the economy. Chinese government has welcomed the foreign investors and also focused on the infrastructural growth to sustain the development process. Though according to many industry analysts and economist Chinese economy is mainly export driven but current data shows that public work spending in China accounts for 4 percent to about 6 percent of the country’s GDP. (Miller, 2009). Though the picture so far reveals a positive and warm picture for investment but there are certain levels of obstacles that are being present in the country. Some of the local analysts have the point of view that China is importantly losing control of its own economy due to the rising level of Foreign Direct Investments and Merger and Acquisition process in the country. (Pernula, 2008). Hence the government imposed some strict limitations to regulate the amount of foreign investments of the country. These regulations were set forth in the “Guidance Catalogue of Foreign Industries” as some industries are banned and also restricted so that the maximum portion of the ownership stays with the domestic shareholders. (Pernula, 2008). But these facts do not change the entire scenario, as there is no official indication from the Chinese government about changing their view towards the foreign investors. Though the country has imposed some level of restriction for particular form of investment (merger and acquisition) to put things under control but the overall scenario is still lucrative enough, especially for the consumer goods industry. (Doing Business in China has its opportunities, obstacles, SyChip President Says, 2005) The companies who are looking to make inward investments and have reasonable expansion plans must consider China to be the ideal market. References 1. “Profiting from China’s Capitalist Revolution”, N.d. chinastockdigest.com. website: < http://www.chinastockdigest.com/articles/china-stock-market-research-2.html> (accessed on November 26, 2009). 2. Why China is an attractive market”. 2009. Uktradeinvest.gov. website: < https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries?_nfpb=true&genericSummary_23_actionOverride=%2Fpub%2Fportlets%2FgenericSummary%2FshowContentItem&_windowLabel=genericSummary_23&genericSummary_23navigationPageId=%2Fchina&genericSummary_23navigationOrigPortlet=Further_Information&genericSummary_23navigationContentPath=%2FBEA+Repository%2F328%2F420147&_pageLabel=CountryType1> (accessed on November 26, 2009). 3. “China”. 2009. Uktradeinvest.gov. website: < https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries?_nfpb=true&genericSummary_23_actionOverride=%2Fpub%2Fportlets%2FgenericSummary%2FshowContentItem&_windowLabel=genericSummary_23&genericSummary_23navigationPageId=%2Fchina&genericSummary_23navigationOrigPortlet=Further_Information&genericSummary_23navigationContentPath=%2FBEA+Repository%2F328%2F420147&_pageLabel=CountryType1> (accessed on November 26, 2009). 4. Lee SC, Lee KB. 2002. “Inward Investment and Transformation of Regional Economies in China”. Website: < http://docs.google.com/viewer?a=v&q=cache:FLF1o5Z8r_gJ:www.nsl.ethz.ch/index.php/en/content/download/432/2807/file+Inward+IInvestment+and+Transformation+of+Regional+Economies+in+China&hl=en&gl=in&pid=bl&srcid=ADGEESgT7iGt37TUUrXtbezf5nQIRfFoWdzV5DLGkq04hjdvKJDeT-9FVuQ00NTsn5A291tZay3zcibf4yEyoRaGY33vmCj3vTOEnf40gGDp-C0zORiTukqsZqhrd-zTh5xn1Fo37DPr&sig=AHIEtbTiI_-7hGixr80fDiTtFGPj1_HsRw> (accessed on November 26, 2009). 5. Chan WK, Perez J, Perkins A, Shu M. 1997. Chinas retail markets are evolving more quickly than companies anticipate. Questia.com. website: < http://www.questia.com/googleScholar.qst;jsessionid=LThLJwQWZyLXKmDq5PLmBnh879BTG9F39Lpcy24ShhJyMvzBTvFG!1486883474!-755419558?docId=5001526561> (accessed on November 26, 2009). 6. Miller D. 2009. “China’s Red Dragon Turns Financial Crisis into Opportunity”. Moneymorning.com. website :< http://www.moneymorning.com/2009/01/07/china-outlook-2009/> (accessed on November 26, 2009). 7. Pernula G. January 23, 2008. “M&As in China: Opportunities and Obstacles”. American Management Association. Website:< http://www.amanet.org/training/articles/MAs-in-China-Opportunities-and-Obstacles.aspx> (accessed on November 26, 2009). 8. Ford P. January 2, 2007. “Consumer Tidal wave on the way: China’s middle class. The Christian Science Monitor. Website: < http://www.csmonitor.com/2007/0102/p01s02-woap.html> (accessed on November 26, 2009). 9. “Successfully Position your company in China”. 2009. business opportunities. Website:< http://www.btmm.qc.ca/en/index.aspx?u=calendrier-occas_affaires_chine> (accessed on November 26, 2009). 10. “Research Report on China Chain Store & Franchise Industry in 2009”. 2009. China Research Intelligence: China 11. “Doing Business in China has its opportunities, obstacles, SyChip President Says”. September, 2005. Metroplex Technology Business Council. Website :< http://www.metroplextbc.org/techlink/200509/ceoforum.html> (accessed on November 26, 2009). Appendix: A US$ million (% as of world FDI) 1984–89 1990 1991 1992 1993 1994 1995 China 2,282 3,487 4,366 11,156 27,515 33,787 37,500 (1.98) (1.71) (2.77) (6.64) (13.23) (14.97) (11.91) Indonesia 133 162 141 151 273 620 1,750 (0.12) (0.08) (0.09) (0.09) (0.13) (0.27) (0.56) Malaysia 798 2,333 3,998 5,183 5,006 4,384 5,800 (0.69) (1.14) (2.53) (3.08) (2.41) (1.94) (1.84) (Source: Inward Investment and Transformation of Regional Economies in China, 2002). B. “Chinas retail markets are evolving more quickly than companies anticipate.” Nov 2, 1997. “Market opportunities Although Chinas market is likely to remain dominated by "More and Pop" shops - of which there are more than 9 million with average annual sales of $20,000 - there is plenty of scope for modern retail formats. Distinct consumer segments are already emerging as a result of the wide availability of consumer goods, massive increases in advertising, and steady exposure to new retail outlets. Affluent women in Shanghai want branded cosmetics and fashions from upmarket stores such as Yaohans Pudong district store, for example, while middle-income families in a densely populated suburb of the city are attracted to the French store Carrefour by its low prices and superior selection. Older, traditional shoppers in Beijing can now meet their basic needs in pleasant, air-conditioned department stores that offer somewhere to park their bicycles and a chance to try Western fast food. In the city of Wuhan, younger, less affluent shoppers who are starved of choice and lack clear preferences seek variety and explore low-priced branded products. Rich consumers in Shenzhen, meanwhile, marvel at their new Wal-Mart, which offers a choice hitherto available only to those able to make an occasional trip to Hong Kong. Department stores The department store is a well-established and popular format in China, introduced during the era of central planning to serve as the main point of distribution for manufactured consumer goods. The country has about 7,000 of them with sales of more than $1 million a year, accounting for approximately 35 percent of sales of durables and clothing. Despite being chaotic, these stores command customers loyalty and are perceived as convenient, one-stop shops that ensure a degree of quality. Even comparatively ...” C. China’s Red Dragon Turns Financial Crisis into Opportunity, 2009. “Infrastructure Paves the Way to Profit The first place to look is infrastructure development, which has been the main engine of China’s explosive growth over the past two decades. While most believe China’s economy is export driven, statistics show public works spending accounts for 4%-6 % of the country’s GDP growth. From 2007-2010, China will spend a whopping $725 billion on infrastructure improvements in a race to accommodate its rapidly migrating populace. By 2030, 1 billion of its people will live in cities, up from 600 million today. About 170 mass-transit systems will be needed. Another 40 billion square meters of floor space will be built in 5 million buildings – 50,000 of which could be skyscrapers. And all of these developed regions will be connected by new roads. Shorter transport times drive down costs, and smooth the transition to city living for China’s exploding middle class. Plans for China’s road system call for 12 major routes across the country from north to south and east to west connecting millions to new routes of commerce, according to The Wall Street Journal. The system will stretch 53,000 miles by 2020, surpassing the 47,000 miles of roadways in the United States. It will take massive amounts of steel, cement, and bulk transport” Read More