Eco friends Solar Technologies Entry into the China - Assignment Example

Ecofriends Solar Technologies (EST) Entry into the China Unit Contents Executive Summary 3 Introduction 4 Company Background4 Country Assessment (China) 5 Solar Energy Potential in China 6 Opportunities and Threats for EST 8 Market Entry Strategy 8 Conclusions and Recommendations 9 Reflections 10 Appendices 11 References 12 Executive Summary Banking on the spectacular growth of the Chinese economy and the ever increasing use for renewable energy, Ecofriends Solar Technologies (EST) endeavors to establish a production factory in China. The main essence of doing so is based on the need to increase efficiency in serving the African and Asian markets. EST has established itself in Europe and America with a high demand for solar panels and accessories being experienced all across the world. China acts as the most spectacular location for the factory because of its convenience in serving the two markets. In addition, there are other benefits including availability of raw materials, affordable skilled labor and ready market. The continued efforts by governments and environmentalists to promote renewable energy are a major advantage for the company. The entry of EST in the Chinese solar panel manufacturing sector can be done through the adoption of a trade-based strategy. This strategy involves establishment of a factory that manufactures solar panels without using any subsidiaries. The development of a wholly owned factory is highly beneficial to the company since the company is able to streamline its operations according to favourable conditions of the company. Introduction China is one of the strongest emerging economies in the world having been catapulted by the economic reforms that were advanced in the 1970s. With a GDP of $ 9.24 trillion in 2013 (which is a 7.7% growth), China has shifted from a centrally planned economy to one that is market based (The World Bank 2014). The availability of raw materials, labor and ready market has made China to industrialize at a very fast pace. Among many technologies that have been advanced in the world, the manufacturing of solar panels is a major hit in the market today. Solar panels are being widely used in many countries of the world where there is adequate solar energy as a source of renewable energy. This is because solar energy is associated with diverse benefits including environmental safety and is a relatively cheaper source of energy. The solar panel manufacturing has demonstrated 15.5% growth rate for the period between 2009 and 2014 (IBISWorld 2014). In addition, there is an increase in the demand for solar panels in Africa and Asia. In an effort to enhance efficiency in the production of solar panels not only for consumption in China but all over the world, Ecofriends Solar Technologies endeavors to establish a manufacturing plant in China. This report puts into perspective an assessment developing such a plant in China while also examining the potential of renewable energy in China and its environs. In addition, the entry strategy will be considered in order to facilitate the process of establishing the plant. Company Background Ecofriends Solar Technologies (EST) is a firm that has its origin in the US and has two plants, one based in Netherlands and another in the United States of America. The company was started in the US in 2002, dealing with installation of solar panels and has since grown to become one of the leading producers of solar panels in US, Latin America and Europe. The company deals with a variety of products that are related to the utilization of solar energy, including solar panels, silicon ingots, solar cells, and silicon wafers among other intermediate products. There are different types of solar panels produced by EST such as thin-film solar panels, polycrystalline solar panels and monocrystalline solar panels among others. Country Assessment (China) The 1978 reforms brought a revolution in China that helped steer its economic progress to the current state. Despite the high GDP of $ 9.24 trillion, approximately 98.99 million people lived below the poverty line as at the end of 2012. The high population makes China an ideal investment hub, this coupled with the availability of raw materials such as rare earth, and highly skilled labor makes China an outstanding manufacturing hub. In addition, the country has advanced its infrastructure; therefore, it has become easy to do business. Despite these benefits, the Chinese banks have been very unreliable especially in the provision of credit as a result of dynamisms in the sector. In addition, China is confronted with an environmental challenge as a result of the increased manufacturing with inadequate attention being given to the environment. It is important that EST is cautious of these challenges by addressing them appropriately. Doing business in China is not a complex affair. It requires the company to meet both legal requirements as well as embrace the business culture in the country. As shown in Appendix I, China has been ranked position 158 worldwide in terms of the ease of starting a business (Doing Business 2014). Multinationals are not only required to abide with the legal requirements in the country but are also keenly scrutinized in order to ensure that their interests marry with the national interests. Despite these requirements, the government has significantly encouraged the use of renewable energy. The rate of revenue growth for companies manufacturing solar panels is a testimony of the growth in the sector. This has led to fast growth in the manufacturing of solar panels. The political environment in China has continued to show goodwill through encouraging investments within the country. In an effort to encourage foreign investors, the government is providing incentives and other benefits. In particular, the energy sector as well as interventions that promote environmental protection is exempt from some of the tax obligations. In addition, due to the environmental pollution courtesy of industrialization and an effort to reduce the level of emissions, the government has continued to encourage the use of alternative energy sources (Ma 2013). As a result of government subsidies there has been a spectacular growth in the solar-panel production in China. In addition, the competitiveness among the Chinese companies with other companies has been boosted. This is because courtesy of the subsidy, Chinese companies are able to sell their solar panels at a relatively reduced price (Martinot 2010). This means that EST will find a soft landing in China hence its ability to promote the marketing of its products while having an efficiency-seeking objective. Solar Energy Potential in China China being one of the leading manufacturing countries in the world is in dire need of adequate energy not only for powering the machines but also for lighting. Being the powerhouse in Asia and its proximity to Africa makes it the ideal location for EST plant. Approximately 400 companies that produce photovoltaic devices within China, but still the demand are not fully satisfied. According to International Energy Agency (IEA), the consumption of solar energy will continue to rise from 0.15% of the total global energy in 2010 to 1.18% by 2010 (Flannery 2013). This position serves as an assurance to EST by affirming that the firm’s setting of a plant in China is worthwhile. In the last one decade, energy consumption in China has doubled. The push from non-governmental organizations, environmentalists, and regional blocks on use of cleaner energy has raised concerns on the use of fossil fuels hence the sourcing for alternative energy sources such as solar energy (Global Energy Network Institute 2010). The rural population in China has facilitated the growth of solar energy. Energy from hydropower, coal and oil is not sufficient to provide power to the entire population in China and in different other parts of the world (International Energy Agency 2013, p.5). Tapping of solar energy and adding it to the grid has not been done, this leaves a big potential for solar energy utilization. It is also true that majority of rural population that has no access to electricity have adopted the use of solar energy (Martinot 2010). Despite this, there remains a vacuum for more production in order to meet the prevailing demand. In addition, Africa serves as a major market since not many people are able to meet electricity connection. The commitment by government to strengthen renewable energy generation serves as a strategy of promoting the use of solar energy in China. According to the National Development and Reform Commission, the country is targeting to cut down on consumption of fossil fuels while increasing the use of renewable energies to make up to 13% of the total energy consumption in China. The entry of EST will be timely since it will be at a position of benefiting from government incentives as well as the market environment. Opportunities and Threats for EST EST entry into China will be benefited by the advanced manufacturing sector. There is availability of affordable labor courtesy of the large population that is rich in both non-skilled as well as skilled labor. Some of the major competitors in the solar manufacturing sector such as Wuxi Suntech and LDK Solar have been confronted with financial challenges in the near past hence their stability in the market has been shaken. The availability of raw materials courtesy of the presence of minerals such as silicon in China is a boost to the production of solar panels. The infrastructural development with the rapid economic growth is a major opportunity for EST. Competition from the preexisting players poses a challenge since the companies are already established. The main competitors include Suntech Power Company, Yingli Solar, LDK Solar, Canadian Solar Inc and Trina Solar. Another challenge to be overcome is penetrating the country that has entrenched the culture of guanxi (relationships) in its conduct of business (APCO Worldwide 2010). Market Entry Strategy The entry of EST in the Chinese solar panel manufacturing sector can be done through the adoption of a trade-based strategy. This strategy involves establishment of a factory that manufactures solar panels without using any subsidiaries. The development of a wholly owned factory is highly beneficial to the company. Firstly, there is the ease of aligning operations appropriately such that maximum utilization of resources is embraced. Secondly, the company has full control over all the operations hence the establishment of the factory is done conveniently and within the time set. Thirdly, the company can effectively take advantage of the available labor and resources in order to maximize profits. Finally, since the establishment of the factory is based on the need to enhance efficiency, transportation and freight costs are minimized. EST will require to obtain all the relevant licenses required in order to abide with the legal obligations. According to the law on Enterprises Operating Exclusively with Foreign Capital of China, a wholly-owned foreign company (such as EST) must meet certain requirements that are sector specific. Either a local government or the Ministry of Commerce People’s Republic of China has the mandate to authorize EST. EST is required to provide specific information that is provided under the regulation upon which the company will be given a go ahead within a period of 30 days. The company upon approval is required to register the company as a limited liability company within 30 days and consequently tax registration is done. The capital contributions are spelt out in the registration documents upon which the company is ready for operations (HSBC Bank in China 2012). Conclusions and Recommendations EST has a potential of thriving in China courtesy of the benefits that supersede the challenges. The manufacture of solar panels in China is anticipated to continue increasing over the years due to the heightened pressure on environmental protection. This has continued to necessitate the use of renewable energy sources while reducing the use of fossil fuels. The government and other stakeholders are doing their best to encourage use of renewable energy, with solar energy being chief among them. Therefore, without doubt, the entry of EST into China will not have as many restrictions while efficiency is assured for the production of solar panels. This is because of the proximity to the market as well as the readily available raw materials. Reflections Several aspects that were learnt in this module came out clearly for me as I worked on this assignment. The choice of the country that I would asses came out clearly after reviewing literature and established that energy demands in China have attracted much attention as a result of the highly developed manufacturing economy that constrains the country’s energy. China being an emerging market stands to enhance efficiency in the production of solar panels that would find market in Asia and Africa due to its proximity. That notwithstanding, the manufacturing sector in China stands tall, therefore, a company manufacturing a highly demanded product like solar panels is likely to do well. In terms of market entry, it is almost obvious that a company that endeavors to focus on long-term production is obliged to develop its own infrastructure. This is exactly what EST endeavors to do; entering wholly into production without using any intermediary is not only an important expansion plan but also a way of ensuring that the multinational company receives an international recognition. The main objective of developing the manufacturing company is not based on the need to have the Chinese market but to ensure that there is efficiency in production and transportation of goods. This ensures that solar panels produced in Netherlands are used within Europe and parts of Africa while those from China serves both Asia as well as Africa. Therefore, the assessment was very instrumental in laying a very strong background of the concepts leant through this module. Appendices Appendix I: Ranking China in terms of Business Establishment (from: doingbusiness.org) Topic Rank in 2014 Starting a business 158 Construction permits 185 Getting electricity 119 Registering property 48 Getting credit 73 Protecting investors 98 Paying taxes 120 Trading across borders 74 Enforcing contracts 19 Resolving insolvency 78 References APCO Worldwide, (2010) Market analysis report: China’s renewable energy industry, retrieved from http://www.export.gov.il/uploadfiles/03_2012/chinisrenewableenergyindustry.pdf Doing Business (2014) Ease of doing business in China, retrieved from http://www.doingbusiness.org/data/exploreeconomies/china/ Flannery, R. (2013) China’s growing role in the global solar power industry, Forbes, retrieved from http://www.forbes.com/sites/russellflannery/2013/10/20/chinas-growing-role-in-the-global-solar-power-industry/ Global Energy Network Institute (2010) Renewable energy potential of China: Making the transition from coal-fired generation, retrieved from http://www.geni.org/globalenergy/research/renewable-energy-potential-in-china/Renewable%20Energy%20Potential%20in%20China.pdf HSBC Bank in China (2012) Doing business in China, retrieved from http://www.hsbc.com.cn/1/PA_ES_Content_Mgmt/content/china/commercial/internationalbanking/images/doingbusinessinchina.pdf IBISWorld (2014) Solar panel manufacturing in China: market research report, retrieved from http://www.ibisworld.com/industry/china/solar-panel-manufacturing.html International Energy Agency (2013) PVPS report: Snapshot of global PV 1992-2013, retrieved from http://www.iea-pvps.org/fileadmin/dam/public/report/statistics/PVPS_report_-_A_Snapshot_of_Global_PV_-_1992-2013_-_final_3.pdf Ma, W. (2013, Aug 30) China boosts renewable-energy surcharge; move is aimed to help nations wind, solar sector, Wall Street Journal (Online), Retrieved from http://search.proquest.com/docview/1428809560?accountid=45049 Martinot, E. (2010) Renewable power for china: Past, present, and future, Frontiers of Energy and Power Engineering in China, 4(3), 287-294 The World Bank (2014) China; country at a glance, Retrieved from http://www.worldbank.org/en/country/china Read More