The Enteringof the Multinational Enterprises in the Asian Market - Assignment Example

Saturation in home market and liberalization in global markets made the multinational enterprises (MNEs) look towards the emerging economies. Globalization of modern retail is at its peak as 49 retailers entered 90 new markets between 2001 and 2006 (Kearney, 2006). Emerging markets offer opportunity for short periods averaging 5 to 10 years. The time of entry and the region enable the retailer to decide on the format that would work. The most attractive developing markets for retail are the Asian countries. Liberalization has made the Asian countries attractive to the multinationals. China in particular had opened up attracting FDI in manufacturing and financial sectors soon after the reforms but in the retail sector, FDI started only in 1992 (Saimee, Yip & Luk, 2004). Retailers such as Wal-Mart and Carrefour had entered China in mid-1990s but Tesco entered China only in 2004 (Kearney, 2006). Tesco, the largest UK retailer had been eyeing China for quite some years but the choice of entry mode depends upon the internal and external business environment. The external environment comprises of the macro-environment and includes the political and economic factors of the host country, the government rules and legislation, the barriers in the sector and the host country market environment. The micro-environment is the internal environment which com prises of the corporate goals and objectives, the corporate strengths and weaknesses and the service factors. Location is a very important factor in the choice of entry mode (Ekeledo & Sivakumar, 1998). The choice of entry mode has a major impact on the success of operations in foreign countries. Because of uncertainties faced in foreign markets, the MNE need to balance between control and flexibility (Lin, 2000). In emerging markets, the MNEs face high external uncertainty and internal constraints. The four most common mode of market entry include exporting, licensing, starting a wholly owned subsidiary (WOS), and joint venture (JV) with a local partner. In the case of retail sector, exports and licensing is not possible because goods have to be procured locally. Between WOS and JV, the decision is taken based on the resource commitment, the degree of control required and the risks involved. WOS requires a thorough knowledge of the local market and the government rules and regulations. It also requires knowing and understanding the local people and their ways of working. Tesco had no prior experience in China although other retailers were operating in China even before Tesco entered the market. Resource commitment is lower in JVs than in WOS and because of country and market uncertainties, JVs in emerging economies is always preferred. Joint ventures allow risk to be shifted to the local firm, while also providing flexibility to the MNE (Lin, 2000). At the same time, Tesco, being financially sound had the uncertainty absorption capability and risk dispersion mechanism in place. Even JVs have substantial amount of risk involved but Tesco was aware of the potential that China offered in the retail sector. The emerging markets cannot have the same route as the developed markets. In emerging markets, the retailers cannot move to advanced retail offers immediately (Alexander & Myers, 1999). This is perhaps the reason that Tesco always starts its operations in a small way and then builds it in “a sensible and responsible way” (Cited by Witthoeft, 2008). It has not applied the traditional entry strategy of buying into the number one or two retailer in China. It preferred to enter through a small-sized retailer and understand the consumer trends and the market environment. China is a huge and diverse market. Tesco wanted to first gain a foothold in the market, gain idea about the market and then expand on a large scale. This was possible only by having a local partner. Tesco’s internationalization approach in emerging economies is to take over local chains that have been performing well (Yoruk & Radosevic, 2000). Once they enter, they then expand through construction of hyper markets in the suburbs and tier-II cities. Their strategy is to have influence over the production and distribution strategy. Hence, in 2004, Tesco entered China under 50:50 joint venture with Ting Hsin International, a group having 24 hypermarkets in China under the name Hymall Chain of Stores, basically in the Shanghai region (Jones, 2004). China had a population of 1.3 billion people and the economy is surging 9% a year. By 2006, Tesco bought another 40% of the stakes in the retail store and by 2009 Tesco operated 62 stores across China (Telegraph, 2009). Joint venture has its own advantages in countries where the MNE has no prior experience. In entering into joint venture, Tesco gained from the local knowledge and operating expertise of Ting Hsin (BBC News, 2004). Local knowledge is essential to enter and start operations in any country and particularly in China. This is in view of the fact that government regulations are stringent. Even to establish retail joint ventures in China requires approval (Samiee, Yip & Luk, 2004). Certain retail formats are not legal in China. Ting Hsin, even though are the largest retailers in China, they are miniscule by Chinese standards. Foreign competition in retail sector is small. Before 2000, the local governments could grant permission to open new stores without the approval of the central government in Beijing. However, then only smaller formats were introduced in the retail sector. The larger formats are fairly new and can displace the smaller independent shops. Because of foreign competition in the retail sector, the rules have been tightened by Beijing regarding store opening (Samiee, Yip & Luk, 2004). This again points to joint ventures being the solution. Moreover, the international retailers have the processes and systems that are lacking in China. These capabilities can be turned into sustainable competitive advantage but the international retailer has to adhere to the factors and conditions prevalent in China (Samiee, Yip & Luk, 2004). High quality brands that are price competitive have a wide appeal in China. The foreign retailers need to offer local and regional brands in their merchandizing strategy. Local knowledge is hence essential in operating in China. In addition, foreign firms operating in China have to be cognizant of the operating environment which is entirely different from the business environment in the developed countries. In China, the retail environment is likely to remain volatile in the near future. Environmental conditions can vary from region to region and hence the foreign retailers need a sophisticated market information system (Samiee, Yip & Luk, 2004). Besides, the cost of distribution in China is high due to lack of infrastructure (Jones, 2004). Tying up with a local partner eases such issues like finding the right people and developing a distribution system. Tesco’s international strategy is to ACT LOCAL (Tesco Plc, 2010). This requires them to be aware of the local people, their customs and culture, to have local supply chains, and to know the local regulations. This means they need good local staff to understand and deliver. This also demonstrates that they are sensitive to the local expectations, which prompts them to enter into joint ventures with local partners. Understanding the needs and motivations, is the name of the game, according to Tesco representative (Telegraph, 2009). Local partnerships also provide valuable resources such as government relations, and the advantage of obtaining government incentive packages (Lu, 2010). To understand the nuances and the culture of the local people, Tesco decided to initially enter China through joint venture. Although Tesco entered Chine through joint venture for reasons as above, it gradually increased its stake and is now building its own mall. The idea behind this is to have total control over its operations while also working in cooperation with the Chinese government in implementing their ambitious urban regeneration programs (Telegraph, 2009). Location decision Tesco opted for China as a location for several reasons. Consumer goods sector is not a strategic sector in China and hence the restrictions and scrutiny are far less than in sectors such as steel and telecommunications (Jones, 2004). Secondly, the disposable income in the hands of the Chinese has increased, which has helped to create a consumer market that can afford soaps and detergents. Moreover, with China’s entry into WTO, the retail sector was also opened to FDI. This made the country attractive to Tesco. However, China is not a single unified market. Because of wide disparities, it is a collection of several local markets, each with its own competition levels and characteristics (Lu, 2010). Most retailers in China are located in the bigger cities such as Beijing and Shanghai. China is a very different market to compete in but Tesco has attained undisputed success in emerging economies such as Hungary, Poland, Czech Republic and Slovakia (Yoruk & Radosevic, 2000). Most of the stores of Hymall, the local partners of Tesco, are located in the “high quality” shopping areas in the East (including Shanghai), North (including Beijing) and the South (including Guangzhou) (Tesco, 2008). Today Tesco has 19 stores in Shanghai alone. Selection of urban cities as their location for the stores is based on certain factors. China is a vast complex market with huge regional differences. Diversity in lifestyle, food preferences, custom and tradition, are some of the factors that influence the choice of location of foreign businesses in China (China, 2007). The average per capita disposable income in China has gone up but there is an unequal distribution of regional prosperity. The coastal cities like Shanghai, Beijing and Guangzhou are more affluent than other cities as these cities or regions were the first to open up their economies two decades ago (China, 2007). The per capita household income in these cities is higher than the national average. The reason why Tesco has been focusing on the urban cities and the coastal belt is that due to different levels of income in different regions, the consumers are at different stages in their brand relationships (Hollis, 2006). The rural areas still prefer the domestic products for two reasons. The domestic retailers have been able to match the quality of the domestic products and also compete with them on prices. The imported products are very high-priced for the rural consumers and international retailers would not be able to penetrate where the domestic retailers have already made inroads. The urban Chinese consumer is brand conscious in the luxury goods segment, and the fact that they can afford these goods gives them a status symbol (China, 2007). However, for daily use products, they prefer the domestic brands that are cost-effective. Because of the affordability, the urban consumers are more responsive and receptive to the foreign brands. Imported packaged food is popular among the urban consumers in higher-tier cities. The urban Chinese consumer is now looking for speed and convenience which reflects in their eating habits and shopping pattern. The super markets offering packaged food in the urban areas are able to capture the segment that looks for convenience. Women in these areas are their largest consumers. In the rural areas, the population still sticks to the tradition. Moreover, low income levels, with low household penetration of refrigerators and microwave ovens have not made the region attractive to retailers. The rural areas also have underdeveloped rural network and distribution infrastructure. This increases the retail price of the packaged foods thereby making it even less affordable to the rural consumer. The costs of distribution and uncertainties are high for the retailer, making the rural areas unattractive. Distribution efficiency in the rural areas is also affected because of lack of cold storage warehousing, limited refrigeration facilities and lack of efficient methods of food preservation and packaging. The supply chain costs are high which create additional hurdles and burden on the retail system. Expanding beyond the first-tier cities would be burdensome and costly for Tesco. Another reason why Tesco stuck to the urban areas is that there are only two cars per 100 people in China and hence there is reliance on public transport (Telegraph, 2009). This is easily accessible in urban areas while it would be difficult for consumers to reach the stores in rural area. Areas in Shanghai where Tesco has most of its stores, have surrounding residential areas, which make it more accessible (Tesco, 2010). The traffic around is heavy and there is substantial scope for development. Because of the huge amount of retail space, Tesco is able to offer over 30,000 products. This helps them to uphold the tradition of Tesco’s convenience. From the new store in Shanghai, Tesco provides up to ten free shopping shuttle services. It also offers 400 car parking spaces to facilitate the consumers. The retail scenario, however, has changed in China since 2004. The lower-tier cities have seen a change in economic prosperity. So far only the East, North and South had been covered by retailers. China’s middle class has been expanding by 20% a year and their food spend is expected to increase by 17% a year to about £300 billion in the next decade (Arlidge, 2008). With developments in infrastructure and increase in market share of third-party logistics, retailers such as Carrefour have moved to second-tier city in Western China, to Chengdu (China, 2007). In 2005, the government announced its ambitious program of building a national rural retail network covering 70% of all villages. This opened up huge opportunities for all retailers – both domestic and international. This is because more than two-thirds of China’s 1.3 billion people live in rural areas (Kwok, 2010). Another reason that Tesco has started moving to tier-two cities is that the first-tier cities are becoming saturated. The supply and marketing cooperatives in rural areas have consolidated the distribution and retail resources in rural China (Xiang, 2010). The retail market in rural China has huge growth potential and the extensive retail network will boost rural retail. Apart from market saturation, with China opening up its economy to FDI, MNEs in several sectors have entered China. This has driven up the real estate costs in the major cities. Apart from real estate and rentals, labor and other operation costs have also increased (IDS Group, 2007). Retailing in China is becoming capital-intensive and the costs at the entry level have become prohibitive. These factors hurt the retailers’ margins. Tesco started looking out for tier-two cities and tapping the potential in rural areas. However, because of the wide regional disparity, Tesco has been careful in choosing the location for new stores. They hunt for cities with better logistics infrastructure because the consumer products have to pass through a complex multi-layered distribution network before it reaches the hands of the consumers (IDS Group, 2007). Apart from high distribution costs, the chances of proliferation of fake products rises, and this undermines consumption safety in rural areas. Tesco too took advantage of the huge potential in rural China and started operating stores in these areas. Shenyang, in North-East China, which was a Mongol trading center in the 11th century, is now an industrial town with a population of 4 million (Telegraph, 2009). The city is untouched by Western influence but over the past few years, world’s leading brands and companies have a prominent presence here. This has made the city important from the retailers’ perspective. Tesco now has five stores in this city and Shenyang is one of the few cities in the world where three retailers – Tesco, Wal-Mart and Carrefour – have a presence. Thus, it is evident that Tesco played its cards very carefully both while choosing the entry mode and the locations within China. Joint ventures offer the maximum benefits, with shared risks and investments. It provides the advantages of local knowledge and government incentive packages. More importantly, Tesco’s internationalization strategy is to first find a foothold and then firm its position in any foreign country. This is all the more important in emerging economies as the uncertainties are higher. China in particular, is a vast market with wide disparities. Differences exist across regions and the retail sector is highly fragmented. By entering with 50:50 stake, Tesco soon gained a foothold and then increased its stakes. Gradually, due to opening up of the retail sector to FDI, many foreign retailers entered the market. Most were based around the major cities which soon became saturated. Initial entry through urban cities was essential because the rural masses were not ready to shop at retail stores. However, as the urban markets became saturated and the per capita income in the rural areas increased, Tesco, like other retailers started moving towards tier-two cities. Tesco has very wisely taken advantage of the business environment as it unfolds and this has made the company the market leaders in the retail sector. References Alexander, N., & Myers, H. (1999) European Retail expansion in South East Asia. European Business Review, 99 (2), 91-104 Arlidge, J. (2008). Tesco Express rolls into China. The Sunday Times. Retrieved September 25, 2010 from http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article3671705.ece BBC News. (2004). Tesco gains a foothold in China. 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E., & Radosevic, S., (2000), International Expansion and buyer-driven commodity chain: The case of Tesco, Retrieved September 25, 2010 from http://profesores.ie.edu/enrique_dans/TESCO/international%20expansion.pdf Read More