Market Entry into China - Assignment Example

 Market Entry into China Overview A large number of companies today are considering the Chinese market to be lucrative. China is the world’s fastest growing economy. The country is experiencing 9.5% growth every year. Ever since China joined the World Trade Organization (WTO) and the economy became open to foreign competition, China has started attracting increased foreign investments. A company which plans to enter China needs to understand the culture, the language, the regulations and the legal issues of the country (Orfield, 2005). China is second to the US in regards to inward FDI. In the period between 1979 and 1999 it had FDI inflow of about $306 billion (Organization for Economic Cooperation and Development, 2000). Why China is Lucrative for Foreign Investors? China Automobile industry is experiencing immense growth. The living standards of the Chinese consumers are increasing. The country has a large proportion of middle class population. China has millions of potential car buyers that make the foreign automobile companies to enter into the Chinese market. China ranks third among all car manufacturing countries. The prices of automobiles, automobile parts and import tariffs got reduced after China entered the WTO. The cost of labour is cheap in China and the automobile industry in China is extremely competitive. This is the reason that automobile manufacturers in other countries are exploring the opportunities in Chinese market (Jun & Zhiqiang, 2008). Company profile Mitsuoka was founded in the year 1968 by Susumu Mitsuoka. Mitsuoka is a luxury car maker in Japan. They are planning to enter the Chinese market by introducing a model called ‘Orochi’ (Mitsuoka Motor, 2010) China’s Automobile Industry The automobile industry was declared as a ‘pillar’ industry by the Chinese government in 1985. The automobile tariffs in 2006 were reduced by 50%. The major limitation that automobile manufacturers faced while entering China was the mode of entry. They had to enter into a joint venture with a local company and had shareholding only up to 50%. The industry is extremely competitive in China. Three local big companies, First Automobile Works (FAW), Shanghai Automobile Industry Corporate (SAIC) and Dongfeng Automobile were selected to enter into joint venture with foreign companies. It was believed that these joint ventures would raise technology level and ensure survival of the domestic players (Min, 2005). Routes of Entry into the Chinese Market FDI (Foreign Direct Investment) The ‘Open Door Policy’ of China is the major reason for the capital inflow into the country through FDI. The inflow of foreign capital added to China’s economic growth and advancement of technology. The foreign enterprises can enter through EJVs (Equity Joint Ventures), cooperative joint ventures, WFOEs (Wholly owned foreign subsidiary) and joint ventures (Deng, 2000). FDI has several benefits like increased productivity, increase in global trade, and better quality of labour; and also provides financial capital to the nation (Sweeney, 2010). Equity Joint Ventures In an equity joint venture, the management is shared between the domestic and the foreign entity in proportion to their equity shares (Dang, 2008). Joint Ventures In the joint ventures between foreign companies and Chinese companies, the foreign companies are expected to contribute 25% of the capital. In a joint venture both the companies contribute resources and jointly operate the company. The ownership rights of the parent companies depend on the proportion of investments made by each partners. The joint venture law was passed in 1979. This law states several conditions for a joint venture business. Joint ventures have to be registered with the Chinese government. They have to abide by Chinese laws. The entities in the joint venture are jointly responsible for managements, risks, gains, losses and investments (Murray, n.d.). Cooperative Joint Ventures Cooperative enterprises refer to partnership businesses between the Chinese companies and the foreign companies and they cooperate on certain terms and conditions. They function on some mutual agreement between the partners (Long, n.d.). Wholly Owned Foreign Enterprises (WOFE) The WOFE in China have increased since 1992. By the end of 1999 most of the foreign investments in China were through WOFE. The WOFE ensure more control over operations of the foreign enterprise. There is no possibility of conflicts of interest or goals between the foreign company and its local partner. Decision making is also fast in the case of WOFE (Deng, 2008). Reasons for Which China Has Favoured Inbound FDI through Joint Venture Route China leads among all developing countries in inbound FDI. China ranks second in inbound FDI amongst the APEC (Asia Pacific Economic Cooperation) nations. FDI in China mostly consist of Greenfield investments. Green Field investment denotes that the foreign company starts an entirely new venture in the country, builds new operational facilities and generates employment (Graham & Wada, 2001). China favoured FDI for the following reasons: Initially the Chinese economy was an agricultural economy so FDI was expected to bring about industrial development, built infrastructure and transportation. The establishment of research centres would make them technologically advanced. They expected to benefit from the management systems and technologies of the foreign companies. They also wanted to improve their exports and get better connected with the world. FDI was also expected to make the domestic companies competitive because they had to compete with the foreign companies (Rutkowski, 2006). Reasons for Favouring Joint Ventures Joint ventures help to share the risk associated with the business. The domestic company could acquire knowledge from the foreign company in terms of technical know-how and managerial skills. The foreign company benefits from the contacts of the local company. The foreign company could contribute significant capital to the joint venture (National Informatics Centre, n.d.). Foreign Investor Shareholding Corporation The FISC requires the approval of the Ministry of Foreign Trade and Economic Relations and also compliance with certain state regulations. The investment from the foreign investor should exceed 25% of the total registered capital (All China Marketing Research Company Limited, 2010). In FISC, the Chinese partner of the foreign company will not participate in management but will help the foreign company in accessing the domestic market. They are given minority stakes in the company in return of their assets. State Development Planning Commission of China is involved in the creation of FISC. The FISCs are registered in the Shenzhen and the Shanghai stock exchanges. JVs and WOFE can be converted into FISC if they have earned profits for the past three years. Cost and Benefits of FISC to Mitsuoka In FISC the local company has minority stakes. The foreign company thus has to bear the major operational costs. They can use the business assets of the Chinese company and thus save cost. The local company does not participate in the management which makes decision making easier for the foreign company. Since the local partners have some stake in the company so they have the incentive of providing contacts and network to the foreign company. The political authorities of China also have the advantage of encouraging industrial reforms without coming to the forefront. The FISCs are listed in the stock exchange and can generate capital whenever required. Cost and Benefits of FISC to the Chinese Economy The foreign company will benefit the economy by providing its technical know-how and also the R&D will be available to the local players. The local players will become more competitive. Since the foreign company will get listed in the stock exchange in China, it will result in capital inflow into China’s economy. The cost the economy has to bear is in the form of tariff reduction given to the foreign company by the government. Thus, it can be concluded that the best market entry strategy for the Japanese company, Mitsuoka is through FISC. The company is a small sized car manufacturer. The FISC mode of entry will enable it to use the assets of the Chinese counterpart. It will also benefit from the Chinese company’s sources and knowledge of the local economy. The company will be listed in the stock market and thus can generate capital as and when required. References All China Marketing Research Company Limited, 2010. General Survey. China Data Online. [Online] Available at: http://chinadataonline.org/info/yearly02.asp [Accessed December 14, 2010]. Dang, X., 2008. Chapter 1 – Introduction China. Foreign Direct Investment in China. [Online] Available at: http://krex.k-state.edu/dspace/bitstream/2097/1116/1/XiaobaoDang2008.pdf [Accessed December 14, 2010]. Deng, P., 2000. Major Advantages of WFOEs. WFOEs: The Most Popular Entry Mode into China. [Online] Available at: http://accweb.itr.maryville.edu/pdeng/publications/bhtext.htm [Accessed December 14, 2010]. Graham, E. M. & Wada, E., 2001. Introduction. Foreign Direct Investment in China: Effects on Growth and Economic Performance. [Online] Available at: citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.145.3399... [Accessed December 14, 2010]. Jun, C. & Zhiqiang, J., 2008. The China’s Automotive Market Overview. Balancing the Paradox of Localization and Globalization: Research and Analyze the Levels of Market Involvement for Multinational Carmakers in China’s Market. [Online] Available at: www.diva-portal.org/smash/get/diva2:24364/FULLTEXT01 [Accessed December 14, 2010]. Long, G., No Date. The Evolution of FDI in China. China’s Policies on FDI: Review and Evaluation. [Online] Available at: http://www.piie.com/publications/chapters_preview/3810/12iie3810.pdf [Accessed December 14, 2010]. Mitsuoka Motor, 2010. History and Development. Company Profile. Online Available at: http://www.mitsuoka-motor.com/english/company/history.html [Accessed December 14, 2010]. Murray, M. J., No Date. I. Introduction. Sources of Capital for a Sino-Foreign Equity Joint Venture: A Case Study of Shanghai General Motors Corporation. [Online] Available at: http://frank.mtsu.edu/~jee/pdf/murray.PDF [Accessed December 14, 2010]. National Informatics Centre, No Date. Benefits of a Joint Venture. Growing a Business. [Online] Available at: http://business.gov.in/growing_business/joint_ventures.php [Accessed December 14, 2010]. Orfield, K., 2005. Land of Opportunity. Doing Business in China is Finally Starting to Pay Off, But is the Time Right For Your Company? [Online] Available at: http://www.bus.wisc.edu/update/winter05/business_in_china.asp [Accessed December 14, 2010]. Organization for Economic Cooperation and Development, 2000. Total Inward and Outward FDI Flows. Main FDI Trends and Prospects. [Online] Available at: http://www.oecd.org/dataoecd/57/23/1922648.pdf [Accessed December 14, 2010]. Rutkowski, A., 2006. Introduction. Inward FDI, Concentration, and Profitability in The Ceecs: Were the Domestic Firms Crowded Out Or Strengthened? 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