Political Environment on Airline Industry in China - Essay Example

I. Introduction A. Current political and economic trends The current global environment has drastically changed with the advent and rapid development of "globalisation". Globalisation affects all nations in the 21st century, impacting them in one way or another, at different levels, and in various aspects of society such as economy, social life, culture, traditions, and technology. It permeates the way of life of every human being, influencing their quality of life, the directions they would take, and their future. It also affects governments and their policies, requiring serious contemplation and even shifts in their strategies and policies to ensure sustainable existence in an increasingly competitive and shrinking "global village". "Globalisation" was coined by Levitt (1983) who describes it as the shrinking of the world as brought about by the expansion of the reach of global media and the reduced cost of communication, resulting in the convergence in the tastes of consumers worldwide and the large-scale creation of global markets for standardised products. According to Giddens (2001), it is "the growing interdependence between different people, regions and countries in the world as social and economic relationships come to stretch worldwide". It is these economic and political relationships which have encouraged nations to reevaluate their political agenda and economic policies. According to Rosenberg (2000), "The term 'globalisation' after all, is at first sight merely a descriptive category, denoting either the geographical extension of social processes or possibly, as in Giddens' definition, 'the intensification of worldwide social relations'." Among the major economic changes in a more globalised world is the diminishing role of nation-sates and the increased significance of transnational corporations in the transformation of the economies in bothy the national and international scales. Business is at its primacy and transnational corporations which possess cross-border markets and production systems are the poster boys of an increasingly globalised planet. In business and industry, Bartlett and Ghoshal (1989), Hout et all.(1982), Campbell (1993), Keegan (1995), Bertrand (1994), Parker (1998) find that "Globalization [to business administration] is the set of transformations faced by companies as a consequence of the contemporary phenomenon typical of the post cold war which is constituted by: (1) the empowerment of transnational organizations; (2) the mass information technology evolution; (3) the increasing flows of capital, merchandise, people and data across national borders; and (4) the tendency of world market homogenisation." (Azevedo and Bertrand, 2000). Among the most dynamic economies of the 21st century is China. It has for the past five decades undergone numerous, often radical transformations, finally emerging from its cocoon to become among the most powerful and influential economic and political players in the Asian region and the global stage. In fact, China has opened its doors to the world, providing business investments in many parts of the globe especially among developing and underdeveloped nations. It has also adopted shifts in policy and governance, designed to attract robust invest6ments and businesses from abroad and bolster the vast potentials of its trade, commerce and other potentials of its economy. Like all other nations, China must reckon with the permeating effects and challenges of an increasingly globalised world. Like all other nations, China must reckon with the increasing role and dominance of transnational corporations and the diminishing roles of nation-states. From a highly centralised form of government, China must begin to not only delegate policy and decision-making to its corporations, but also encourage and develop its corporations into globally-competitive entities. This entails empowerment of its domestic corporations, gradually increasing their capability to undertake vital economic, operational and management decisions for both domestic and foreign operations. China must also liberalize its economic borders, opening its doors to encourage the entry of important investments from beyond its boundaries. It must also encourage and establish domestic partnerships to ensure the strengthening of its corporations. It must also initiate partnerships with foreign corporations to ensure the exchange of much needed cap[ital, technology and knowledge. B. Background of the Chinese aviation industry The People's Republic of China was founded in 1949 with only 36 airports with only the most rudimentary of facilities existing. Facilities were so basic that a small plane such as a DC-4 can only land in Shanghai, Nanjing or Guangzhou. After almost sixty years, aviation is one of the country's leading industries. Its rapid development has resulted in an increase from 12 to 1,115 domestic routes and from nine cities in five countries to 64 cities in 34 countries. Air travel among the Chinese was rare until 1979. Prior to that year, China had only one airline and the airports and airspace were controlled by the military. Equipment remained crude and flights were often grounded due to bad weather. The late Premiere Deng Xiaoping enabled the Civil Aviation Administration of China (CAAC) to take over the development of civil aviation. This opened the gates for the establishment of competing airlines while encouraging cities to construct their own airports. The last five years saw the upgrading of 33 existing and the construction of 17 new airports. In 1978, China ranked 32nd among ICAO-covenant countries. The country now ranks 6th in terms of passenger volume. II. Discussion Given the encompassing impact and the various challenges on the economies and policies of all nations, the Chinese government and aviation industry must also contemplate, rethink and reformulate some if not many of its policies, approaches and strategies to protect its niches and make use of the opportunities being offered by this new age of globalisation. The record shows that China's aviation industry had been able to do so, especially in the past three decades when globalisation was most furious and rapid. This paper aims to identify the various influences that globalisation has on nations, their economies and governments. After having identified these factors, this paper aims to identify the problems encountered by the Chinese aviation industry as a result of globalisation. This paper also identifies the shifts in policies, approaches and courses of action which Government adopted to arrive to address these problems. Needing a new business model Globalisation and the initiation of new technologies have significantly changed the way business, government and society are organized. One of the key driving forces behind these changes is a new business model. Manufacturing technology, which began during the industrial revolution, making mass production possible; Transportation technology, like railways, motor transport, steam shipping and aeroplanes, allowing the movement of people, materials and finished products from country to country and continent to continent more quickly and cheaply; Information and communications technology, like the telephone, computers, the internet, satellite television, which have together contributed to both the globalisation of markets and the global co-ordination of worldwide business activities; all these contribute to the rapid pace of globalisation. According to Stonehouse (2002) From the perspective of economics, interest in globalisation centres on two major facets: the globalisation of markets and the globalisation of production and the supply chain. Levitt (1983) 'The globalisation of markets' suggested that technological change, social, political and economic developments have, in recent decades, driven the world toward a 'global village' or 'converging commonality' - homogenized, unified global market in terms of consumer tastes and product preferences. Levitt (1983) considers that the main beneficiaries of this convergence would be global organisations producing globally standardised products in order to achieve world economies of scale. Such global business are (because of scale of economies) to undercut the prices of more nationally based on standardisation of product, branding and advertising. According to Stonehouse et al. (2002) Globalisation of strategy is the extent to which an international business configures and co-ordinates its strategy globally. A global strategy will normally include a global brand name and products, presence in major markets throughout the world, productive activities located so as to gain maximum advantage, and co-ordination of strategy and activities throughout the world. Forces promoting globalisation Globalisation increased in pace in the last two decades as a result of developments in information technology, global communications and transportation which enable people to communicate, transport goods and services, and interact faster (World Bank Brief 2000). In order to compete within the global market, more open policies encouraging close international economic cooperation are being adopted by many governments. The end of nation states and the rise of transnational corporations is explained by Kenichi Ohmae in In The Borderless World (1990): "The global economy is becoming so powerful that it has swallowed most consumers and corporations, made traditional national borders almost disappear, and pushed bureaucrats, politicians, and the military toward the status of declining industries." Ohmae's (1990) work represents what may be called the business-utopian model of globalisation, but the idea that national systems of government are becoming marginal is shared by theorists of cosmopolitan governance who believe that powerful new supranational institutions are emerging-a view that is no less unreal. The normal development in aviation is to begin with trunk routes catering to economically-developed areas with large populations which is then followed by the establishment of regional aviation in regions which are less-developed. For Chinese aviation, this normal hub-and-spoke evolution was not possible until only recently due to several factors including geography, distance, and the economic disparity between regions. Specifically, in 1999 there were only 160 routes between cities which were 350 miles apart representing 17% of China's total number of air routes. Xinjiang and Yunnan were the only provinces with regional aviation. Only 12% (62) of the total number of civil aviation aircraft were used for regional aviation. Recently, the CAAC plans to purchase 200 aircraft for regional aviation which signals fierce competition in the domestic regional aviation market (Efendioglu and Murray). A major limiting factor to the growth of Chinese aviation is the lack of airports and similar infrastructure. In late 2000, of the approximately 700 large- to middle-size cities in China, less than one-fourth had an airport. In comparison, a survey done on 40 countries showed that there is an average of 2.08 airports for every 10,000 square kilometres while China has only 0.127 airports for the same area. China addressed this problem by building and expanding 70 airports over the past 20 years. This was intended to create an international and domestic network of airports. This has increased China's airports to 142 with 31 airports open to traffic from foreign destinations [Zhou, 2001]. However, the Chinese infrastructural limitation pales in scale to the U.S. The total number of Chinese airports remain to be only one-twentieth of those in the U.S. To address this limitation, the Chinese government continues to make investments for the extension and completion of the trunk airport system and the construction of regional airports. China aims to increase the total number of civil transport airports to 170 by adding 28 new airports by 2005. These include three large-scale hub airports, six medium-sized hub airports and the rest as trunk and regional airports (Efendioglu and Murray). In response to market forces, the Chinese government is also debating changes in policy related to ownership of structures of airline companies and airports in China. The CAAC is responsible for draft9ing guidelines so that under-funded airline companies and airports can accept foreign investments which may compose 49% of all shares in the sector. These new developments resulted in the establishment of 25 new aviation joint ventures in support areas such as catering and aircraft maintenance by late 2000 [Zhonghua Gongshang Shibao , October 24, 2000]. 1. Market forces development. Kenichi Ohmae (1996) predicted in his book The decline of the nation state, that countries will rely less on national power and more on international partnerships in trade and economic zones. A good example of this tendency towards increased international partnerships is China, which transformed its economy to a centrally-planned system to a more market-oriented one. Its rapidly growing private sector is increasingly becoming a major player in the global stage. Collectivised agriculture was phased out in the 1970s. Other economic reforms such as price liberalization, fiscal decentralisation, autonomy for state enterprises, development of stock markets, diversification in banking, and the opening to foreign trade and investment, brought China into the global economic arena. Most recent among these economic developments is the sale of equity in China's largest state bank to foreign investors. There have also been recent refinements in foreign exchange and the bond market. China's economy is presently only second to the U.S. It also has from 100 to 150 million surplus workers drifting from village to village seeking low-paying jobs. With the potential cross-border movement of workers and the preference of companies for high-skilled yet low-wage workers, China is most likely to penetrate and impact the global labour market. International organisations also become increasingly powerful as a result of globalisation. The General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO) promotes the lowering of tariffs and removal of trade barriers, these being requisites in the global economy allowing the manufacture of products from any location on the globe. Work, services and knowledge become virtualised and can be offered anywhere while countries compete to attract investments in the establishment of production facilities, and high-skilled and knowledge-based workers. This competition standardises labour, tax and trade policies among nations. Nations must meet standards of conformity to remain competitive and attractive to investors. Globalisation is larger than any national leader or politician and the role of international organizations like the World Bank, International Monetary Fund, Asian Development Bank and Association of Southeast Asian Nations, to name a few, are becoming larger and increasingly influential. The dominance of the Chinese government in terms of regulations and policies was evident since 1995 when it created comprehensive regulations which covered all aspects of airline operations. These regulations and policies which became the Civil Aviation Law in 1996 included the approval of domestic, regional and international route allocation. The government also set policies for published fares, aircraft acquisition and standards for aircraft maintenance, jet fuel prices, and airport operations and air traffic control. The CAAC, aside from owning some of the largest airline companies, also strictly regulates domestic airline companies. However, recent times have seen the increasing degree of operational autonomy accorded by the CAAC to domestic, Hong Kong regional and international routes. Increasing autonomy also include aircraft route allocation, purchase of aviation equipment, pricing of Hong Kong regional and international air fares, supervision and training of personnel, and day-to-day business operations. Changing the Theoretical Approach As efficiency barriers of time and space break down and international markets become increasingly integrated, corporations must adopt a global dimension if their operations are to remain competitive. They must develop strategies to design products for a global market, and to produce and deliver them using a supply chain that rationalises the firm's resources to the maximum extent. Among the infrastructural developments adopted by China involves helping customers acquire tickets and make informed decisions [Reuters News Service, November 14, 2000]. Five Automatic Ticket Machines (ATMs) were installed in Shanghai in May 2001 for ticket purchasing using "Peony Cards". This allows customers to purchase their tickets without going to the airport or travel agent. In june 2001, a "Civil Aviation Supermarket" was set up in Ji'nan which provides customers with choices on prices, flight schedules and types of service. Aside from providing customers the ability to compare prices and services, the supermarket also aims to cut down on irregular deals. To remain competitive in the global market, China's airlines have entered into bilateral agreements that allow the exchange of air traffic rights between parties. China is also a contracting nation and a permanent member of the ICAO which is an agency of the United Nations. The ICAO assists in the planning and development of international air transport and is also affiliated with other conventions. At present, there are 43 countries represented by 57 air companies which operate in 13 Chinese cities. 3. External industry globalisation drivers External industry globalisation drivers are grouped into five major categories: market factors; cost factors; competitive factors; technology factors; and environmental factors. Among market factors which can drive globalisation are: emergence of global customers, homogenisation of consumer needs and wants, existence of global marketing channels, and transferability of marketing practices (Levitt, 1983; Yip, 1989). Cost benefits are argued to be a key benefit of globalisation (Levitt, 1983; Yip, 1989). Key benefits include economies of scale in marketing and production, economies of scope, efficiencies in sourcing and transportation, and synergies in other value-adding activities. Similarly, the need to respond to competitive challenge is another major driver of globalisation (Hamel and Prahalad, 1985; Yip, 1989). With competition becoming globalised in many industries, business units have to respond to the competitive pressure by leveraging their competitive position across markets, and by seeking integrated operations (Hout et al., 1982). Before 2001, most of China's 31 international, regional and domestic carriers were small and inefficient (Centre for Asia Pacific Aviation, 2002]. Their foremost goal during this period was to build market share often at the expense of profit. This has resulted to the massive indebtedness of these airlines, with combined losses estimated at USD 112.6 billion by 1998. Director for the notes that Centre for China Study Hu Angang "debt ratios of above 80% are common for the China airlines."(http://www.ebusinessforum.com, 2002). In contrasts, the debt ratios for U.S. airlines ranged from 47% in 1997 to 58% in 2001 (Heimlich, 2002). The global aviation industry was greatly affected by the increase in fuel costs and further aggravated the cost revenue balance of Chinese airline companies. The increase in fuel costs has further reduced company profits, since airlines have to contend with higher cost scales and restricted pricing schemes. To offset this problem, the Chinese government allowed domestic fares to increase by 20% and 3% increase for international fares if oil prices increase by more than 10%. However, analysts also predict that the 20% increase in fares will result in a 10% drop in passenger volume. This would translate to a 0.2% decrease in growth of demand . [Webb, November 2000; Webb, December 2000]. Profitability in the aviation industry is highly influenced by economies of scale which is delivered by medium and long distance flights. Because of their size, Chinese airlines had to operate at higher costs and were unable to explore opportunities innate to the aviation industry. The four largest Chinese carriers handled operations of half of the domestic fleet while the rest of the two dozen smaller airline companies shared the rest of the over 500 domestic aircraft. This means that more than half of the carriers owned and operated less than 10 aircraft each. In comparison, TWA which is the smallest of the three largest U.S. carriers had 577 airplanes owned and operated. Low load factors also compounded China's aviation woes. The international average is 70% to 75% while Chinese carriers operated at only 65% passenger loads. In. contrast, U.S. airline companies like Southwest average 67%-72% load factors. Coupled with its operational efficiencies, Southwest can break even with 50% passenger load. In addition, the airline's lower debt burden which has a 30% debt to equity ratio increases its profitability (Webb, November 2000; Pender, 2001; Heimlich, 2002). Another factor that adversely compounded China's airline industry are the 1997 Asian economic downturn which resulted in capacity exceeding demand. According to Efendioglu and Murray, "As a result, the already existing competitive pressures, in price, quality of service provided and the quality of its management personnel were significantly amplified. These new dynamics not only created a competitive threat but also, an opportunity for reengineering and further development of the industry." As China strove to gain entry into the WTO, foreign countries also saw their opportunity to penetrate this growing market. This encouraged domestic carriers to change their characteristics and initiate improvements in their size and efficiencies. The CAAC initiated the consolidation of the top 10 state-owned airlines into three major air groups. By November 2000, the State Council of china also came out with a mandatory directive for the merger of airlines which was completed in 2001. 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