International Business Examples of UK and China - Essay Example

UK has been the fourth largest economy in the world. It has been because Chinese economy is leaping ahead as it has done for several years, has pushed the UK into fifth position. The economy of the world's most populous nation has been growing vastly in recent years with an annual growth rate regularly nudging - even exceeding - 10%. It is hard to find items in our shops not made in China. Many electronic items are manufactured there and BBC television, in its recent China Week broadcasts, came out with all sorts of extraordinary data. Some 90% of the world's toys are made in China, 60% of the world's fabrics - and so on. China has a growth rate three times higher than that of Europe, but wage levels there are typically close to a tenth of the UK's. The mere fact that China is such a successful player in the global economy means that small businesses in the UK are affected by the growth of the Chinese market. There are mutual benefits for both UK and Chinese businesses. China has a strong manufacturing base but is in need of technical expertise and innovative technologies that can be provided by Welsh companies. Moreover, there is a strong incentive for Chinese companies to co-operate with Britain as it can be used as a gateway to Europe, and in turn the biggest consumer market in world. Chinese labor costs are very low. There is a fear from some small firms that British manufacturing base could be undermined. Indeed if a large manufacturer relocates to China this has implications for small manufacturers who are first or second-tier suppliers. In terms of labor costs a UK small manufacturer cannot compete and many are suffering as a result. Others indicate, however, that labor is not their highest overhead and when transport costs are included, they believe that they can compete favourably with Chinese products. Moreover, as China's economy develops its workforce, it will grow in wealth and in turn is potentially an extremely large consumer market for goods. Chinese economy presents threats as well as opportunities to British businesses not only as competitor but as the market and supplier. "China and India now encompassed a third of all humanity, and were a potential mass market, supplier and competitor" (Duckers, 2005). Duckers makes a note that British businesses should not think that high value products can be kept while making low value products in China using the cheap labour. In fact, China is turning many times more engineers and technologists than Europe. China is producing half of the world's cameras, refrigerators and TV sets, 30 per cent of air conditioning and washing machines. The growth of Chinese economy has proved to have positive impact on inflation in UK. "According to Monetary Policy Committee member Stephen Nickell, cheap Chinese imports are one of the main reasons why inflation in the UK has remained low in recent years. At the same time, the price of services such as lawyers' fees and haircuts have risen reasonably quickly" (Conway, 2005). In the result of the rapid growth of Chinese economy, more and more British businesses are considering exploring opportunities for trading in China. When getting started the following challenges need to be considered: "Businesses need to ensure they receive a consular briefing before starting business in China and that the Chinese consulate knows in advance of the visit. China is one of the world's most complex markets and companies should send their best people. Employees should be prepared to stay in the region for at least five years to build a successful market. Companies should not start up blind - they need to undertake their own market research in the region before setting up an office or factory. Talking to complementary companies who have already established a successful base about the issues they faced will be hugely beneficial" (Logan, 2005). As Helen Logan continues, the first step is securing a customer base. "Existing, international customers should be targeted first to build the client base, leaving the Chinese state-owned enterprise market until later. There is a new, rising middle class in China - focused in cities like Shanghai - with an appetite for consumer durables that should bring continued rewards for consumer industries such as manufacturing. Operating without a representative office in China is too challenging and a risk not worth undertaking. Companies should set up an office and invest in local staff and networks" (Logan, 2005). Several companies have already taken advantage of entering Chinese market. For example, the Trifast Company is planning to invest 2.75 millions to build a new factory in China (Marsden, 2005). The pretax profit is expected to rise 62 percent compared with the previous years. The company is successful in Asia and Singapore and remains focused on high value specialist production. The aim is to build 'a major presence within the Chinese economy. The factory will support the production of over 150 million parts every month. The statement said: "This decision is essential as we look to produce operationally efficient high quality product for worldwide consumption at competitive and profitable pricing" (Marsden, 2005). However, not all economists perceive the Chinese economic expansion as an opportunity for British businesses. As Walker has written, "figures from the monthly PMI Business Survey Data, produced for Royal Bank of Scotland, show employment continuing to increase and companies showing more confidence in the future. However, the statistics for last month also show that the North-East is still lagging behind the UK average when it comes to rates of growth and its businesses are seeing profit margins come under increasing pressure" (2004). Walker related this drawback to the Chinese growth. Chinese economic boom and continuing interest rate rises are making life more difficult for the region's firms. The Chinese economy growth is impacting not only United Kingdom, but the rest of the world as well. The assumption that China is able to become the main industrial production centre for the world is no longer perceived as unrealistic. In order for the British companies to respond to the challenges created by Chinese expansion, it is necessary to be aware of strengths and weaknesses. The United Kingdom still comes in the top nations with regard to academic skills and research ranking but was ranked bottom last year with regard to workforce skills (as measured by qualifications). Regarding UK, manufacturing field is impacted the most by Chinese economic growth. Over the last five years many companies in this sector have faced the increased competition from Eastern nations, in particular China. Manufactures depending on such war materials as steel or oil have faced the dramatic costs increases and had to pass portion of the expenses to customers - through increased product prices. The combination of factors (increase in raw materials and energy costs, higher pension costs and others) have impacted the cost base of UK manufacturing and gave the Chinese producers a competitive advantage in terms of price. China is the low cost production region and the labour costs are 70 percent below the European rates. This has forced the UK producers to establish production facilities in the low cost regions and through ventures with local and foreign partners. There is also potential for business-to-business commercial activity. Opportunities exist for western experts to provide services and sell innovative technologies. Indeed, there is a keen demand for environmental technologies to reduce pollution outputs. The point is that British businesses can either fear the situation, or try to take advantage of it. As a first step for a small business, exporting into China it is important to find local distributors for products, as it is unlikely that a small business without a local presence would be in a position to service the Chinese market. China is becoming the major threat to UK businesses, however, from the other side, this threat can be re-directed into an opportunity. The British economy has to change to be able to compete with Chinese businesses. The process of change has five major elements: executive leadership, employee empowerment, cooperation among suppliers, customer collaboration and recognition of the threat. Each of these elements is not new for British economy, however, their importance are often under-estimated. Executive leadership means the development of clear vision and goals that are communicated to employees. The supplier cooperation means creating continuously improving relations with suppliers. Customer collaboration should become the heart of the manufacturing strategy - ensuring that the products and services offered to the customers meet their needs. The recognition of the threat imposed by Chinese rapid expansion means being prepared for radical strategy changes. Employee empowerment is rightfully considered the most important element - employees are the major asset of any company and any unplanned change of the overall course can result in the disaster if the employees were not involved in decision making process. One of the negative consequences of Chinese expansion on UK businesses if that business leaders have to divert their attention from building successful companies to finding cheaper inputs. UK economy will greatly slow down if there are no forward looking innovative leaders. It is not only about generating the technical ideas, but searching for the new products and better services rather than locating cheaper inputs. China has cheap resources and British small companies are attracted to source goods from China. Small business leaders do not realize that if this process is not properly managed it is possible that the goods will be of poor quality with potentially damaging consequences. A small business may not have the resources to manage the supply chain and many small businesses complain about uncertain service and quality during the first stages of sourcing. It is possible to mitigate this risk and one technique is for a small business to piggy-back on a larger company and source products from Chinese companies that already have well established European or North American customers. Initially a business will need to make a visit to China and they may find it difficult to obtain a business visa. To secure a visa it is necessary to first have a formal invitation letter from China inviting them to attend a meeting or an event. If this requirement is not met the Chinese Embassy will not issue a visa. Understanding local laws and customs is important. For instance there is a lack of protection of intellectual property in China and some businesses run the risk of having their products copied. It is advisable to register trademarks, patents and copyright with an accredited agent. With China's adhesion to the World Trade Organization it is hoped the problem will be reduced. Import/export regulations and customs tariffs on both the Chinese and UK side can cause problems. It is important to find a good freight forwarder who can deal with customs, documentation, storage and insurance. Letters of credit can be difficult to obtain and understand for a small business. They are vital, as they are a promise from the bank to pay. The seller gets the money and the purchaser is then able to specify the quality parameters, standards, specifications and delivery time. It is difficult for the Western world to understand and accept the fact that China is becoming the major competitor is majority of the industrial fields. For example, the Chinese auto producer Chery plans to export ars to Europe in 2007 and even produce these cars in Europe, thus, the production process will be outsourced from Europe to China (Deaves, 2005). Even more interesting, China is planning to outsource the product design as well. Chinese businesses have proved their ability to produce high quality products as low cost and are going to repeat their success in other locations. The whole world has learned the lesson on how to be successful. In conclusion, it is difficult to say whether the Chinese economy expansion is a threat or the opportunity for UK businesses. It would be more correct to assume that Chinese growth is a threat and an opportunity for UK at the same time. China has become an attractive market for foreign investments and a place for outsourced manufacturing activities. The whole process of entering Chinese markets has changed. Despite of the fact that Chinese economy is rapidly developing, there are many opportunities to take advantage of (such areas as intellectual property protection and environment protection are underdeveloped). The new partnerships are created, the British businesses are forced to find more effective ways to offer the products that meet the needs of the customers and at the same time bring profits to the producers. Word Count: 2096 References Conway, E. (2005, September 14). Gordon Brown's New Horror Blockbuster. City Focus. The Daily Mail, p. 67. Deaves, M. (2005, January 13). Made in Europe for China. Industry Commentary, p. 3. Duckers, J. (2005, November 18). Still Life in Manufacturing. The Birmingham Post, p. 19. Logan, H. (2005, February 15). Rooster Booster. Evening Gazette, p. 6. Marsden, J. (2005, June 23). Trifast Bolts on Profits. The Birmingham Post, p.19. Walker, H. (2004, August 10). Expansion Goes on but It's Not All Good News. The Journal, p. 27. Read More