Business and Investment Opportunity in China - Essay Example

ASSIGNMENT Product: I have chosen China, the country of over 3 billion citizens, as my potential market to export bottled water (product) in bio-degradable packaging. Business and Investment opportunity in the Chinese market: Peoples Republic of China is the most densely populated country of over 1300 million residents in the world with reasonable per capita incomes. The real incomes in China are on rise because of its phenomenal economic growth in past three decades. China is the only country that has constantly maintained double digit manufacturing and services sector growth rate (prior to economic recession) in past 10 years thereby resulting in higher employment, financial wealth, prosperity and improved standard of living of its people. Its Gross Domestic Product is just around $5 trillions against Japan’s $5.1 trillions. That’s why economists and pundits expect that China’s GDP (presently 3rd largest) will easily surpass the Japan’s GDP (presently 2nd largest) in next few months or within a year. China has not become an Asian tiger in just 10 years rather it has covered a long journey in past 30 years. In fact, the open-door policies of successive Chinese governments and their business friendly strategies not only attracted the private sector in China but also the foreign investors who shifted their assembly lines, plants, manufacturing units and factories to China to make the most of its cheap labor and infrastructure to become competitive and maximize their profit margins. In short, the business friendly policies although enabled China to now become a 2nd largest economy and ‘a place to produce goods for customers across the globe’, however, these strategies, policies and tactics have adversely affected its environment. Many industrial cities such as Beijing (capital), Shanghai, Chengdu and Guangzhou in China have seen an increase in pollution as factories dispose their waste including, paper, dye, fertilizer, chemical waste, and many other different products. Also, the increase in standard of living has increased the demand of cars, automobiles and other means of transport. Simultaneously, the demand of fossil fuels has skyrocketed in recent years, thereby heavily contributing in environmental pollution. Many different organizations especially the manufacturing businesses such as consumer goods producers, plastics, chemicals, cement, textiles, fertilizers, pharmaceutical etc. get rid of their industrial waste by dumping it in lakes, rivers, and canals, thereby contaminating the water and making it pernicious for any human-being to drink. It must not be forgotten that these rivers, lakes and canals are the main source of drinkable water for millions of Chinese residents. (Halasz, 2009) Taking the above facts and ground realities into consideration, an American Company, therefore, has a great business opportunity to convert contaminated water or to find way to provide clean potable water and make it available to millions of residents in China. A US-based company could not only invest in China and develop a manufacturing unit to produce clean, hygienic drinking water through Purification and Desalination plants that convert sea water into drinking water (and sell in pet bottles or biodegradable packaging), but also it could export safe and clean drinkable water to a large pool of Chinese customers who are facing the scarcity of germs-free drinkable water. Water is essential to human survival; therefore, it is justified to say that hygienic, mineral bottled water has an inelastic demand for Chinese residents. The market potential is enormous, in fact endless, because every Chinese has an inclination towards safe bottled and barreled water over unhygienic tap water. It is worthwhile to mention that in 2009, “some of the sources of water were not available for human consumption and a large bottle of water in China jumped from $1 a bottle to $6.” (Halasz, 2009) Table 1: Global bottled water market Leading countries consumption and compound annual growth rates (CAGR), 2002-2007 Millions of Litres Compound Annual Growth Rates 2007 Rank Countries 2002 2007 2002/07 1 United States 21,938.7 33,398.7 8.8% 2 Mexico 14,757.8 22,277.9 8.6% 3 China 8,094.7 18,123.8 17.5% 4 Brazil 9,621.8 13,707.4 7.3% 5 Italy 9,683.8 11,738.2 3.9% 6 Germany 8,674.3 10,384.1 3.7% 7 Indonesia 6,141.8 9,087.3 8.2% 8 France 8,424.8 8,642.9 0.5% 9 Thailand 4,833.9 5,803.4 3.7% 10 Spain 4,509.9 4,860.5 1.5% Top 10 Subtotal 96,682.1 138,024.4 7.4% All others 34,273.9 50,752.2 8.2% World Total 130,956 188,776.6 7.6% Source: Beverage Marketing Corporation Source: http://www.cbc.ca/news/background/consumers/bottled-water.html The above table shows acquired from CBC News report shows that United States and Mexico are top most consumers of bottled water with 33,398.7 and 22,278 million litres respectively in 2007. Their annual growth rate was under 9% on average over last 5 years. China is ranked third in this list with bottled water consumption of around 18,124 million litres compared to its consumption of just around 8,095 million litres. It must be highlighted that China has observed the highest annual growth rate of 17.5% (double the next fastest growing country USA) on average in consumption of safe and clean bottled water in past 5 years. This enormous business potential and lucrative opportunity has also attracted different groups and companies such as Synutra International Inc. (the Nasdaq-listed dairy-based nutritional food producer), China Water Group Inc. (provider of turn-key engineering, equipment and chemical sales for industrial and municipal waste water treatment facilities) and other groups to enter the water bottled business in recent 2-3 years. Table 2: Global bottled water market Per capita consumption by leading countries, 2002-2007 2007 Litres Per Capita Rank Countries 2002 2007 1 United Arab Emirates 133.2 259.7 2 Mexico 142.7 204.8 3 Italy 167.3 201.7 4 Belgium-Luxembourg 123.8 149.5 5 France 140.4 135.5 6 Germany 105.2 126.1 7 Spain 112.4 119.9 8 Lebanon 94.3 110.9 9 United States 76.1 110.9 10 Hungary 51.1 107.9 11 Switzerland 91.6 106.7 12 Slovenia 71.2 95.4 13 Austria 79.1 94.6 14 Czech Republic 79.9 93.1 15 Croatia 56.4 92.0 16 Saudi Arabia 90.1 91.2 17 Cyprus 81.0 90.8 18 Thailand 76.1 89.3 19 Israel 46.9 87.8 20 Portugal 75.3 84.8 Source: Beverage Marketing Corporation Source: http://www.cbc.ca/news/background/consumers/bottled-water.html The above table shows the Per Capita Consumption of bottled water in leading nations in 2002 and 2007. United Arab Emirates was ranked first among top 20 nations in per capita bottled water consumption (around 260 litres) while Portugal ranked 20th where per capita consumption was around 85 litres. HKTDC forum mentioned that The Research and Markets report on “China Drinking Water Market 2008-2009” pinpointed the fact that “sales of drinking water in China increased sharply to a level of 18.36 million tons in 2007 from 3.39 million tons in 1999. It was forecasted that Chinas sales of drinking water would exceed 30 million tons in 2010, and Chinas drinking water market will continue to grow at a rate of over 10% annually in the following five to ten years.” It was estimated in 2007 that the market value of bottled water in China was around 30 billions RMB (Chinese currency). (HKTDC, 2008) However, it must not be concluded that these existing international players and business giants may thwart the moves of potential new entrants like us mainly because the demand of bottled is extremely higher than the actual supply of all the producers, suppliers and dealers. Hence, any entrant that can offer safe and hygienic drinking water in an environment friendly packaging such as in biodegradable bottles that can be composted back to soil, has a higher probability of survival and growth in Chinese market. According to the sec 10-k annual report of by China Water Group Inc., the global average consumption per capita is 29 liters compared to ‘China’s per capita consumption of only approximately 14 liters of bottled water. If Chinas consumption per capita grew to the global average of 29 liters, it would represent a 110% increase (or an additional 20 billion liters) in consumption of bottled water. If Chinas consumption per capita grew to the average consumption per capita of the top 10 countries, it would represent an over 1,000% increase (or an additional 184 billion liters) in consumption of bottled water.’ (China Water Inc. annual report, 2009) Environmental, Political and Legal Forces: Source http://economicobjectorvism.wordpress.com/2007/07/19/china-wakes-up-to-the-dangers-of-pollution/ Wuhan, Hebei province: The picture portrays a man collecting the dead fish in Donghu lake, where officials say an estimated 30,000kg of fish have been killed by a combination of pollution and hot weather. Source http://economicobjectorvism.wordpress.com/2007/07/19/china-wakes-up-to-the-dangers-of-pollution/ The above picture portrays the situation of an urabn area Benxi where Pollution from steel mills after rapid industrialization blows over residential buildings. Unlike USA, government has not compelled the manufacturers to abide by the environmental safety laws and regulations. Therefore, it must be highlighted that although some laws have been developed and formulated but are deliberately implemented by Chinese governments to attract more foreign investors with their money so that severe national issues such as unemployment and poverty could be curbed. Chinese government probably thinks that strict implementation of those laws might compel industrialists and manufacturers to close their industries that will then lead to flight of capital and foreign reserves from China besides increasing unemployment and poverty. The China Water Group Inc.’s annual report (2009) highlighted the facts gathered by State Environment Protection Administration (SEPA) of China. SEPA estimated in 2007 that tap water in one-half of Chinas major cities such as Beijing, Shangai, Chengdu and Guangzhou was polluted by industrial chemicals manufacturers and agriculture fertilizers who dumped their industrial waste in lakes and rivers. It is worthwhile to mention that China’s per capita consumption is on rise because of improvement in purchasing power parity, industrialization and employment (supported by the fact that industrial and housing demand have risen by more than 70% since 1980); therefore, there are enormous chances that our export of bottled water in biodegradable packaging will achieve consumer acceptance and success. (China Water Inc. annual report, 2009) It is also worthwhile to mention that The State Environmental Protection Administration (SEPA) and other concerned auhtorities, individually and collaboratively put their efforts to formulate and develop a comprehensive and in-depth ‘legal framework and bureaucratic infrastructure’ to cope with China’s alarming environmental issues. It was also highlighted that Chinas has a relatively weak environmental bureaucracy compared to that in United States. In addition “funding and personnel levels remain well below the level necessary merely to keep the situation from deteriorating further.” The federal government of China (at Beijing) has not endorsed ‘the regulatory and enforcement regimes’; therefore, even technically sound policies were not successfully implemented and finally failed to reap any benefits. (China Water Inc. annual report, 2009) China’s contributions to global warming, ozone layer depletion, acid rains and carbon emissions forced the international community, non-governmental and international governmental organizations (NGOs and IGOs) to pressurize China and alter its environmental regulations and practices to secure environment. According to OECD report, “an estimated figure of 300 million people are drinking contaminated water every day, and 190 million are suffering from water related illnesses each year. If air pollution is not controlled, it says, there will be 600,000 premature deaths in urban areas and 20m cases of respiratory illness a year within 15 years. In addition, it must be pinpointed that one third of the length of all China’s rivers are now “highly polluted” inclduing 75% of its major lakes and 25% of all its coastal waters.” Therefore, pressure groups, local publics, community-welfare institutions and environmental groups in China tighten their belts and spent huge amount of money (around $1.3 billion) to ‘clean and save the lake Taihu’ (China’s third largest source of freshwater) in Wuxi, ‘which provided potable water to 5.8 million residents.” (Economic Objectorvism article, 2007) The above mentioned details can help concluding the fact that although some measures are taken to secure environment and natural resources from pollutants, yet the measures and practices applied are insufficient to completely cope with the issue of scarcity of clean drinkable water. In simple words, the demand for bottled water will continue to increase at a phenomenal rate in recent years. As far as political stability and certainty is concerned, China is relatively secure and an attractive destination for US bottled water, however, any legal and trade restrictions such as quotas, import tariffs, taxation, negative products list etc may affect our operations. But, it must be forgotten that current China has been constantly introducing ‘Economic Reforms’ to encourage trade and economic decentralization. The legal requirements include the registration and acquisition of trade license from Chinese government authorities and agencies to initiate the trade process and business activities. Secondly, a company must purchase the intellectual property rights, patents, trademarks etc. for its products to avoid any theft, larceny and use of company’s name and its products by fake organizations. (China Water Inc. annual report, 2009) Marketing the product in China: The success of our bottled water (in biodegradable packaging and with highly inelastic demand) business depends on how we build our reputation of a company that will offer safe, pure and clean drinkable water. In fact, we would become successful only when we will build positive relationships with our potential clients and win their trust and conviction over our brands and products. In simple words, quality products at comparatively cheaper rates will serve as a key to goal accomplishment. Failure to maintain, sustain and improve our quality will result in negative relationships that, in turn, may lead to failure of our venture. In addition, the marketing strategy that will be adopted in China will be different from what businesses adopt to sell in USA. There are perceived changes in societal norms, standards, values, attitudes, beliefs and experiences. Unequivocally, Chinese value “loyalty, honor, honesty, kindness, and patience. As such, marketing should focus creating ways to link bottled water products to these aforesaid values. An effective marketing campaign should create the feeling that by drinking Chinas bottled water, the customer will gain these attributes.” (Halasz, 2009) Exchange Rates: Yiping Huang (2010) mentioned has mentioned in his article that China is moving towards internationalization of its currency Renminbi (RMB). In simple words, China is planning to make RMB an international currency to gain more economic power against developed nations. Also, the weakening of US Dollar in recent months has forced China to revalue its currency that can have serious implications for export/import businesses. Undervalued Yuan will make imports expensive for China whereas Overvalued Yuan will make imports cheaper since more US Dollars can be acquired for fewer Chinese Yuans. NOTE: This report includes many facts that are gathered from various sources. Also, it includes quotes from the reports, articles, forums etc. written by institutions and individuals that are placed in Inverted Commas so no reliance must be placed on writer for any academic misconduct and plagiarism. In simple words, it was not possible to even paraphrase some literature, therefore, the writer has just simply copied and has mentioned in QUOTES. Also, the writer is not responsible for any losses if incurred by any institutions or companies who will use the information presented in this report. References: No author. (2009). “China Water Group Inc. Sec 10-k Report ” Faqs.org. Available at www.faqs.org/sec-filings/091211/China-Water-Group-Inc_10-K.A/ - Halasz, John. (2009). “Bottled Water in China – Industry”. Ezine Articles. Available at http://ezinearticles.com/?Bottled-Water-in-China---Industry&id=2976910 No author. (2008) “Mineral water export to China” HKTDC.com Available at http://forum.hktdc.com/forum/Forum8/HTML/000421.html No author (2009). “Beijing Packaged Drinking Water Market Investment Report, 2009”. Available at http://www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=1058071&q=Consumption of Bottled water in China&p=1 Huang, Yiping (2010). “The future of the international currency system and China’s RMB”. East Asia Forum. Available at http://www.eastasiaforum.org/2010/02/28/the-future-of-the-international-currency-system-and-chinas-rmb/ No author (2007). “China wakes up to the dangers of pollution”. Available at http://economicobjectorvism.wordpress.com/2007/07/19/china-wakes-up-to-the-dangers-of-pollution/ No Author. (2008) “Bottled water - Quenching a planets thirst”. CBC News. Available at http://www.cbc.ca/news/background/consumers/bottled-water.html Montague-Jones, Guy (2010). “China ensures continued global bottled water growth”. Available at http://www.foodproductiondaily.com/Packaging/China-ensures-continued-global-bottled-water-growth Read More