What western companies face when entering China

What western companies face when entering China This thesis will focus on the business environment for MNCs planning to invest their businesses in China. Today, China has a huge market for foreign investment and low labour work force.it has its own unique culture differs from the western countries. The culture shock and the different market characteristics are the key difficulties for foreign businesses, also not an easy business environment to penetrate. China business environment has helped so many MNCs in the past and present to achieve their profit. It also analyse the barrier of entering mode and how difficult it is to get the right Chinese partner to negotiate with. Having the money its not the problem getting fully connected and a good relationship with the government is significant. Another dynamic code for western companies its guanxi, well connected Chinese person although what happens in China now is that the highest guanxi merits the business. China is amazing, the beauty of Shanghai has made several multinational companies to flock into the Chinese market through beverages, furnitures, pharmaceuticals, logistics also contributing in their economy growth through wholly foreign owned enterprise WFOEs and EJVs equity joint venture. However, formal rules need to be backed by informal rules to be inefficient in terms of overcoming any informal limitations of human interaction. Informal rules need to be such that the costs of enforcement, measurement, supervision and monitoring can decrease. The difference between the marketplace China and the west is that both, formal and informal rules are well developed in the west, while they are severely underdeveloped in China. IKEA is a successful case to open the China market recent years. The main goal is to acquire the information in order to provide the overseas retailers with a good entering and starting point for creating an effective business plan and operating successfully in the Chinese furniture market. Another successful case in the Chinese market is Coca-Cola who entered the business market as a joint venture but now have five major bottling plants in five different cities in China, two of them are owned by joint ventures why the others are WFOEs wholly foreign owned enterprise Introduction In an era where consumers are more demanding, critical and possess higher purchasing power, firms increasingly discover that where service was previously a mere factor employed in support of the main organizational functions, the quality of, and efficiency in delivering, service, have now joined the fundamental business pillars of technological advancement and product novelty as principal determinants of success. Nowadays, many businesses in service-oriented industries in China, including MNCs furniture, beverage chains, rely on Chinese culture as a distinctive cutting edge in gaining and maintaining business. Hampden-Turner, (1990) suggests that culture is fast becoming a vital business tool in the encouragement of high performance in China. Where multinational organizations attempt to replicate these values in another national setting, problems may arise. Mead (1994) suggests that such organizations may have to modify these home country systems, structures and values to comply with local norms. China was an emerging market where the main challenge for MNCs was simply getting started, choosing the right joint venture Chinese partner and securing government permission to enter the market, the right city to sell in, and even the right target customer segments in those cities. However, few companies had large, complex operations in this market. Today, over more than 450 of the fortune 500 foreign companies are in China, and they are all facing home-grown competition from Chinese companies is rapidly growing. The Chinese market more profitable, more complex, and also potentially riskier than ever. As Chinas economy grows and open further, the opportunity it presents to MNCs is changing. Now, western companies can actually go after the Chinese domestic market, and its worth going after, the improvements in Chinas infrastructure, workforce, and regulatory environment are making it possible for companies to lower their cost to reap new competitive advantages. Lieberthal.K,and Liebe rthal,G. During the decline in demand brought on by the Asia financial crisis in 1997,then China made massive infrastructure investments, including a huge expansion of the highway, telecom, rail, and water management systems. All these investments have improved connections among what used to be largely separate domestic markets. However, the regulatory environment is also moving in the right direction, also getting more transparent. As China implements its WTO commitments, many opportunities are opening up to foreign firms, which are increasingly in the same position on an equal footing with home-grown companies. Also, with the structural changes established by the National Peoples Congress in March 2003, indicate additional progress in shifting the role of government from the planning and administration of a socialist economy to the regulation of market economy. In 1990, China led the world in the production of only televisions and cotton textiles, by 2002 they added refrigerators, motorbikes, cameras, DVD players, desktop PCs, bicycles, cigarette lighters and cellular phones. China, in sum is rapidly becoming the manufacturing center of Asia. In this thesis I will examine what multinationals need to know before entering China for business, in the next ten years, multinationals should be the biggest winners in China. For, western companies to reap the benefits, a multinational must properly nest its effort into its overall business, show one face to China at the national level and tailor local strategies, be wary of EJV and mitigate risk, and in particular the theft of intellectual property. One important reason for this trend, in FDIs and foreign companies is no doubt globalisation. The phenomenon has given individuals the awareness of opportunities outside their region or territory. In that case it can be seen as an incentive for foreign investors looking to gain global market share. Which off cause globalisation has made the world not only globalised but very competitive. Also, as these foreign investors are expanding they have to be cautious on issues such as culture, negotiation, risk and most importantly the politica l environment. All these issues we be examined in the rest of the dissertation. The research method used is based on case studies. Which are real life examples, showing the success of one firm to the failure of another. At the end one discovers that culture has its own trait into the Chinese working society, based on established theories. Means of Entering China: When entering China, western companies have 3 investment vehicles that can be used, Equity Joint Venture (EJV), Wholly Foreign Own Enterprise WFOE, and foreign-invested companies limited by shares (FICLS). Traditionally and in the past foreigner and western companies enter through EJV using a well connect Chinese partner or middle man, this trend is still stand although in some sectors. Today china is changing, more and more opportunities are created and more challenges face western companies. More western companies are entering and have begun to explore the chines market through WFOE as the best alternative. Although EJV and WFOE are similar in terms of corporate liability and taxation and operate within the same foreign exchange rules. One of the reasons for changing tend would be the time. It takes more time to establish an EJV than a WFEO. WFOE are faster to set up and easier to manage. They allow managers to expand operations more rapidly and meet only minimal resistance from au thorities. Harvard Business Review 2004. Another reason would be the limitation and underperformance of EJVs. Western companies investors are finding greater managerial control and flexibility which makes an excellent start for the competitive market in China. Some analyst describes the new emergency of WFOE as dramatic in china. Access to Chinese markets through a Joint venture is more limited than many foreign investors have hoped, and much more limited than most Chinese partners can deliver.   By 2002, WFOEs comprised nearly 65% of the approved projects and by value 69% of the deals.  Ã‚  Its expected that WFOEs will grow even more in number and value once more of  Chinas industrial sectors become open wholly-owned ventures that are currently restricted to JVs. Some advantages of WFOE is that it gives greater protection of intellectual property rights, know-how and technology since no partner required and therefore more control of IP. It also helps with greater efficiency in its operations like mentioned above, including management and future development. In addition the ability of converting RMB profits to US dollars or other foreign currency for remittance to their parent company outside China. U.s household products company had entered china through an EJV in 1990 with Shanghai Jahwas corporation. Jahwa was Chinas largest cosmetic manufacture. The two companies had conflicting interest and the result was devastating. First the US Company intended to capitalise on the Chinese base company for distribution, brand equity, guanxi in other to push its own production line. On the other hand Jahwa Home Base Company was looking to the foreign company to upgrade the companys technology and increase its competitive capabilities both locally and abroad. Having direct direction, aims and objects except for sales, the joint venture went into halt for 3 years. Following that was a we drawer from Jahwas selling all it shares. This action left the American base company seeking a new local partner to save its investments and to save face. Such actions and the Chinese culture make it extremely stressful and risk taking for western companies to undertake in an EJV. In contrast to Jahwas and the U S base company, the experience of Johnson and Johnson a western pharmaceutical company that entered china as part of an EJV is slightly different and optimistic .The company entered China as an EJV, Although this had been successful, but a change in strategy came in 1992. The company decided to launch new products in oral care, baby and feminine hygiene but as WFOE, looking for more control over sourcing and marketing. This result was achieved, ever since the introduction of the new venture, revenues have increased 40 % to 50 %. Following, that was the decision from the company to continue its business operations as WFOE unless they were given a great and major offer from a Chinese partner. In respect of the different cases, it is important that western companies enter china through the right way, either EJV or WFOE demanding on the offer and the possibility of gaining market share. Although this is exaggerating for western companies to enter and gain market share due to the level of local competition, but having the right partner and long term sight might bring the puzzle together. Despite the criticism of EJV and the thought of been left to hang out dry there are also Chinese in the market looking for westerners to join or buy part of an EJV. This on its own is increasly happening. Short Term and Long term Results This is important for new investor or foreign companies planning to enter china. One would have to look at the long future not the short term. There are uncertainties about political stability and the market economy. What could go wrong? Could it affect the companies aims or objectives. In the case of china, the future some is bright, a rising star, with a demanding population there might always be a market and most especially consumers. Most western companies might not want to enter the Chinese market on the short term basis because of uncertainties, however in most cases it is impossible to do. They end up finding themselves in the market for the long term. Several multinationals are approaching China as a long- term strategic market, and they are investing large sums of money to help build sustainable long-term positions. In the short term, the result might not be as expected, and it is unlikely to make profit gain market share. Companies would have stages to under go, from introd ucing the brand, acquiring consumers to keep sales stable. Many western companies look to the case of Coca Cola as an early entrant in the Chinese markets and back the arguments that one must be around a long time in other to achieve best results. The case of coca cola When Coca Cola entered china in the early 1980s, it wasnt well received by the consumers. The market was saturate with different soft drinks, most being lightly colour or orange flavour. In that case Coca Cola changed strategy and began to invest in sprite and Fanta. While doing this Coca Cola never lost sight of pushing its brand forward. It continued to invest in branding the product coke. By the early 1990s consumers began to accept the soft drink that the sales of other began to decline. Sales of Coke to Sprit volume ratio was four to three. In contrast, Pepsi- Cola has been less successful with 7-Up, the Pepsi to 7-Up ratio is four to one. Coca-Colas long- term success has been also involved taking as much control as possible of its joint ventures. When the company first entered china it was force to merger as a joint venture. It formed an EJV with China National Cereals, Oils and Foodstuffs Import-Export Corporation (COFCO). However in 1988 when regulations changed and where more relaxed, the company moved quickly to buy shares from its partners, having full managerial control of firm. It was complete, coke decided to invite 2 new partners when establish a new joint venture. The partners were Citic China International Trust and Investment Corporation, Swire Pacific, and Kerry Group. Citi is a state owned companied founded by Deng xipong, this relationship between the two partners could if not used as a basis for developing guanxi or influence , related to the process of doing business in China. Though the case of Coca Cola was succefully and showed how the long run paid off the company today the company has gained enormous share in the Asian region with China being the third just after Philippines (see chart below) so did other early entrant like Volkswagen report to be successful over the long peiod of time, growing at double digits per year. However, some other western firms have found it different. But Peugeot entered the Chinese market at the same time as Volkswagen, and it has lost tens of millions of dollars each year since 1995. This brings us to the argument of why are short-term results so important? Turbulent market such as Chinas, sustainable long-term positions are necessarily built on a series of successful short-term moves. Short-term results can help build brand recognition, attract local talent, and secure support from the parent company, which can create a virtuous cycle. Source: http://fliiby.com/file/328720/m6qct0zqis.html. By contrast, a vicious cycle is established when a multinational company sees no positive short-term results. Rather than revise the companys strategy, managers typically justify underperformance with the argument that China is a long term market. However, the hard truth is this, when no positive short-term results are seen, critical mass is not achieved, so the overhead cannot be spread over a reasonable volume. Therefore, the operations lose credibility back at the home office. As a rule, the China business is then scaled back in order to reduce short-term losses. What MNCs have to put in mind is that, in general, market share falls and the Chinese operations are second guessed; How far should we go, How hard should we push, When will we see results and How attainable are the long-term targets .Drawing upon these dynamics, players that want to be around over the long run had better be making the right moves today or they we be sitting on the side-lines before tomorrows game even be gins. It doesnt mean that MNCs have to get every thing right? No. Everyone makes mistakes. Moreover, multinationals must learn from their mistakes and learn fast. Long term success is best achieved through measurable short-term results. Guanxi Guanxi can be roughly described as a type of social capital that is developed between two persons via a process of reciprocal exchange (Gregory Osland 993). Has become a familiar term among those involved with Chinese society its creating personal connection, networking and a valuable asset for any one thinking of investing or doing business in China. Access to Chinese markets can be hindered by what is thought to be the great door-opener guanxi. Therefore, guanxi has long been touted as an invaluable asset to western investors. This concept is different to that of the west. Westerners put a premium on the networking, information, and institutions, the Chinese place a premium on individuals social capital within their grow up friends, relatives, and close associates. Although today some argue that the role of guanxi is fading, as some Chinese business practice the western style of business. According to Hexter and Woetzel 2007, more and more western companies are finding out that the scope of their Chinese partners guanxi is limited, which may take them in directions that are difficult to control or may not be strategically suitable. In addition, some companies are finding that guanxi may not be cost effective. This doesnt underestimate the force of having guanxi, it remains an important social force. More often than not, the person with the best guanxi wins. Although the key to using guanxi as a way of establishing reputation is to focus on developing and maintaining a network of high-quality contacts while maintaining the focus on the discrete relationships that constitute the network. Organizations can establish themselves as reputable in China by having a multitude of organizational participants engage in guanxi -based business practices. However, guanxi remains a product of individuals and becomes an organizational asset only to the extent that individuals are willing to use their guanxi in order to achieve organizational objectives. Maintaining guanxi Maintaining guanxi in china is essential and important. It is also important even critical to note that the entire process is embedded in discrete relationships. One must continually invest in their guanxi networks In order to maintain the network and relationship. A survey conducted by the Hong Kong Independent Commission Against Corruption (Anonymous, 1993) found that Hong Kong business persons spent 3 5 per cent of their total operating budgets to cultivate guanxi in China. Yan (1996) found that in the north China village of Xjajia, households spent between 10 and 20 per cent of their disposable incomes on nurturing guanxi relationships. Indeed, the cost of maintaining a guanxi network can be quite expensive (Park and Luo, 2001; Yu, 2002 ; Fan, 2002b). However, the penalties for not continuing to invest in the relationships can be rather substantial. According to Tung and Worm (2001), Most European firms appear to have a basic grasp of guanxi. However, these same firms do not appear to recognize the importance of continued investment in the guanxi relationship. Most of the firms surveyed by Tung and Worm showed a reluctance to engage in substantial social activities outside the normal work environment. Consequently, the depth of relationships developed was substantially hampered (a limitation on the quality of relationships established). At the extreme, a failure to focus on the long-term relationship can be perceived as an expectation of immediate pay-out, which can be interpreted as an attempt at bribery. Such a perception can have a devastating impact on reputation. Succeed with Guanxi Having guanxi is only for starts, succeeding with it will yield the owner the benefits Davies  et al. (1995) highlighted a number of benefits to be derived from guan xi: It can serve as an information gathering mechanism; It can act as a means of securing access to important resources; It smooths the process of gaining privileges such as government licences etc.; It is often used to enhance company reputation; It can contribute to the building and enhancement of competitive advantage; and It can serve to open doors where once they were firmly shut. While trying to succeed with guanxi. It is important to note that guanxi remains the product of the individual. It would not only be inappropriate to describe an organization as having good guanxi but difficult in the true sense to achieve .the only way organizations can have the concept as an assets is through its employees. In most cases these who are amongst senior/ high ranked employees, especially in western companies. But the dilemma is that guanxi becomes an organizational asset if the individuals one have it, two maintain it (and that would require at an escalating manner) and thirdly are knowledgeable on how to succeed on it in order to achieve organizational objectives. An organization with the greater number of individuals possessing guanxi has greater possibilities of getting deals done if not faster. It also gives the company greater reputation causing a multiplier effect. In that case organizations should endeavour to promote and support the development of this concept within its employees. Incentives like rewards or bonuses can be given to individuals using guanxi to promote the companies core objective. In that way employees would be enthusiastic about the approach especially westerns who come with a different way of doing business. Negotiation They have different basic cultural values and ways of thinking when it comes to negotiation. The westerners are known to prefer quick meeting and getting deals done fast. The chines on the other hand are known for their long courting process and as some would say Friendship first then business. When it comes to doing business any way, the art of negotiation is important, if ignored could lead to the end of the deal before even getting to start. Westerns approach negotiations with an informal attitude while the chines are formal. What ever the case maybe, communicating in the same direction is needed. However some argue that there are a lot of communication break down that exist between western and Chinese businesses. One of the causes is the failure of westerners to understand the broader context of the culture and values in China. However problem that too often leaves western negotiators confused and whirling. (Harvard Business review pg.32) Western and Chinese approaches often appear incompatibility. Westerner see Chinese negotiators as inefficient, indirect, and even dishonest, while the Chinese see western negotiators as aggressive, impersonal, and excitable. Such perception has deep cultural origins. Yet those who know how to navigate these differences can develop thriving, mutually profitable, and satisfying business relationships. The Chinese cultural threads are shown through the way of negotiation. Cultural threads are like agrarianism, morality, and wariness of strangers. Most western business people often find these elements mysterious and confusing but ignoring them at any time during the negotiation process and the deal can easily fall apart. Culture and Business Hexter and Woetzel 2007 The culture and government of any country could have a significant effect on businesses and China is no exception. Today in China western companies find that the government is quite different. Past of the reason would be that in the last 25years, China has passed more than one thousand laws and regulations related to commerce and distribution, limitation of foreign businesses have been relaxed . Allowing private and foreign enterprise to join and merger with local Chinese businesses or even as wholly owned foreign enterprises in most industries. This approach is most welcomed from MNCs as a choice of entering as mention above. Government also has established the necessary legal codes for mergers and acquisitions (MA) of both state and private assets. In China the role central and provincial governments in the business sphere have become more defined, and decisions more open and transparent. The central government, for instance, today tends to exert more contro l over businesses earmarked for national development, such as high technology and aviation, less control over businesses such as consumer goods or food processing, where provincial and local governments with their growing economic clout compete to offer substantial investment to woo business opportunities. These remarkable developments mean that today western companies in China will find a clear, well-trodden path for almost every activity they may want to pursue. Foreign investment law is much better developed Nevertheless, western companies need to focus on their relationship with the government to achieve success has changed. However, in some ways this appears to be a dilemma. On the other hand, transactions occur, and the government is involved in every one all foreign invested business needs government approval and therefore government relationships must be maintained. The ability of a company to make future deals with the government rests on how well it executes the deals it has already made, including the service it delivers to customers and its ability to hit financial performance targets and thus return expected tax revenue to the government. Therefore, China has been more critical, then for western companies to work with central and local government on day to day basis to identify new opportunities. With more western firms in the field, and much greater competition among foreign -based and domestic companies on the ground in every sector, government has almost no choice but to ado pt more routine processes to manage access. The average CEO will find it much more difficult to see the minister in Beijing nowadays. Conclusion In conclusion doing business in China involves many challenges but also provides many rewards. Challenges include cultural misunderstandings, consumer diversity, and the vast size of the country. However, China is a unique business environment The world is expanding and China in its own way has received in an influx of international companies. Western company in their own way have influence the Chinese way of business, its national culture and identity remain steadfast. Their culture is embedded in the way they do business and management style. But its uniqueness and characteristics is what westerner companies face as a major challenge till today. Multinationals organizations seeking investment opportunities find this an enormous task of researching into the Chinese corporate culture. Now many western companies have recognised the need to under the corporate and local culture than persist in China. ( Pang, 1998) In previous years possessing qualities like guanxi was highly valuable but today with the changing atmosphere having high influence would be more beneficial. Finally if western companies aim to be successful in China they must radically improve the way they execute in the country. High performance is difficult in a country with high competition therefore western companies must increase they scope, maintain high/ quality productivity. They should adapt global managerial practices to the realities of Chinese context (Harvard business review 2004, p 171) not forgetting to embed also the Chinese rules and elements. Companies could always tumble in how they execute tactic and approach in china. The wrong tactics or bad execution of good strategy has terrible consequences. But good tactics and execution on the level that western companies would accept of their operating managers in competitive developed market is exceptional in China, even harder to define. Until now many multinational did not need to focus as relentlessly as executing to world class stands in their china operations as they did in other market. Western companies would urgently need to improve performance is nearly every aspect of their operation in china, if they are going to be profitable in the short or long run and indeed if they are to survive in china. In addition other relevant elements would be securing government permission to enter the market, picking the right joint venture partner and then selling existing brands at premium prices in the right cities to right customers. Time and time have shown that those who make smarter choices about joint venture partners like coca cola, brands cities and distribution networks tends to fair better than rivals. Moreover the reforms in the government and plans to use the WTO entry requirements to force the domestic reforms. many believe will make Chinese firms competitive internationally in the coming decades. So in a remarkably wide range of sectors, western companies must now think seriously about their ways in China and those of their current and potential competitors that are likely to affect their wider future global opportunities To be sure, China will remain an exceptionally challenging environment. It is a country with inadequate legal protections, rampant intellectual property right violations, massive government interference, and severe price competition from state subsidies firms. However Beijing desire to expand the service and private sector, combined with its willingness to allow foreign firms to compete nearly across the board, means that the china market is ever changing and now becoming a real opportunity just as the purchasing power of Chinese consumers is beginning to increase. Western companies should try to try this into their advantage just like Ikea has done in china. Entering the Chinese market in 1998 as an EJV, with a low pricing strategy and today has captured 49 % of the furniture market in china. Although as they say patience is a virtue, Ikea had waited for 10 years before its success came in the Chinese market. In the near future China is likely to remain the worlds fastest growing major economy therefore western companies should turn the situation into their advantage and gain global market share while the sun shines.