Evaluation of China as a business destination

Introduction

China also known as PRC (People’s Republic of China) is the third largest country in the world. The country stands first with its population estimating to a 1,330,141,295 (1.3 billion) as of July 2010. China is also predicted to consume 29% of the world’s luxury goods by 2015 which precisely signifies the consumers spending ability. China has a high spending middle class even after the financial instability which makes it a prospective business destination. Beijing is the capital of China and Shanghai also known as the financial capital of the country is the largest city in China. Beijing, Shanghai, Guang Zhou, Shen Zhen is China foremost cities for business and commercial activities. Although China is one country by itself, due to the history and differences in culture in every province, this makes every province akin to small little countries that has different needs and wants. For example, there are different policies in certain provinces; also, due to the differences in geographical area that is spreading horizontally throughout the globe and difference in weather, consumers from different provinces have different needs and wants. Thus, any firms that wants to enter into different provinces in China has to do a thorough research before entering and not taking granted by using the same entry strategies, knowledge and marketing efforts to enter into different provinces in China. Even though, new market entry is likely to boost a company’s revenue, productivity and profit, Market entry without proper analysis will be a costly experience for the company but a hasty decision to not enter may lead to loss of extensive profits and market shares (Hollensen, 2004). However, in our project, we will only be looking into Shanghai as it is the financial capital of the country and has the most robust commercial activities as compared to the rest of the china. Shanghai has been growing exponentially since the past few years and is expected to grow even more (BBC News, 2011). As Takeomega 3 is looking for international market, especially in China, we are here to explore the feasibility and attractiveness of Shanghai market using PEST analysis.

Political Factors:

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China acts like a single unit where the Chinese communist party (CCP) governs all the political powers. The above map shows the different administrative zones of the country. According to Euromonitor International (2005a) there are three areas which threaten the political stability of the country.

1] Differences in the rich and poor areas in China: The tensions are growing between these two areas and also the government has to handle the separatist movements in Tibet, Xinjiang. (Euromonitor International, 2005a)

2] Unstable Pension system: The pension system in the country is on the verge of a breakdown. As of now only 6 out of 31 regional pension funds are solvent. (Euromonitor International, 2005a)

3] International issues with neighboring countries: There are issues with the neighboring countries like Taiwan on the basis of political belongings, and also issues with Hong Kong with pro democracy activists and with Japan on the topic of exploitation of natural resources (Euromonitor International, 2005a). These factors can lead to political instability which can hamper the market entry for our firm.

Other factors that can be linked with issues relating to our market entry are issues like corruption in the country and the business entry procedures. Transparency International Corruption Perceptions Index indicates China with a 3.2 index compared to 8.2 of Europe and 3.9 of Asia, corruption index being 1 as highly corrupt and 10 being the lowest.

Factors influencing Business procedures:

Some of the upcoming business destinations can be middle-east and emerging markets. It is important to consider the time taken to complete business procedures. The business procedures to enter the Chinese market are however a bit problematic. On an average it takes 12 separate procedures and 41 days to start a business compared to 9 procedures and 61 days to start a business in Middle East. Moreover the system is also strict in closing down the business. It approximately takes 2.6 years to close down compared to 1.8 years compared to OECD countries. To enforce a contract, 20 separate procedures and 180 days are required compared to 18 procedures and 213 days in OECD countries (Business monitor international, 2006a).Thus it can be seen, compared to other emerging business destinations China has a monotonous approach for business procedures.

A few advantages:

When it comes to do business overseas, it is essential to know the global reputation of the country or its market. There are institutions and governing bodies which help international trade. China being a member of the IMF (International monetary Fund), World Bank, Asian development Bank, General Agreements on Trade and tariffs and most importantly WTO (World trade organization) promote orderly and stable foreign exchange markets, maintain free convertibility among the currencies of member nations as well as reduce international barriers to trade and provide liquidity to counteract temporary imbalances in international finances. This can be an advantage for our firm since it makes our target country reliable to carry out business (Jeannet & Hennessey, 2004).

Weakness of the market for business:

In spite of these advantages China has been known for its weak IPR (Intellectual property rights) and has also been blamed by its previous trading partners for inducing price dumping strategies to overcome its competitors (Business monitor international, 2006a).There have been developments to protect IPR since it became a member of the WTO however these laws have not been implemented that efficiently with fines still being imposed (Business monitor international, 2006a). This in turn can be hazardous for the business hence maintaining control on these things is of utmost importance to enjoy profits as well as keep the brand name established. To overcome these negative impacts on the firm and avoid counterfeiting the following steps can be taken:

1] To register the product and the logo in China, doing so will overcome the issue of counterfeiting the product by local manufacturers.

2] The next step is to get the product certified by the SFDA (State food and drug administration).

Economic factors:

China is undoubtedly playing as a primary engine of growth considering the role played by United States of America since mid 2003. Despite the financial crisis the global growth in emerging countries remain favorable. With China’s rapid start in 2010 economic growth is likely to slow down because of the partial normalization of the macro policy stance and some property measures. The GDP growth for 2010 as a whole is expected to be around 9.5% and 8.5% for 2011.But the advantage here is that the growth will be less investment driven and more because of external or foreign trade (World Bank group, 2010). The GDP of the Shanghai region individually is $450bn (?225bn). Furthermore the Shanghai region along with the two neighboring provinces contributes to 30% of China’s foreign exports and attracts 25% of all foreign investment into China (Schifferes, 2007).This makes it favorable for a firm to export Shanghai with increasing potential for profit margins. Shanghai has high number of FDI’s rather than foreign loans moreover FDI are less risky compared to any other financing source. The country itself is still the largest receiver of FDI’s in the world (Business monitor international, 2006a). Inflation would remain in limit this year due to nonexistence of price pressures. Inflation is increasing but core inflation remains low (World Bank group, 2010).Active labor force comprises of approximately 737 million and unemployment rate is 3.6 %and is also expected to increase due to internal migration and urbanization (Business monitor international, 2006a).

Moreover Shanghai is known for its sophisticated and affluent consumers and highly educated skilled labor force. By 2020, shanghai is expected to expand greater than New York in 1997 which was the richest city in the world (Schifferes, 2007). This is the reason why choosing Shanghai over any other cities in China is preferred.

Taxes:

China has decreased its import tariffs by 40 % since 1990.China has dual tax regime imposing different for Domestic and foreign firms more importantly the same in Shanghai. Although the state tax rate for foreign companies can be reduced by 15% if the firms are located in special administrative zones (Business monitor international, 2006a). The standard rate of VAT is 17%. This is generally applicable on sale and import of goods. There is a reduced rate of 13% which is applicable for books and certain types of oils. Small sized businesses with a turnover of less than the legally defined limit pay 3% VAT (www.worldwide-tax.com, 2011).

Social and cultural factors:

The society in China and till a certain extent across the globe has come to a stage of “mistrust” due to the exaggerate claims in advertisement made by the merchants. Consumers have lost confidence in nutritional products and find it difficult and confusing in believing and judging in one. At the initial stage, merchants advertise to create awareness amongst consumer about the quality of their products. The more advertisement it has, higher will be the sales they would be able to attain. However, too much advertisement brings about a question of quantity Vs quality. As many a times those claims made by the advertisement concluded to be false. Eventually consumers came to a stage where their mindset has changed. They have started to believe that consuming natural food itself is better than consuming processed food supplements. Furthermore natural food gives better results than the fake and over exaggerated food supplements – “??????”. This has led the Chinese government to impose strict laws in China especially Beijing and Shanghai in order to deal with the trust level in China’s market. Shanghai being the most crucial city for new businesses it is essential to deal with this matter in a thoughtful way in order to be able to sell your product and achieve brand recognition.

Shanghai’s life expectancy has increased to that of the economically developed economies and figuratively is 75.18 and 79.21 for women (shme, 2011). The average age is 25-59 years and is dominated by male population (Euromonitor International, 2005a). As of 2009, the per capita income was $6500 which has increased compared to previous years and is the highest in Asia (Datamonitor, 2010). The average per capita savings deposit among local residents had skyrocketed from 166 yuan in 1978 to 20,909 yuan in 1997 and has been still increasing (shme, 2011). This indicates decline in poverty which means increase in purchasing power of the consumer. This signifies a potential market.

Statistics have shown that there is a growing market for health products (supplements) and demand mainly comes from 2 groups of people – white collar consumer who face pressure and work in high risk profile companies and also employees that involve lots of entertaining work and consume very high cholesterol and carbohydrate enriched food like seafood and high protein food like eggs and also animals organs (which is highly popular amongst the Chinese). With development of Shanghai’s economy, consumer now has higher income to pay and care about their health by purchasing these health supplement products and this precisely explained why the increasing growing trend of these products in the country. Increasingly, Chinese consumers are behaving like their counterparts in the developed world. They are more demanding and pragmatic than ever as their horizons expand beyond basic concerns about product features. Also, they are willing to pay for better value and quality and are spending more time researching and are exploring product nuances. Yet McKinsey’s 2010 survey of China’s consumers also found that they are blazing a uniquely Chinese trail. The country obviously offers some of the world’s biggest growth opportunities—but only for consumer product companies that understand and respond to this rapidly evolving marketplace.

The floating population which means internal migrated population was recorded at 140 million in 2005. Due to urbanization a lot of population keeps migrating to the major cities like Shanghai and Beijing, which provide cheap labour but puts stress on the city infrastructure and most of the people remaining unemployed (Datamonitor, 2010).Adult literacy rate of Shanghai is 91.6% which signifies knowledgeable customers and more potential target market (Datamonitor, 2010).Although because of the one child policy there have been issues with ageing population. As a result it is expected to increase in forthcoming years and decrease in productive output and target consumers for the future (Datamonitor, 2010). Moreover Shanghai population has one of the highest savings rate in the world where people prefer to save more than invest due to cultural risk. This issue needs to be given a thought and dealt in productive manner since people don’t invest which indicates more liquidity in cash flows.

Cultural factors affecting business procedures:

Chinese consumers remain brand conscious but, unlike shoppers elsewhere, they focus on value so intensely that brand loyalty is often secondary. Since there are so many brands in Shanghai itself it becomes difficult for a consumer to choose and hence they opt for a product defining high value or comparatively low cost. The needs or interests of their families have greater importance for them than for their counterparts in the developed world. Word of mouth has become a more significant source of product information than it is elsewhere, thanks largely to fast-growing use of the Internet, which Chinese consumers see as a credible information source.

Most intriguingly, though, Shanghai’s consumers prioritize purchases across different product categories by trading off among them: the Consumers maximize their buying power by spending more in the categories they care about most and less in others. Also, the trends in the target market keep changing depending on the local circumstances.

Chinese have a high context culture hence it is crucial to know the cultural background of the partner (Johansson, 2003). People from Shanghai mix emotions with business hence they value individualism and work towards economic welfare (Chen, 2004). People in Shanghai treat foreigners equally and laws are more stringent than any other parts of China (Chen, 2004). People in China more importantly in Shanghai are influenced by the packaging. Especially colors play an important role for example: red exemplifying happiness.

Many companies that have struggled to find a niche in China may therefore now find a market for their products and attract partners. Conversely, companies that have relied on low-cost, low-quality business models may end up on the losing end of trade-off decisions and could require a shift to value

Technological Factors:

In recent years, American and Europe supplement products have taken a different and more innovative route by developing new design, new function, new way of consuming, new style supplement products. This knowledge has also been transferred to China through its financial capital Shanghai. This better and more advanced technology brings about better purity and quality and enhances the absorption capability in the body to take place. These occur in capsule, tablets and recently into liquid and concentrate products. These supplements are also offered in candy form, biscuit, can, vinegar and Mi Jian- dry preservatives fruits. Products that are targeting at low cholesterol, low fats and carbohydrates market are proven to be the most popular amongst all nutritional products. Products that are offered in herbal type like tea, protein, herbal plants, has the highest sales relatively. Thus the technical knowhow of manufacturing, packaging and other functions is well advanced in Shanghai (China) and hence it can get difficult for a foreign company to keep up with the competition.

Moreover R&D spent in China is 2% in 2010 and is aiming to increase it to 2.5% by 2020 (Business week, 2006). Transportation network has improved immensely through the expressways. The length is 74000 km as of 2010. Moreover Shanghai is building the world’s largest container port at an island connecting with a six lane bridge to the city (Schifferes, 2007). This will provide assurance for safe and faster transportation of the products and prove beneficial not only for TakeOmega3 but its competitors as well.

Bibliography

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