International Business Narrative Essay

Abstract

Walt Disney is a well diversified amusement company with global presence and China is a blooming market and the global economic engine. With the theme park business in both the US and Europe already saturated, and a dwindling number of visitors affecting the profits, it is an opportunistic moment for Disney to enter China. The proposed joint venture with the State owned ‘Shanghai Shendi Group’ would definitely guarantee the government support and remove any possible administrative hurdles that would otherwise hamper any new business investment in a foreign land. The prevailing climate of political stability, economic viability and significant growth prospects that China offers and the comparative economic stagnation in US and Europe, offer strong economic reasons for Disney to venture into China which holds great possibilities for future business growth.

Introduction

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The Walt Disney parks and resorts is one of the leading entertainment businesses in operation across the world. With more than 66,000 employees and well over $1.2 billion in annual payroll, Disney is most visited theme park and recreational resort in the US. (Kok, 2009) Originally started as Disneyland in California 1955, Disney’s business has today rapidly expanded with several theme parks and resorts across America, Canada, Europe, Japan and Hongkong. With the theme park business virtually saturated in the US and Europe, Disney is now actively looking for expansion of its multi billion dollar entertainment business into mainland China. The robust economic growth of China and its growing middle class population present an opportunistic environment for Disney, the leading entertainment theme park in the world. However, opening a theme park and successfully running it in a different country is not so easy. Disney’s own past experience reveals the phenomenal success in Japan while the parks in Paris and Hongkong are reportedly running loses. (SMG, 2009) This paper would address the international business issues, discuss the market conditions and recommend an entry strategy that is most conducive for Disney’s breakthrough into China.

Disney in China

China presents a huge business prospect for Disney. Chinese GDP has been growing at an average of around 10 % every year over the last decade or so. (Holmes, 2011) Particularly with the backdrop of the economic stagnation in the US and Europe, the thriving economic growth makes China the engine of the global economy in the years ahead. Also, China has the largest population in the world and with this phenomenal surge in its economy a great number of Chinese people are now within the middle class section of the society. Furthermore, since the entertainment industry is one of the fastest growing industries, tapping into this section of the population that is willing to spend a lot for entertainment is a judicious business policy. Disney has been trying over the last two decades to gain entry into China but had been rejected by the protectionist government polices. Currently however, Chinese government has approved Disney to set up theme parks and stores across the country. Disney has to capitalize on this new window of opportunity and commence its Chinese operations as early as possible. The next few sections will discuss the political, socioeconomic and technological factors present in China as well as the strength and weaknesses of Disney and the opportunities and threats that the company has in setting up its entertainment business in China.

PEST analysis

Political Factors

Political factors are crucial for the establishment of any business as they directly impact the macro environmental variables. China has remained a politically stable country since the 1980’s and also the previously strong communist centric focus is now slowly giving way to the possibility of a democratic transition. Even the Chinese premier Mr. Hu openly expressed his thoughts about this when he said that “There is a need to … hold democratic elections according to the law; have democratic decision-making, democratic management, as well as democratic supervision; safeguard people’s right to know, to participate, to express and to supervise.” (Hill, 2011) Both the domestic policies as well as the international relationships of China over the last decade or so attest to the inclination of the Chinese government to create a stable and secure national structure as the basis for propelling its continuing economic growth. With the Country entering the WTO in 2001, there has been a string of policy changes that led to lesser government intervention in developmental projects and greater encouragement for industrial investors.

Economic Factors

China is the fastest growing economy in the world and as mentioned earlier, the country has witnessed stable GDP growth averaging around 10% over the last two decades or so creating a favorable economic climate for new investment. By the measure of GDP, China currently ranks as the sixth biggest country in the world. (Cui, 2009) Availability of resources, low cost labor force and the infrastructural improvements including mega projects that guarantee availability of power to match the growth pace of new industries are some of the favorable factors that sustain this continuous economic growth in china. These are also factors that encourage foreign investment. China’s entry into the WTO and its subsequent open policies that allowed 100% FDI in many sectors including the energy and retail sectors saw the phenomenal surge in foreign direct investment into the country. The following table released by the Chinese government indicates the latest figures about the number of FDI projects as well as the investments during the previous year.

The strength of the Chinese economy could be measured by its continued ability to attract FDI inflows even when the developed economies of the US and the Europe were reeling under recession. In 2011 during the recession in Europe, China attracted a record $116 billion in FDI. (Edwards, 2012) Also, as the industrial progress and the continuous economic growth of China continues, the standards of living of the huge Chinese population also continues to increase which only translates to increased purchasing power and increased demands for amenities. In particular, the entertainment spending of middle class Chinese people would create an explosive growth opportunity for the amusement industry.

Social Factors

Social factors should also be assessed before any investment venture. China has a huge population in the middle aged segment. Currently the population segment in the range of 15 and 64 represents the majority in China. (Banister et.al, 2010) A significant number of Chinese people are still in their twenties and middle age which is the target population for the theme parks. Also, traditionally Chinese are a nuclear family and hence theme parks are usually visited as a family. Also the huge population of China implies that the aging population does not create an economic stagnation as retiring workforce is rapidly replaced by skilled workers. (Banister et.al, 2010)

Technological Factors

China is a technologically advanced economy and hence there is immense scope for innovation in the amusement market. Even in the local amusement market there is a constant surge of innovative amusement themes and new facilities to entertain the public. There would be no dearth of talent and lack of scope for the application of technology into the development of the theme parks. Only last year an international ‘Theme parks expansion Summit’ was organized in the country and several new technologically innovative solutions were disclosed. For instance, Nanotron technologies, one of the main sponsors of the conference introduced the ‘Child Loss Protection System‘(CLOPS) and spoke about its introduction into the Chinese Theme parks, while another company, Dynamic Motion Rides, introduced the 4D simulation effects into the Theme parks. (Blooloop, 2011) So the Chinese theme park industry is a technologically thriving and competitive industry.

SWOT analysis
Strengths

Financial Might

Disney has a powerful financial base and there fore could invest significantly for innovative attractions and features in the proposed Theme park. Disney already has a dedicated channel in China which it could utilize for marketing purposes. Already the company has proposed to invest as much as $3.8 billion for setting up its Shanghai theme park. (Rapoza, 2012). Disney’s huge experience (almost 80 years) in the entertainment industry is one of it’s main plus points. (De Groote, 2008)

Brand Recognition

Disney is a well established brand across the world. Even in China Disney’s Mickey Mouse and Donald Duck characters are well known among the public. Disney could capitalize on its brand value to attract public to its theme park. For a new entrant into the Chinese market, Disney’s brand recognition would definitely ease the difficulties which any new and unrecognized brand would face. One other advantage for Disney is the qualified and educated workforce that it employs. Disney also has a variety of attractions and thematic features that would help bring more people into the theme parks. (De Groote, 2008)

Opportunities

Globalization and the easing of barriers of entry in many countries provide Disney the ideal opportunity for expansion and with its financial muscle Disney can easily carve a niche market for its amusement parks in the global arena. Since China has already given the green signal and allowed Disney to enter the market it is the ideal time for the company to establish itself and gain a significant share of the growing Chinese amusement industry. Its diversified products and established brand power give it a clear advantage compared to any other international entrant into China.

Weaknesses

Disney is known to suffer from management problems. Its international diversification has furthered its management woes. Managing over 1, 37,000 employees across the world is not an easy job and it leads to communication problems and administrative bottlenecks. (De Groote, 2008) With the proposed expansion in China there will be a significant addition to the workforce which would complicate the management still further. Corporate officers are frequently shuffled across which also contributes to management difficulties. Chinese customers though they are huge in numbers and willing to pay could not be expected to spend as much as American customers would. The increasing fixed costs which directly relates with expansion and the increasing operating costs due to its large workforce imply that Disney has to spend considerably with any new venture. Furthermore, in the case of Disneyland in Paris the French government contributed over a billion dollars to help out Disney during the initial struggling phase. The same could not be expected from the Chinese government if Disney ventures alone. (De Groote, 2008) Its main threats are from a growing number of Chinese theme parks that are more culturally oriented and cater to the tastes of the local population. Disney has to modify its themes to make them appealing to the cultural tastes of the Chinese people. The Chinese currency value fluctuation is one other major issue to be considered.

Strategic Entry

Entry into the Chinese market involves huge amounts of investment. As already indicated, Disney plans to invest as much as $3.8 billion into the Chinese venture. Though Disney has the financial might to bear the expenses by itself it would be a prudent risk management strategy to involve a large number of outside participants to cover the initial investment costs. In fact, Disney employed such a strategy when it entered the European market. The Saudi Prince Alwaleed owned 10% of the company stocks while the 50.2% were owned by others while Disney itself owned 39.8% of the stocks. (De Groote, 2008) In the case of Disney in Japan it was a Licensing agreement between Walt Disney and Oriental Land Corporation of Japan with Disney getting 7% of the sale proceeds in exchange for transfer of technical and managerial knowledge. (Misawa, 2005) Unlike the retain industry or the energy industry , the Chinese government is not opening up for a 100% FDI in the entertainment industry and has so far only agreed to a joint venture. This is however, a welcome opportunity for Disney as not only the cost is shared but also a joint venture with the State owned ‘Shanghai Shendi Group’ would definitely guarantee the government support and remove any possible administrative hurdles that would otherwise hamper any new business investment in a foreign land. (Bloomberg, 2010) With risk sharing also divided between the two, Disney can look forward to capitalizing on the great market prospects that China promises. Disney’s entry into the blooming Chinese amusement park industry with the government backing (as a joint venture) would be an ideal entry strategy for the Company.

Conclusion

Walt Disney is a well diversified amusement company with global presence. China is a blooming market and the global economic engine. With the theme park business in both the US and Europe already saturated, and a dwindling number of visitors affecting the profits, it is an opportunistic moment for Disney to enter China, the economic powerhouse of the world. As indicated by both the PEST analysis as well as the SWOT study, Disney is well poised for a successful venture into china. Since 100% FDI is not permitted in the Chinese entertainment industry, the proposed joint venture with the Chinese State owned firm, is a good entry strategy for Disney in China. Such an approach shares the investment costs, promotes equal interests in the operation and removes any possible administrative hindrances as well as contributes to equal risk sharing. The prevailing climate of political stability, economic viability and significant growth prospects that China offers and the comparative economic stagnation in US and Europe, offer strong economic reasons for Disney to venture into China which holds great possibilities for future business growth.

References
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