Barriers to Entry and Various Risks That Must Be Considered by Foreign Retail Companies Seeking to Conduct Business in China Essays

Barriers to Entry and Various Risks That Must Be Considered by Foreign Retail Companies Seeking to Conduct Business in China Essays Barriers to Entry and Various Risks That Must Be Considered by Foreign Retail Companies Seeking to Conduct Business in China Essay Barriers to Entry and Various Risks That Must Be Considered by Foreign Retail Companies Seeking to Conduct Business in China Essay Barriers to entry and various risks that must be considered by foreign retail companies seeking to conduct business in China By Aizhan Yermekbayeva Let China sleep, for when she awakes, she will shake the world (Napoleon Bonaparte) Most politicians, businessmen and academics would agree with the quote above. It is becoming more and more evident that â€Å"China is now slowly waking up†. And a market of over 1. 5 bn potential consumers is perceived by most multinational enterprises (MNCs) as an opportunity hard to miss. Businessmen and even renowned academics make various recommendations on approaching Chinese market. This article will provide a critical analysis on how to develop businesses in China successfully and sustain stable profitability. The main focus will be drawn on entering and operating business in the retail industry as the industry is attracting the growing number of foreign investors despite the fact of having unresolved issues with the supply chain management, â€Å"bureaucratic red tape† and most importantly fierce competition. China could be divided into two main parts when it involves setting up a business: Hong Kong and mainland China. Hong Kong, which was a British colony until it was reunited with mainland China in 1997, is considered to be one of the most liberal markets with low level of governmental interference. However this article’s primary focus is on the mainland China, given its current political and economic importance. Merely thirty years after the reforms initiated by Deng Xiaoping in the late 1970s, China has become the world’s fastest growing economy. Some predicted that by 2015 China will surpass Japan and will become the world’s second largest economy (Hall, 2009). But it happened five years earlier. It has been expected that by 2010 its retail industry will be worthy of $596 bn. China’s vast natural resources and cheap labour are substantially appealing to foreign investors. â€Å"No future is brighter than China†, states Coca-Cola’s chairman and CEO Muhtar Kent (Einhorn, 2009). As thought provoking as it may be Lehman Brothers in China still went bankrupt in 2009 and Marks Spencer, despite having more than sufficient financial resources, failed to succeed. According to a statement made by the executive chairman of MS Sir Stuart Rose, â€Å"basic shop keeping mistakes† (wrong clothing sizes) and issues in the supply chain were the main reasons why their market entry strategy did not succeed in China. However, there are still barriers to entry and various risks that must be considered by companies seeking to conduct business in China. The government in mainland China regulates the market, sets the controlling legislation and rules for foreign direct investments (FDIs) and competition . After China’s admittance to the WTO most of the regulatory barriers to Chinese market have been eliminated. China’s current economic environment offers a great opportunity for businesses. Although China has been undergoing fast economic reforms these are not necessarily followed in tandem by political reforms. As such, most MNCs mistake is that they approach China in the same manner and with the same strategy as they would any other country. Conversely those businesses that have succeeded in China have used a strategy of â€Å"understanding local ways†. It is vital not to underestimate the power of guanxi. Therefore foreign managers are strongly advised to understand this cultural phenomenon before attempting to start a business in China. Guanxi is â€Å"a complicated system of favour banking† which is practiced within a certain group. The importance of guanxi is often emphasised by a Chinese saying that without guanxi a person gets â€Å"half the result with twice the effort†. However, the main risk of guanxi is that it requires a high level of trust between parties involved in favour exchange – where someone’s word is his bond as opposed to an actual agreement. Strong guanxi networks would make the challenges of conquering Chinese retail market, such as setting up an efficient supply system less complicated. However there are additional threats and limitations that might affect foreign businesses, particularly retailers. Especially, taking into consideration a significant role that local government plays in the Chinese market. The growing concern for retailers is that the Chinese government is discussing adopting protectionist regulations in the retail industry. New regulations are showing signs already as the local government has selected a group of local retailers and is giving them financial support. It is the first stage of formation of the â€Å"national champions† local retail companies which are expected to become the leaders of the retail industry. There are many reason why the Chinese government is compelled to undertake these actions such as the retail industry is expanding at a fast rate and from the local population’s perspective the key industry players that benefit from it the most are foreign companies. This viewpoint pressurises the government to protect the local retail chains, which are not able to compete against international retail giants because of the insufficient financial resources. Therefore these regulations are expected to favour domestic retailers in allocation of strategic locations and have been highly welcomed by national retailers. Under these circumstances it is of utmost importance for foreign retailers to re-assess their future strategies. As it was mentioned before the Chinese retail industry is highly competitive which emphasises the importance of the visibility of hypermarkets. Another challenge of maintaining competitiveness lies in increasing prices of land and rented premises as foreign retailers are focused on operating hypermarkets in strategic and urban areas that raise operating costs. Moreover foreign retailers are already being pressurised into price wars as local retailers, mostly family-owned stores, offer very low prices which appeals to Chinese price-conscious customers. Furthermore with variety of retailers offering similar goods and services the local customers’ demands have shifted. The times when foreign companies could sell their ut-of-date products are long gone. Currently foreign retail companies are expected to provide high quality products and it makes it even more challenging to offer competitive prices at the same time. Initially foreign retail chains could differentiate themselves from locals with new technologies, innovative practices in marketing and by offering consumer friendly return policies. As â€Å"understanding the needs and motivations of Chinese consumers is the name of the game†. However they have soon lost this advantage as domestic competitors were fast to copy and employ them. Additionally local retail chains’ scope is smaller which makes it easier for them to set up an effective supply chain. While for retailers like Tesco, Carrefour and Wal-Mart it is difficult to keep supply chain centralised. Fragmented nature of Chinese retail market and geographically vast area impose more challenges. Moreover the local governments of different areas have customs duties which also increase the prices of suppliers. For example each of Tesco’s stores has to work with 1000 suppliers. Furthermore it is difficult for global retailers to overcome â€Å"the liability of foreignness†. It makes them vulnerable to changes in global political arena and politics between countries. In 2008 Carrefour suffered significant financial losses because Chinese customers decided to boycott all French retailers in protest to the pro-Tibet political standing of the President of France, shortly after riots in Tibet. Therefore political risks have to be taken into consideration. It is evident from the above mentioned that Western businesses coming to China should not make false assumptions based on the rapid development of infrastructure that the Chinese market and especially the retail industry function the same way. Therefore the significance of doing proper â€Å"homework† before approaching foreign markets, especially China, cannot be overemphasised. The differences outlined above should be considered to avoid future disappointments and subsequent failures in entry strategy. Companies that rushed into conquering the Chinese market without sufficient information failed to succeed encountering the Chinese bureaucracy and unreliable business partners. There are several conditions in order to create successful joint ventures in China: Finding a reliable partner, which is best achieved through connections attained with guanxi. Chinese business partners bring local knowledge and the experience in conducting business in the Chinese market which may be useful for cost cutting. Nevertheless when choosing a partner or business allies, financial strength and mutual interests should be taken into account. Foreign companies should seek for a financially reliable partner. Strategic location. Interaction with local governments is crucial for obtaining a desirable location Monitoring changes in accounting, taxation and other legislative modifications Human resources management (HRM). Low labour costs are one of the major incentives for foreign companies to come to China. The general manager of JV companies noted that there are three key elements to succeeding in China: â€Å"people, people, and people† (Epser 1991:24-30). Although success depends on the quality of personnel management. Relations with trade unions (TUs) may come as challenge as the way they function in China is different from Western countries. Interestingly it is noted that TUs are usually focused more on protecting the interests of the Party than that of employees. Other precautions include: avoidance of recruiting from only one source as in some cases new recruits may have similar negative qualities; While high quality employees may require patience and flexible attitude to find; Avoid employing a large workforce as local authorities might pressurise to hire more; Experienced native management personnel is essential for managing bureaucratic procedures; New employees should be trained, their skills and work ethics developed to coincide with main interests of the company Supply chain management is without a doubt of significant importance in decreasing costs and developing business. However this is one of the areas that have not been researched thoroughly. Summarising all criteria above, locating a Chinese partner with high level of reliability and with a nationally successful business is of utmost importance when establishing a joint venture. Guanxi is as well important in finding a strategic location and employing a suitable workforce. Nevertheless there is a scarcity in detailed information on supply chain management which is arguably one the most significant areas in cost cutting strategy. El Kahal identifies the main challenges of developing businesses in Asia Pacific, and as the author says â€Å"anyone who looks to Asia has to look at China†. Therefore challenges found the most relevant to conducting business in China and suggested (potential) solutions are presented in Table – 3. Table – 3. Challenges |Implications |Solutions | |Obtaining information on market competition |It is difficult for foreign managers |â€Å"hands-on experience†, the manager has to | |and the external factors affecting business |to assess the market, potential |have an extensive knowledge of the | |operations |rivals and find suitable partners |operating environment to reduce reliance on| | | |detailed data analysis. Establishing sound | | | |personal ties and networking is used by | | | |most local senior managers as an | | | |alternative to documented data and is | | | |essential for verification of information | | | |reliability received from various external | | | |sources. |â€Å"Bureaucratic red tape† |Might affect the pace of projects and|Weigh diligently possibilities of | | |business operations |regulatory and legislative obstacles and | | | |utilise the knowledge of the local managers| | | |through building a personal network | |Political aspects and internal issues of the|May lead to termination of business |It is highly encouraged to do thorough | |country like bribery |and even more severe consequences; |research before starting a business. | |make a significant damage to | | | |company’s reputation | | Overall China offers opportunities to prosper however challenges and obstacles should be taken into careful consideration. Foreign businesses should do their ‘home work’ to meet or avoid them. This article attempted to provide various advice and recommendations on the subject, however every company adopts a different approach based on the internal and external environments. Despite foreign retailers’ high expectation about future prospects of the Chinese retail industry, the economic crisis has affected China as well. Bain Co predict that in the next four years there will be a decreasing trend in the number of hypermarkets in China. According to Financial Times there is an over-saturation of hypermarkets in some urban areas such as Shanghai were there are already approximately 120-130 hypermarkets. This tendency causes an increase in rental costs, fierce competition forces rivals to cut prices and these factors combined with the country’s present infrastructure issues creates an uncertain future for foreign retailers. However, some global retail giants like Wal-Mart, Carrefour and Tesco see the economic downturn as an opportunity to get ahead of competition. Interestingly the Chinese character for ‘risk’ has two symbols: â€Å"danger† and â€Å"opportunity†. Investing abroad is a risk, but it is also an opportunity and with the right and timely information organisations can form a unique strategy of succeeding in China. References Chen, C. C. and Chen X. P. (2009) Negative externalities of close guanxo within organizations. Asia Pacific Journal of Management. 26. pp. 37-53 Chen, M, (2004) Asian Management Systems. 2nd ed. London: Thomson Learning. p5. , 241, 242 Chow, I. , Holbert, N. , Kelley, L. , Yu, J. (2004) Business Strategy: An Asia-Pacific Focus. 2nd ed. Singapore: Pearson Education South-Asia. El Kahal, S. 2001) Business in Asia Pacific. New York: Oxford University Press Inc. p. 63, 70, 562 Epser, P. (1991) cited in Chen, M, (2004) Asian Management Systems. 2nd ed. London: Thomson Learning. p. 241 Fels, A. (2009) The regulation of retailing – lessons for developing countries. Asia Pacific Busine ss Review. 15(1). Pp. 13-27. Gamble, J. (2009) Demanding customers in the Chinese context. Asia Pacific Business Review. 15(1). pp 93-105 Peng, M. (2009) Global Strategic Management. 2nd ed. Canada: South Western Cengage Learning. p. 16; 156 Wang, S. (2009) Foreign Retailers in post-WTO China: stories of success and setbacks. Asia Pacific Business Review. 5(1). pp59-77 Wal-Mart, Tesco, Carrefour do battle in the East. (2008) Strategic Direction. 24(2). pp5-7. Hall, J (2009) Every little helps for Tesco in ChinaSupermarket makes steady inroads. Daily Telegraph. [online] Available from: http://find. galegroup. com/gtx/infomark. do? contentSet=IAC- Kent, M (2009) cited in Einhorn, B (2009) Coke Committed to China Expansion. Business Week. 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