Whether it be the large Western multinationals with an established China presence or the first-time market entrant with no previous China experience, foreign companies of all shapes and sizes often find their China success stymied through insufficient lack of local understanding. The first realisation that foreign companies often need to make is that China is in no way a uniform and homogenous market.
Although China is unified in the geo-political sense, socially and economically the picture is much more disparate and fragmented.
Uneven rates of economic growth in different parts of China over recent years have served to exacerbate many of the economic and social differences that already existed between different provinces. For example, there are huge variations between different provinces in terms of population levels, per capita GDP, average income levels, consumer spending habits, education levels, literacy rates, lifestyles and so on. As such, it is certainly no exaggeration to state that rather than representing a single, unified market, China is actually a collection of individual sub-markets defined by vastly differing demographic, economic and cultural characteristics.
The nature and make-up of markets in different parts of China also varies considerably, which means that foreign companies should think carefully about which geographical location offers the best vantage point to target the broader China market. In the past, foreign businesses have often been drawn to coastal provinces such as Zhejiang, Guangdong, Jiangsu and Shanghai, due to higher populations and incomes in those areas. In particular, foreign companies involved in consumer markets have tended to focus their attentions on these higher income coastal regions.
Although foreign companies in the b2c sector still remain focused on coastal cities, business-to-business markets are often far more geographically scattered.
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As in many countries, China has actively encouraged the setting up of industrial clusters in specific cities or regions, and in many cases entire industry supply chains can be concentrated in a small handful of cities. In many b2b markets, such clusters can help foreign companies to know where its target customers are, which cities to focus on and even where to base its operations particularly where local manufacturing will take place.
The first step of any effective China market entry strategy is therefore to identify the geographical location of the target market s and the best specific location to target first. Shanghai, Beijing and Guangzhou — highly populated areas with a large, middle-class representation and income levels well above the national average. Although being based in a Tier 1 city may offer the lowest risk point of market entry , it will also mean that the company faces higher operational costs and more competition.
Not only do Tier 2 cities have the advantage of lower set-up and operating costs, but the increase in consumer spending power in these areas is creating a rapid growth in demand for foreign manufactured goods and products. In particular, cities such as Shenzhen, Tianjin, Wuhan, Chongqing, Chengdu, Nanjing, Qingdao, Dalian, Suzhou and Hangzhou all offer strong commercial opportunities for foreign companies across a range of sectors. Over the long term, including Tier 2 and even Tier 3 cities in their strategy can enable foreign companies to gain first-mover advantage in these cities and lead to greater long-term market success.
Whether to set up in more tried and tested locations or to take the risk of setting up in a less developed market is likely to depend on a variety of different factors, and ultimately this decision will be based on having thoroughly research the market landscape. For example, it is critical to spend time mapping out the location of customers and suppliers, understanding how distribution channels vary between different locations, and fully researching any local regulatory barriers that could block market entry in specific regions.
Companies planning to set up a local manufacturing facility will be required to research a broader range of factors, such as local manufacturing and transport infrastructure, access to key raw materials, local investment policies, the availability and cost of human resources, and a myriad of other factors.
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Understanding government policy and regulations is critical to success in Chinese b2b markets. There are still a lot of industries that remain off-limits to foreign companies, and many industries where severe limitations remain in place. China now has a host of different ministries and regulatory organisations with responsibility for industry regulations and laws.
In industries with greater levels of regulation such as the healthcare and food sectors , foreign companies will need to attempt to unravel the web of complex laws and regulations, and try to understand which authorities have primary responsibility for implementing them. Regulation is becoming more stringent, as are to efforts ensure that companies actually conform to them.
In the wake of the melamine poisoned milk scandal in , the Chinese authorities have taken a tougher line against companies that openly flaunt the food safety law, whilst the SFDA is also tightening regulations on pharmaceuticals and medical devices to avoid similar events from occurring in the future. Likewise, environmental problems caused by poor environmental regulatory enforcement and widespread pollution in years gone by have led to the introduction of much tighter environmental legislation.
Foreign companies are now required to go through lengthy environmental assessments before gaining permission to produce locally. Government regulations can very often impact significantly on the timeline and costs of market entry, and companies are advised to examine the implications of such regulations prior to committing to the market. For example, in the medical and pharmaceutical sectors, long product or clinical trials may be required, which result in a longer sales cycle than may be the case in other countries. It is also worthwhile noting that just because a product has previously been approved by regulatory authorities in Europe or the US does not automatically guarantee that the same product will receive approval in China.
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It is critical to spend time researching and understanding the regulatory environment prior to making any decision to enter the market. Having entered the market, it is equally important to constantly monitor for any changes to legislation or regulations and how these could affect your business. Chinese regulatory bodies often operate in a quite opaque manner, making it difficult to anticipate regulatory changes before they happen. Governance is not a cause or a theology for McKinsey; it is an important element in the value of an enterprise. By getting the opinion of what we call Global Investors with portfolios of holdings on every continent, McKinsey has importantly impacted the cost of capital for all corporations henceforth.
Or, put even more simply: When all is said and done, how do we measure better versus worse? Even more simply: How do we keep score The market is inevitably ignorant of many of our actions and opportunities, at least in the short run Surprisingly little attention is paid to what we all intuitively know, that talented people are not entirely motivated by financial compensation. Directors therefore must pay special attention to creating an appropriate environment for stimulating optimum management performance.
Volume 9 , Issue 3. The full text of this article hosted at iucr. If you do not receive an email within 10 minutes, your email address may not be registered, and you may need to create a new Wiley Online Library account. If the address matches an existing account you will receive an email with instructions to retrieve your username. Robert A. However, these cases are exceptions and creating management strategies requires a shift in thinking.
In doing so, we must be cognizant of countries and regions that are important to the global strategy. This is particularly important when considering business in countries such as China and India that have significantly different business environments from those in developed nations. In reality, some countries already have production centers and must be examined from the perspective of existing overseas networks.
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Moreover, in the case of parts manufacturers, it may be necessary to examine entry into specific countries because of key customer demands. In our discussion, we assume that the important countries have already been decided upon when contemplating a global strategy. Administrative distance: differences in foreign investment policy, regional economic blocs the existence or absence of free trade agreements , political proximity, currency, lack of colonial ties, etc.
Geographic distance: differences in transportation costs and times, time zones, etc. Economic distance: differences in income levels and wages, transparency in commerce practices, characteristics of corporate systems, etc. Source : Compiled from Ghemawat , Table 2. Low language barriers make India very attractive short cultural distance. India was formerly a British colony, and English is widely spoken, this is not so in the case of China. Moreover, there exist strong US—India elite class connections.
In contrast, language and customs vary greatly in India by region, making it difficult to take a one-size-fits-all approach across the Indian region in terms of expanding business operations there. In terms of administrative distance, India and the US have similar legal systems, as the economic systems were built by a common colonizer—the UK.
Conversely, relations between China and the US have been somewhat strained in the past. An Indian characteristic is its entrenched democratic political system, which contrasts with the one-party rule of communist China. India follows a democratic political process to bring about major policy changes, while China most likely does so through a top—down approach.
Therefore, in China, companies must always conduct business with an awareness of this inherent political risk. Alternatively, the ease with which businesses can be created is a major attraction of China. In addition, it also provides incentives to foreign investments, such as the economic zones. India, however, has several business regulations, which need to be adhered to strictly.
For such purposes, conducting business operations in China is certainly more attractive. In addition, economic zones in China were first created in the s, and this program has been a success, with many zones existing today, particularly along the coast. In terms of geographical attractiveness, compared with India, China is relatively closer to the west coast of the US, and has the necessary infrastructure-support, such as harbors, in place. This deems China as more attractive than India. In assessing these regions as manufacturing centers, geographical proximity is an important factor.
Southeast Asia has well-developed infrastructure and a production network of component and product manufacturers that extend beyond national borders. Vietnam, Laos, and Myanmar neighbor China, and are connected via expressways. For example, the Pearl River Delta area of Shenzhen and Guangzhou has manufacturing agglomerations in electronics and textiles. Moreover, travel routes are available from these areas to Bangkok via continental expressways. In terms of economic attractiveness, India has many engineers in software and other fields.
In addition, the market is not as competitive as China, making profitability relatively higher for companies doing business there. Furthermore, managements in India are familiar with the Western style of business, perhaps because of westernization of the elite class. As illustrated, India has superior soft-business infrastructure, while China has a large market with high wage levels. Moreover, the Chinese labor force is far superior to that of India and has more capital.
Another benefit of conducting business operations in China is the relatively greater number of foreign firms in the domestic supply chain system and in other business activities, thereby making it easier to form local partnerships. Given that, the question lies in how companies should globally expand based on the differences in domestic and foreign business environments? Before introducing theories of global strategy, we first examine whether China should be perceived as a market or a factory.
High tariffs on vehicles in China and high transportation costs make local production more feasible. In addition, with Japanese food product manufacturers recently making forays overseas, there has been significant development in frozen foods and vegetable production in China for the Japanese market. On the other hand, products that must be manufactured in Japan are limited to those requiring a high level of manufacturing technology.
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For example, high-end electronics such as ultra-slim laptops are manufactured in Japan. In addition, vehicles are manufactured in Chinese factories; however, high-performance automotive parts are often manufactured in Japan and then exported. These products are universal parts supplied throughout the world being manufactured specifically for the Chinese market. Finally, there are only few product categories that are manufactured in Japan exclusively for the Chinese market. Perhaps Japanese animation films or high quality rice, sold as Japanese brands, can be placed in such a category.
The objective of management strategy from the perspective of globalization is the maximization of corporate value i. There are two ways to increase profitability: increase revenues or reduce costs. Our exercise of questioning China as a market or a factory effectively asks whether a company should elect to increase revenues the market or reduce costs the factory in its approach to conduct global business operations in China.
A conclusion is arrived at by considering the distance in business environments between Japan and China. Generally, when viewing China as a market, the smaller the differences the better, as it becomes relatively easier to manufacture domestic Japanese products specifically for the Chinese market. On the other hand, when viewing China as a factory, differences will be exploited; thus, the larger the differences the better. This exercise considers how to conduct business operations in China with existing products and services; it is not meant to provide answers to the strategic question of how to foster mid- and long-term growth in developing nations such as China and India.
We have already discussed case studies on Japanese corporations entering China as they are easy to understand. However, in case of India, there are very few Japanese products that can be sold in India as-is. Because of the high cost of Japanese consumer electronic products, Japanese companies lag behind Korean companies such as Samsung and LG. While the potential market for beverages and food products is large, food culture and customs are very different in India, making it difficult to expand the market for Japanese foods there.
Specific local circumstances must be taken into consideration while developing products and services for local markets. Typical arbitrage strategy within global businesses can be seen in local production that exploits wage differences. Many Japanese manufacturers have adopted this arbitrage position and have established production centers in China. Arbitrage is a widely used term in the finance industry, and arbitrage trades refer to those trades that generate profit by exploiting differences in interest rates within financial markets. Financial products are quickly traded in the market even in case of a minute arbitrage opportunity; such actions in turn resolve market distortions.
Arbitrage opportunities are likely in a global business environment with national barriers. For the same reason, western companies have concentrated offshore development in India. We now return to examine the AAA framework by using the consumer electronics industry as an example. For example, most washers in Europe are front-loading and have a vertically rotating drum; this design consumes relatively less electricity and water. Europe has a much stronger propensity to environmental awareness and has stringent energy conservation policy standards.
On the other hand, washers in Japan and the US are typically top loading and spin horizontally; this design consumes relatively more water. Similarly, the capacity of refrigerators varies according to shopping frequency. In the US, consumers often buy goods in bulk because they can load them into their cars; this type of shopping requires relatively large refrigerators. Therefore, white-goods products must be localized for each market by observing how locals live. In lifestyle research centers located in developing nations such as China, Panasonic analyzes home environments and lifestyles of local consumers by visiting their homes.
Product development is, therefore, based on information obtained in these lifestyle research centers so that products can be adapted to local market environments. On the other hand, AV products such as televisions and video cameras are not impacted greatly by lifestyle differences. The price of AV products drops annually. Manufacturers in China and other developing nations are technologically catching up with Japanese manufacturers, and while Japan may have higher quality products, their acceptance rate in many markets will be difficult without price reductions.
Sony has standardized the design of components that are not specific to any particular region, such as digital video processing chips, to increase television development efficiency. In doing so, Sony has centralized development teams in Tokyo. The integration of procurement and logistics, procurement, and logistics Source : Porter The AAA framework suggests ways to manage distances that have been recognized in the CAGE framework within international business expansion. This is effective when considering global business strategy, though this discussion remains highly abstract.
The application of this framework to a more detailed corporate strategy requires further examination of corporate activities.
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Figure 2. The automobile manufacturing process begins with the procurement of parts. These parts are assembled into completed vehicles at factories, exported, and then sold to consumers via dealer networks, who provide post-sales services such as maintenance services. The entire process from vehicle production to post-sales service, through activities such as production and sales, are called primary value chain activities.
Companies are organized along these functional divisions, with leaders of each function comprising the management team. These leaders are often directors and corporate officers. A clearer image of global strategy appears when each business unit considers increasing the value chain of activities in global expansion.
The AAA framework becomes more crystallized when deliberated at the business unit level.
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In this case, cost margins are possible by arbitrage of wage differences and in the use of local suppliers. A key limitation to creating overseas production facilities is the risk associated with such high investments. In addition, there are significant transaction costs associated with managing local labor and with decentralization of production facilities. Balancing both determines the financial feasibility of localization.
Generally, developing nations have higher tariff rates than developed nations, so that local production makes more economic sense as compared to exporting products to these countries. However, the recent entry of many developing nations into the WTO has resulted in a declining average tariff rate. This is in turn causing the production centers of Japanese corporations, which were formally spread throughout Asia, to be concentrated in single countries.
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