Diplomarbeit / Diploma Thesis

FH Stralsund

Entry strategies in the Chinese market

by

Christian Herbst

2004

Entry strategies for the Chinese market

Table of content
Table of figures
List of tables
List of abbreviations

Reference

1. Introduction ... 10

2. China as business location  ... 13
2.1 General facts on China  ... 13
2.2 Economic development of China ...  16
2.3 Foreign Trade  ... 20
2.4 Foreign Investment in China  ... 21

3. Cultural habits  ... 23
3.2 Social and cultural general conditions  ... 23
3.2.1 Comparison of German and Chinese cultural elements  ... 24
3.2.1.1 Hofstede’s 5-D-Model  ... 24
3.2.1.2. Cultural habits and behaviour  ... 27
3.2.1.3 Negotiation strategy  ... 28

4. Choice of entry mode  ... 30
4.1 Exporting ...  31
4.1.1 Legal requirements for exporting to China  ... 32
4.2 Piggybacking  ... 33
4.3 Licensing  ... 34
4.4 Franchising  ... 35
4.5 Representative office  ... 36
4.6 Joint venturing  ... 38
4.6.1 Legal background  ... 39
4.6.2 Approval procedure  ... 40
4.6.3 Kinds of joint ventures ...  41
4.7 Direct investment ... 43
4.7.1 Wholly foreign owned enterprise ...  43
4.7.2 Foreign-Invested Joint Stock Corporation  ... 45

5. Choice of location  ... 37

6. Risk analysis  ... 49
6.1 Security Risk  ... 50
6.2 Political Stability Risk  ... 50
6.3 Government Effectiveness Risk  ... 51
6.4 Legal & Regulatory Risk  ... 51
6.5 Macroeconomic Risk  ... 52
6.6 Foreign Trade & Payment Risk  ... 52
6.7 Tax Policy Risk  ... 53
6.8 Labour Market Risk  ... 53
6.9 Financial Risk  ... 54
6.10 Infrastructure Risk  ... 54

7. MNCs in China  ... 55
7.1. Siemens  ... 55
7.1.1 The company  ... 55
7.1.1.1 Corporate History  ... 55
7.1.1.2 Major Businesses  ... 56
7.1.2 Siemens in China  ... 57
7.1.2.1 External Environment  ... 57
7.1.2.2 Entry strategy  ... 59
7.1.2.3 Conclusion  ... 60
7.2. Toyota  ... 61
7.2.1 The company  ... 61
7.2.1.1 Corporate History  ... 61
7.2.1.2 Major Businesses  ... 62
7.2.1.3 International markets  ... 62
7.2.2 Toyota in China ...  63
7.2.2.1 External Environment  ... 63
7.2.2.2 Entry strategy  ... 64
7.2.2.3 Conclusion  ... 65

8. Conclusion  ... 66

9. Appendix  ... 69
9.1 Figures  ... 69
9.2 Tables  ... 72

Affidavit  ... 80

List of figures
Figure 1: http://www.universes-in-universe.de/asia/chn/d-map.htm
Figure 2: http://www.ccpit.org/vhosts/english/II.htm
Figure 3 - Compare: http://www.chinaexperts.
de/Ratgeber/HANDEL_1/Aussenhandel_der_VR_China/aussenhandel_der_vr_china.html

List of tables
Table 1: Luo, Y.; Multinational corporations in China - Benefiting from structural transformation; Copenhagen Business School Press;; Copenhagen; 2000; Page 18

Table 2: Wang, Z.Q.; Foreign Investment and Economic Development in Hungary and China; Avebury; Aldershot, Brookfield; 1995; Page 166

Table 3: Hofsteede, G.; Culture’s consequences – International Differences in Work
– Related Values; Abridged edition; Sage publications; Newbury Park, London, New Delhi; 1984; Page 107

Table 4 Hofsteede, G.; Culture’s consequences – International Differences in Work – Related Values; Abridged edition; Sage publications; Newbury Park, London, New Delhi; 1984; Page 173

Table 5: Hofsteede, G.; Culture’s consequences – International Differences in Work
– Related Values; Abridged edition; Sage publications; Newbury Park, London, New Delhi; 1984; Page 207

Table 6: Hofsteede, G.; Culture’s consequences – International Differences in Work
– Related Values; Abridged edition; Sage publications; Newbury Park, London, New Delhi; 1984; Page 142 f.

Table 7: http://www.chinaexperts.
de/Ratgeber/Investitionen/Investitionsstatistik/investitionsstatistik.html

Table 8: http://www.quickmba.com/strategy/global/marketentry/

Table 9: http://home.aigonline.com/country_view/0,4605,1315,00.html

List of abbreviations

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Reference

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1. Introduction

The recent 20 years have been the era of globalization with enormous growth in international trade, financial flows and foreign direct investment (FDI). 

In former times, most Western companies did not engage in international business activities. On the hand their domestic market seemed to be attractive enough and there were sufficient opportunities for growth. On the other hand, companies did not have to take into consideration the specific features of foreign markets. Managers did not have to deal with foreign languages, currencies and “strange” cultural behaviour. Furthermore, companies did not need to adapt their products to different customer preferences or care about legal and political uncertainties. ¹

Nowadays, however, the changing business environment and the dependency on other nations’ goods and services has forced most companies to seek opportunities in foreign markets as well. In general, companies decide to invest abroad for a variety of reasons:

• Limited domestic growth is one of the major reasons why firms enter foreign markets. This development has started in the 70’s when Japanese manufacturers began to enter Western markets in many sectors. Nowadays those companies have to face competition from other Asian countries, such as South Korea and Taiwan, which have gained advantages through their low-cost labour force.
• Geographic market diversification to reduce country-specific risk is another popular reason behind many companies′ expansion plans. Country specific risk is defined as the risk of operating in only one country and thus being dependent on its political and economical system.
• Lower cost of production in developing countries is a popular reason, as well. However, such a "cost-led approach" is unlikely to lead to be successful in the the long-term. If customers′ needs are not identified and satisfied, the company will not be able to become a successful "global player".²

During these two decades, China was strongly influenced by globalization, as well and has undergone a structural transformation - from a centrally planned economy to a market - based one and from a rural, agricultural society to an urban, industrial one. In this period, more than 320,000 enterprises were founded, and China became one of the largest FDI recipient countries, surpassed only by the U.S. There are various reasons for investing in China: On the one hand lower wages reduce costs and the huge market potential enables the companies to raise their revenues. On the other hand economic and legal reforms have created favourable conditions for business activities - some people still cannot believe that it is possible to make large profits in a socialist country. Nowadays China is world′s largest developing market economy and the fastest growing market. ³

Once a company decides to enter the Chinese market, it should develop a long-term entry strategy and prepare the entry thoroughly. It is the goal of this thesis to give detailed information about the Chinese market itself, to describe its specific features and to explain different entry strategies.

The process to succeed in entering the Chinese market, consists of the following milestones:

• Gather general information about China, the specific features of the Chinese market and the company′s competitors
• Learn about cultural habits and the people′s mentality
• Choose the entry mode
• Develop a risk analysis for the Chinese market

Those milestones will be outlined in the following chapters.
Concerning the structure of this thesis, it will start off by giving a general description of the Chinese market and its economic development, as well as trade and investment opportunities and motives.

After that, an overview of the Chinese culture will be given, including a description of Chinese behavioural patterns and the difference to German behaviour. Furthermore negotiation style and techniques will be pointed out.

Based on all the information given, potential entry strategies will then be pointed out, including each strategy’s advantages and disadvantages. Besides, industrial and foreign direct investment opportunities policies regulated by the Chinese government will be illustrated and major investment opportunities will be outlined.

This chapter is followed by a description of the choice of location, which also includes an overview about certain investment incentives which are offered in specific regions. The following chapter deals with a complete risk analysis for the Chinese market.

The second but last chapter deals with companies, which have managed to enter the Chinese market. This chapter also includes a description of the reasons why these companies have been so successful in accessing the Chinese market. Finally, the most important information will be summarized and a final conclusion will be drawn. Figures and tables are part of the appendix.

[....]

1 Compare: Kotler, Armstrong, Saunders, Wong; Page 166

2 Compare: Kotler, Armstrong, Saunders, Wong; Page 167

3 Compare: Luo, Page 12