Entry strategies in the Chinese market

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

2  NA  

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 china-  

  experts de Ratgeber HANDEL 1 Aussenhandel der VR China aussenhandel der NA  

  vr china html NA  

3  NA  

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 china-  

  experts de Ratgeber Investitionen Investitionsstatistik investitionsstatistik html NA  

Table 8:  http: www quickmba com strategy global marketentry  

Table 9:  http: home aigonline com country view 0 4605 1315 00 html  

4  NA  

List of abbreviations

  APEC - Asia-Pacific Economic Cooperation  

  CCP - Chinese Communist Party  

  CEO - Chief Executive Officer  

  CJV - Contractual Joint  Venture

  CNY - Yuan  

  EJV - Equity Joint  Venture

  ETDZ - Economic and Technological Development Zone  

  EU - European Union  

  FDI - Foreign Direct  Investment

  FIE - Foreign Invested Enterprise  

  FISC - Foreign-Invested Joint Stock Limited Companies  

  f o b - free on board  

  GATT - General Agreement on Tariffs and Trade  

  GDP -Gross Domestic Product  

  IDV - Individualism  Index

  IMF - International Monetary Fund  

  KMT - Nationalist Party  

  M A - Mergers and Acquisitions  

  MAS - Masculinity  Index

  MNC - Multinational Corporation  

  NPL - Non-Performing Loans  

  PDI - Power Distance  Index

  PRC - People s Republic of China  

  RMB - Renminbi  

  SAFE - State Administration of Foreign Exchange  

  SAIC - State Administration for Industry and Commerce  

  SAR - Special Administrative Region  

  SARS - Severe Acute Respiratory Syndrome  

  SEZ - Special Economic Zone  

  SOE - State Owned Enterprise  

  UAI - Uncertainty Avoidance  Index

  U S - United States  

  USD - United States Dollar  

5  NA  

VAT - Value Added Tax

WFOE - Wholly Foreign Owned Enterprise

WTO - World Trade Organization

6

Reference

Bennett, P.; International Marketing, 2 nd Edition; Kogan Page Ltd.; London; 1998

Bosse, M.; Neue Töne aus China – bessere Rahmenbedingungen – Risiken bleiben, aus: Finance – das Finanzmagazin für Unternehmer, Ausgabe Mai 2004

Brenner, H., Granier, B.; Business-Guide China; Fachverlag Deutscher Wirtschaftsdienst; Köln; 2002

Cheung-Lieh, Y,; Chinas neue Wirtschaftspolitik; Campus Verlag; Frankfurt, New York; 1980

El Kahal, S.; Business in Asia Pacific – Text and Cases; Oxford University Press; New York 2001

Fukasaku, K., Wall, D., Wu, M.; China’s long march to an open economy; Development Centre of the organisation for economic co-operation and development; Paris 1994

Harris P.R., Moran R.T.; Managing cultural differences;; 3 rd edition, Houston Golf Publishing; 1991

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

Internet:

http://asnic.utexas.edu/asnic/countries/china/chinalegal.html http://home.aigonline.com/country_view/0,4605,1315,00.html http://wehner.tamu.edu/mgmt.www/Monteils/3-FDI.htm http://www1.chinadaily.com.cn/en/doc/2004-01/20/content_300575.htm http://www.ahk-china.org/china-economy/government-expenditure.htm http://www.bayernlb.de/p/_de/downloads/offen/1310_volkswirtschaft/laender/China10 03.pdf

http://www.bwl-bote.de/20030917.htm

http://www.china- experts.de/Ratgeber/Investitionen/Investitionsstatistik/investitionsstatistik.html

http://www.china-window.com/china_business/china_business_tips/market-entry- options-for-.shtml

http://www.cia.gov/cia/publications/factbook/print/ch.html

http://www.cia.gov/cia/publications/factbook/print/mc.html

http://www.cia.gov/cia/publications/factbook/print/hk.html

http://www.deacons.com.au/news/article.asp?nID=371

http://www.econ.pncbank.com/china.htm

http://www.efic.gov.au/static/efi/cra/china.htm

http://www.hsbc.com.hk/hk/corp/aoc/businf.htm

http.//www.informit.com/articles/article.asp?p=101588&seqNum=2

http://www.international.ucla.edu/asia/article.asp?parentid=2878

http://www.marketresearch.com/map/prod/965135.html

http://www.oanda.com/converter/classic

http://www.pacificbridgemedical.com

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

http://www.qis.net/chinalaw/setrep1.htm

http://www.republic.wednet.edu/student_projects/Economics/china.htm

http://www.tdctrade.com/sme/ir/sme_irchina.htm

http://www.svcwireless.org/programs/seminar120903/Sara%20Rauchwerger%20Pre sentation%2012-09-03.pdf

http://www.siemens.com/

http://www.thetimes100.co.uk/theory/theory.php?tID=238

http://www.toyota.co.jp/en/about_toyota/history/index.html

http://www.trade.gov/doctm/Fran2002.htm

http://www.wordiq.com/definition/Economy_of_China

http://www.worldlawdirect.com/article/1649/China's_legal_system_and_Chinese_law. html

Janocha, P.; Asiens Märkte erfolgreich erschließen; Springer Verlag; Berlin,

Heidelberg; 1998

8

Kautz, G.; Developing International Markets – Shaping your global presence; PSI successful business library,; 1998 Kotler,P., Armstrong G., Saunders J., Wong, V.; Principles of Marketing – The European Edition; Prentice Hall Europe; 1996 Luo, Y.; Multinational corporations in China - Benefiting from structural transformation; Copenhagen Business School Press;; Copenhagen; 2000 Perlitz, M.; Internationales Management, 4. Auflage; Lucius & Lucius; Stuttgart; 2000 Rothlauf,J.; Interkulturelles Management; R. Oldenbourg Verlag; Wien, München

1999 Tylor E.B.; Primitive Culture, Band 1, , New York 1871 Wang, Z.Q.; Foreign Investment and Economic Development in Hungary and China; Avebury; Aldershot, Brookfield; 1995 Welge, M., Holtbrügge, D.; Internationales Management, 3. Auflage; Schäffer- Poeschel Verlag; Stutgart; 2003

9

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 l ead 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. 1 Compare: Kotler, Armstrong, Saunders, Wong; Page 166 2 Compare: Kotler, Armstrong, Saunders, Wong; Page 167

10

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. B esides, 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. 3 Compare: Luo, Page 12

11

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.

12

2. China as business location

2.1 General facts on China

Note: The following data is taken from the CIA Worldfactbook. If another source has been used, this is indicated.

Country:

China covers an area 9,561,000 square kilometres, slightly larger than that of that USA. Thus, it’s the world’s second largest country after Canada. It shares its borders with North Korea, Mongolia, Russia, Kazakhstan, Kirgizistan, Afghanistan, Pakistan, India, Nepal, Bhutan, Myanmar, Laos and Vietnam. 4 Figure 1 (Appendix) shows a detailed map of China.

People: 5

Population: 1,286,975,468 (July 2003 est.) Age structure: 0-14 years: 23.1% 15-64 years: 69.5%

65 years and over: 7.4% (2003 est)

Population growth rate: 0.6% (2003 est.) In 1971, the communist party introduced a family planning program which allowed just one child per family. However, it is estimated, that, by 2010, the total population of China will be five times of that of the USA. 6 Ethnic groups: Han Chinese 91.9%, Zhuang, Uygur, Hui, Yi, Tibetan, Miao, Manchu, Mongol, Buyi, Korean, and other nationalities 8.1% Religions: Daoist (Taoist), Buddhist, Muslim 1%-2%, Christian 3%-4% Languages: Standard Chinese or Mandarin (Putonghua, based on the Beijing dialect), Yue (Cantonese), Wu (Shanghaiese), Minbei (Fuzhou), Minnan (Hokkien- Taiwanese), Xiang, Gan, Hakka dialects, minority languages Government: 7 Government type: Communist state Capital: Beijing 4 Compare: El Kahal; Page 62 5 http://www.cia.gov/cia/publications/factbook/print/ch.html 6 Compare: El Kahl; Page 63 7 http://www.cia.gov/cia/publications/factbook/print/ch.html

Administrative division: 23 provinces (note: China considers Taiwan its 23rd province) Macau was colonized by Portugual in the 16th century and was the first European settlement in the Far East. Due to an agreement signed by China and Portugal on 13 April 1987, Macau became the Macau Special Administrative Region (SAR) of China in 1999. China has promised that its socialist economic system will not be practised in Macau and that Macau will enjoy a high degree of autonomy for the next 50 years. 8 Hong Kong was occupied by the UK in 1841 and formally handed over by China the following year. Due to an agreement signed by China and the UK, Hong Kong became the Hong Kong Special Administrative Region (SAR) of China in 1997. In this agreement, China has promised that its socialist economic system will not be imposed on Hong Kong and that Hong Kong will enjoy a high degree of autonomy for the next 50 years. 9 Independence: 221 BC, replaced by the Republic on 12 February 1912. The People's Republic of China (PRC) was established in 1949.

National holiday: Anniversary of the Founding of the People's Republic of China, 1 October (1949) Economy: 10 GDP: 1.414 trillion (2003) 11 GDP – real growth rate: 9.1% (2003) 12 GDP – per capita: - $965 (2002 est.) 13 GDP – per capita – purchasing power parity: $4,700 (2002 est.) GDP – composition by sector: agriculture: 15.2% industry and construction: 51.2% services: 33.6% (2001) Inflation rate: -0.8% (2002 est.) Labour force: 744 million (2001 est.) Labour force – by occupation: agriculture 50%, industry 22%, services 28% (2001 est.)

Unemployment rate: urban unemployment roughly 10%; substantial unemployment and underemployment in rural areas (2002 est.) Budget: 14 Budgetary Revenue by Item 100 Mio. Yuan

Total Revenue 16386.04

- Taxes

- Subsidies to loss-making Enterprises

- Revenues from Extra-charges for Education

- other revenues

Budgetary Expenditure by Function Total Expenditure

- Economic Construction

- Social, Cultural and Educational Development

- National Defence

- Government Administration

- others 2262.26

Industries: iron and steel, coal, machine building, armaments, textiles and apparel, petroleum, cement, chemical fertilizers, footwear, toys, food processing, automobiles, consumer electronics, telecommunications Industrial production growth rate: 12.6% (2002 est.) Exports: $325.6 billion f.o.b. (2002 est.) Export commodities: machinery and equipment; textiles and clothing, footwear, toys and sporting goods; mineral fuels Export partners: US 21.5%, Hong Kong 18%, Japan 14.9%, South Korea 4.8% (2002) Imports: $295.3 billion f.o.b. (2002 est.) Import commodities: machinery and equipment, mineral fuels, plastics, iron and steel, chemicals

15

Import partners: Japan 18.1%, Taiwan 10.5%, South Korea 9.7%, US 9.2%, Germany 5.6% (2002) Debt – external: $149.4 billion (2002 est.) Currency: yuan (CNY), also referred to as the Renminbi (RMB) Exchange rate: yuan per US dollar – 8.28 (2003), 8.28 (2002), 8.28 (2001), 8.28 (2000), 8.28 (1999), 8.28 (1998)

1 Euro = 10.14295 Yuan 15

Communication: 16 Telephones – main lines in use: 135 million (2000) Telephones – mobile cellular: 65 million (January 2001) Radios: 417 million (1997) Televisions: 400 million (1997) Internet users: 45.8 million (2002)

2.2 Economic development of China

When the People's Republic of China (PRC) was founded in 1949 it has managed to establish a relatively large and complete industrial system. The number of industrial companies grew up to 350,000 in 1979, while the number of employees in this sector increased to more than 50 Million. 17 However, in spite of this development, China was almost totally sealed off from international trade and foreign investment until 1978. Since then, it took an almost unbelievable development. To explain, why and how economic circumstances changed and how the government has managed to create an attractive market for foreign investors, a description of the economic reform process will be given now: In late 1978 the Chinese leadership began to change the economic system from a centrally planned economy to a more market-oriented system. Whereas the political system is still subject to strict Communist control, the economic influence of private companies and individual citizens has been steadily increasing. The authorities established a system of household and village responsibility in agriculture instead of the old collectivization, increased the authority of local officials and managers in industry, permitted a variety of small-scale enterprises in services and light

17 Compare: Cheung-Lieh, Page 43

16