If there is one truism about China, then it has to be its unique business environment. Politically China remains a communist country, but one with a dynamic economy. This combination was never achieved by another country (KPMG, 2004). China’s economy is huge and expanding rapidly, with an average growth rate of 8 % in Gross Domestic Product (GDP) per annum for the last 30 years. The Chinese growth is almost miraculous and in 2007 China’s GDP reached 3.42 trillion US dollars, while most analysts expect China to become the largest economy in the world in this century (Economy watch, 2009).
China’s admission to the World trade Organisation (WTO) in 2001 signalled the growing maturity of this market and is expected to further increase the investment opportunities (KPMG, 2004). However, the global financial crisis has hit China hard with the growth rate for 2009, while still positive, expected to slow. About 26 million Chinese lost their jobs within the last 2 months which led to social unrest throughout the country. The government therefore started evaluating a second stimulus package in order to keep the economy going.
Lieberthal and Lieberthal (2003) give insights why China has an impact on all multinational corporations worldwide. They discuss that China is not only attractive for manufacturing, but furthermore worth for foreign companies to sell their products to the ‘1 billion consumer’-market.
However, for most Westerners the Chinese culture is difficult to understand, which can be explained by the very different and in some instances opposing styles of negotiation. The ‘eight elements’ of Chinese negotiation by Graham and Lam (2003) were summarised in order to explain the high failure rate of multinational companies in the Chinese market.
The Chinese Economy and doing business with it
Kenneth Lieberthal and his son Geoffrey Lieberthal (2003) give a very detailed overview of how China developed since it opened its doors back in 1978. They argue that China has an impact on all multinational corporations worldwide, as the Chinese low-cost manufacturing has consequences on pricing for various product segments in the world. The manufacturing advantage of China attracts companies to produce at lower costs and export to the rest of the world (Lieberthal and Lieberthal, 2003).
China today is one of the world’s largest trading nations. They achieved this with offering a low-cost labour force, tax and other incentives to attract foreign investment, the needed infrastructure in order to support efficient manufacturing operations and exports as well as a large cadre of technical personnel (Lieberthal and Lieberthal, 2003).
But most multinationals were not only attracted to use China as a base for exporting elsewhere, but additionally gaining the opportunity to sell their products inland to a market with a population of 1.2 billion people. However, the majority of the Chinese are not able to afford most of the Westernised products yet. According to Keillor (2007) the Chinese consumer pyramid is divided into four distinct consumer segments: ‘Rich’, ‘Professionals’, ‘Salaried class’ and the ‘Working class’.
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Currently the ‘rich’ segment consists of 2 million people. The majority in this class are very eager to purchase foreign products that are perceived in China’s Confucian materialistic society as status symbols. This explains the success for luxury cars, cell phones, large colour TVs, new computers, brand clothing, alcohol and cigarettes in the Chinese market (Keillor, 2007) (Rakowski, 2008).
The second wealthiest class is the ‘professionals’. They account for 60 million people in China. This class, combined with the lower ranks of the rich as well as the upper ranks of the salary class, make up the so called ‘emerging middle class of China’. This segment is open to new ideas and products and they are socially active and brand conscious. However, they feel insecure and concerned about the future (Keillor, 2007) (Rakowski, 2008).
The third segment of the Chinese is the ‘salary class’ which consists of 330 million people. They are conservative in their nature, but in some cases wish to purchase a foreign product. But purchases of foreign products are the result of longterm savings and are carefully considered.
The last but biggest segment is the ‘working class’ consisting of 800 million people. They have a very low income, very low education level and hardly speak English. Therefore the segment is very price sensitive and is not able to purchase foreign products (Keillor, 2007) (Rakowski, 2008).
Further information about the income levels, education levels, age groups, location and more about these four distinct classes can be gained from ‘Charcteristics of the Chinese Consumer Pyramid’ in Appendix 1.
The facts show that China has by far not reached its full potential in terms of available customers for westernised products. However, an early entry into the market by establishing the brand and establishing trust and building a relationship with the Chinese consumer can lead to immense future opportunities for westernised companies.
Since joining the Wortld Trade Organisation (WTO) in 2001, China has followed a so called ‘open market strategy’ with minimising tariffs and abolishing protectionist behaviour. These economic alterations confirm the step of many multinational companies to enter this promising market.
As China has become the manufacturing centre of Asia - if not of the world, chief executive officers worldwide in a wide range of sectors, need to think about their own opportunities in China but also observe how current as well as potential competitors can affect their future global opportunities (Lieberthal and Lieberthal, 2003).
For almost two decades foreign companies were only allowed to enter the Chinese market by going into a joint venture with a local partner. With becoming a member of the World Trade Organisation in 2001, this condition was abolished by the Chinese government and companies are now allowed to build up wholly owned subsidiaries (wholly owned foreign enterprises WOFE) in China. Therefore firms are less vurnerable to the weak management culture of the Chinese and the danger of harming intellectual property rights. However, companies still have to face the challenging environment in terms of inadequate legal protection, massive government interference, and price competition from state-subsidized firms (Lieberthal and Lieberthal, 2003).
- Quote paper
- Nina Rakowski (Author), 2009, China in the world economy and doing business with it, Munich, GRIN Verlag, https://www.grin.com/document/124003