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China--Business Environment


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China--Business Environment

  3. 3. China--Transformation
  4. 4. China--Political Change <ul><li>1978: Mao Zedong ’s death </li></ul><ul><li>1988: Reforms including State-Owned Enterprise Law </li></ul><ul><li>1994: Company Law </li></ul>
  5. 5. China--Transformation Results <ul><li>Exceptional growth among developing countries (around 10 % ) </li></ul><ul><li>China: </li></ul><ul><ul><li>Is the worlds leading manufacturer </li></ul></ul><ul><ul><li>“ Opened” itself to the world </li></ul></ul><ul><ul><li>Experienced cultural revolutions </li></ul></ul><ul><li>The country remains very dynamic with many issues and challenges ahead </li></ul>
  7. 7. Preferred Organization Structure <ul><li>Ongoing privatization </li></ul><ul><li>Complex corporate structures </li></ul><ul><ul><li>Owners, local governments, subsidiaries and others </li></ul></ul><ul><li>Growing significance of </li></ul><ul><li>family-owned </li></ul><ul><li>businesses </li></ul><ul><li>Local limitations within </li></ul><ul><li>China due to local </li></ul><ul><li>government intervention </li></ul>
  8. 8. Preferred Organization Structure <ul><li>Differences: </li></ul><ul><li>Similarities: </li></ul>
  9. 9. Entry and Ownership Strategies <ul><li>Although China opened itself to the world, the country remains restrictive of foreign investors through: </li></ul><ul><ul><li>Import licenses, quotas, tariffs, ownership limitations </li></ul></ul><ul><ul><li>Bureaucratic burden </li></ul></ul><ul><li>Biggest threats: </li></ul><ul><ul><li>Intellectual property rights </li></ul></ul><ul><ul><li>Fraud targeting international companies </li></ul></ul>
  10. 10. Entry and Ownership Strategies
  11. 11. Entry and Ownership Strategies
  12. 12. Control Techniques <ul><li>No adequate control techniques in the communist era </li></ul><ul><li>Importance of voluntary compliance </li></ul><ul><li>Difficulties of applying modern control techniques </li></ul><ul><li>Modern control techniques contribute to success </li></ul><ul><li>Mangers lack sufficient control in publicly-owned companies </li></ul><ul><li>Steady but slow improvement of control techniques in the future due to government unwillingness and inability to change </li></ul>
  13. 13. Control Techniques <ul><li>Behind Western standards--difficult to implement </li></ul><ul><li>Requires training, necessary infrastructure, and big financial </li></ul><ul><li>investments </li></ul>Control Techniques of International Companies in China Percentage Cost accounting system 89 Sales forecasting 86 Inventory control system 79 Written procedure for cash spending 79 Long term financial planning 75 Individual budget for each department 68 Management information systems 57 Office automation 52 Pro forma models for cash budgeting 43
  15. 15. Organizational Culture <ul><li>Leadership, motivation, and organizational culture are very important in every company </li></ul><ul><li>Traditional Chinese organizational culture: </li></ul><ul><ul><li>Bureaucratic and hierarchic with high power distance </li></ul></ul><ul><ul><li>Decision making without delegation </li></ul></ul><ul><ul><li>Punishment for negative results </li></ul></ul><ul><ul><li>Poor flow of information (passive communication) </li></ul></ul><ul><ul><li>Decision based on intuition and past experience </li></ul></ul><ul><ul><li>Case by case approach </li></ul></ul><ul><ul><li>Limited use of decision support systems </li></ul></ul>
  16. 16. Leadership Styles <ul><li>STRONG LEADERSHIP is a key concept in China </li></ul><ul><li>Big changes since communism </li></ul><ul><li>Company Law of 1994 </li></ul><ul><ul><li>Defined decision power in companies </li></ul></ul><ul><ul><li>Failed to eliminate government interference </li></ul></ul>
  17. 17. Leadership Styles
  18. 18. Leadership Styles <ul><li>Traditional leadership style: </li></ul><ul><ul><li>Paternalistic, exploitive, and autocratic </li></ul></ul><ul><ul><li>Top-down approach and little feedback </li></ul></ul><ul><li>Need for change </li></ul><ul><ul><li>More then 50 % of Chinese managers are inadequately prepared for the global business environment </li></ul></ul><ul><ul><li>Narrow focus on certain leadership qualities </li></ul></ul>
  19. 19. Leadership Styles United States China
  20. 20. Leadership Styles <ul><li>Hay Group--Chinese CEOs: </li></ul><ul><ul><li>Have a great sense of social responsibility </li></ul></ul><ul><ul><li>Eager for continuous self-improvement </li></ul></ul><ul><ul><li>Focus on building win-win relationships </li></ul></ul><ul><li>New generation of leaders: </li></ul><ul><ul><li>More individualistic </li></ul></ul><ul><ul><li>Less influence of Confucianism </li></ul></ul><ul><li>Lack of good leadership in China </li></ul><ul><ul><li>Big opportunity for international companies with developed leadership styles </li></ul></ul>
  21. 21. Employee Motivation Techniques <ul><li>Lack of sufficient motivation techniques in the communist past </li></ul><ul><li>Research shows that motivators and hygiene factors are important </li></ul>
  22. 22. Employee Motivation Techniques <ul><li>Chinese employees are motivated by similar factors as Western employees </li></ul><ul><li>Different reasoning: </li></ul><ul><ul><li>Promotion, wage increase--status symbol </li></ul></ul><ul><li>Seniority (China) vs. merit based motivation </li></ul><ul><li>Long-term motivational goals </li></ul><ul><li>Chinese employees value intrinsic rewards </li></ul>
  24. 24. Staffing Practices
  25. 25. Staffing Practices <ul><li>Differences between China and US are slowly being washed away </li></ul><ul><li>Internationals should be cautious with employing expatriates (especially US) </li></ul>
  26. 26. Discrimination <ul><li>Discrimination is a huge issue in China </li></ul><ul><li>International pressure to change </li></ul><ul><li>Laws passed in 2007 to protect discriminated parties </li></ul><ul><li>Insufficient enforcement of laws </li></ul><ul><li>It will take time to eliminate discrimination in China </li></ul><ul><li>Discrimination is not a major </li></ul><ul><li>issue in international companies </li></ul><ul><li>in China </li></ul>Discrimination based on :
  27. 27. Nepotism <ul><li>Nepotism is historically incorporated into the business environment </li></ul><ul><li>Ongoing change, but favoritism regarding friends and family still widespread </li></ul><ul><ul><li>90 percent of Chinese billionaires are the children of high-ranking Chinese officials </li></ul></ul><ul><li>Recent investigation of nepotism in the government </li></ul><ul><li>Internationals have to be aware and prepared for nepotism in China </li></ul>
  28. 28. Staffing Methods <ul><li>With the growing market China has been hiring young professionals right out of college. </li></ul><ul><li>Online recruiting has been increasingly popular. From 2005-2007 the amount of internet users in China jumped by 23% to ~ 137 million users. </li></ul><ul><li>Common job recruiting sights in China include:,, and </li></ul><ul><li>Campus recruiting is very popular. Peking, Fudan, andTsinghua Universities are considered the top 3 schools for undergraduate studies and are heavily recruited. </li></ul>
  29. 29. Staffing Methods <ul><li>Recruitment is so competitive at top universities that many Chinese companies will send high ranking executives to speak at these schools. </li></ul><ul><li>Job fairs are becoming increasingly popular. </li></ul><ul><li>Larger cities in China will often have “fixed” job fairs. This means that they occur multiple times over the year on a “fixed” schedule. </li></ul>
  30. 30. Training and Development <ul><li>Many Chinese companies have relied on mentoring and on-the-job training for the development and training of young executives. </li></ul><ul><li>They tend to recruit young Chinese prospects who have gone to school in the U.S. to work in their companies that are located here. </li></ul><ul><li>Many Chinese companies are starting to realize the importance of enticing new prospects with training opportunities. Training opportunities help reduce employee turnover in the growing job market. </li></ul>
  31. 31. Training and Development <ul><li>Many Chinese companies are trying to copy training methods that have attracted young Chinese professionals to U.S. companies located in China. </li></ul><ul><li>The most popular types of training are the following: foreign language, business writing for English and Chinese languages, public speaking, and job specific training. </li></ul>
  32. 32. Performance Appraisal <ul><li>Performance reviews have not been traditionally found in Chinese companies. </li></ul><ul><li>This is due largely to the Chinese concept of “guanxi”. </li></ul><ul><li>Since the early 1990’s American companies have introduced the concept of a written review and a meeting with a supervisor. Young Chinese executives tend to like having their work evaluated, but Chinese companies have been slow to catch on to this idea. </li></ul>
  33. 33. Compensation <ul><li>Wage rates compared to the U.S. </li></ul><ul><li>Mandatory benefits: Leave, Vacation. </li></ul><ul><li>Health Benefits </li></ul><ul><li>Retirement </li></ul><ul><li>Mandatory bonuses </li></ul><ul><li>Cost of Living </li></ul>
  34. 34. Wage rates compared to U.S. <ul><li> </li></ul><ul><li>Labour Law of the People’s Republic of China. </li></ul><ul><li>Ch 5 of the above document covers minimum wage. Minimum wage is regional. </li></ul><ul><li>In September, 2006 Guandong province increased its minimum wage. It was split into 5 categories with the highest being 780 yuan/month, which is 4.66 yuan per hour. This is equivalent to ~ U.S. $.68 / hour. The lowest was 450 yuan / month. (2.69yuan/hour) or ~$.39/hour. </li></ul>
  35. 35. Wage rates compared to U.S. <ul><li>In the U.S. Kansas has had the lowest state approved minimum wage at $2.68 (This will change to $7.25 in Jan 2010). Five states have no minimum wage laws and the federal minimum wage laws apply ($7.25/hr.) </li></ul><ul><li>Santa Fe, New Mexico has the highest minimum wage at $9.25/hr. </li></ul>
  36. 36. Mandatory Time Off <ul><li>Covered in Ch 5 of Labour Law of the People’s Republic of China. </li></ul><ul><li>Article 38: labourers should have at least one day off per week. </li></ul><ul><li>Article 40: National holidays. </li></ul><ul><li>Ch 7, Article 62. Maternity leave no shorter than 90 days. </li></ul><ul><li>Most companies in China either do not have a system of paid vacations, or have a system written out in their manuals but do not apply them. </li></ul>
  37. 37. Mandatory Time Off <ul><li>Labour law was passed in 1995 that entitled individuals who had worked more than one year to paid vacation. </li></ul><ul><li>Lack of regulation for implementation of this law made it unenforceable. </li></ul>
  38. 38. Health Benefits <ul><li>In 2005 the New Rural Co-operative medical care was passed to make healthcare more affordable. </li></ul><ul><li>Under this system annual coverage costs is 50 yuan per person. This is about $7 a year. </li></ul><ul><li>Of this 50 yuan, 20 is paid by the central gov, 20 is paid by the provincial gov, and 10 is paid by the individual. </li></ul>
  39. 39. Health Benefits <ul><li>In this system, if an individual goes to a hospital in their town, 70-80% of their bill will be covered. If they need to go to the county hospital 60% of their cost will be covered. If they need to see a specialist in the city, only 30% of their bill will be covered. </li></ul><ul><li>After this bill passed, 80% of the rural community signed up. Previous to this, less then 50% were covered. </li></ul>
  40. 40. Retirement <ul><li>Demographically young nation caught in the midst of a transformation into a modern society </li></ul>
  41. 41. Retirement <ul><li>Current retirement system consists of a basic pension system </li></ul><ul><ul><li>involves first tier pay as you go benefits </li></ul></ul><ul><ul><li>second tier personal retirement accounts. </li></ul></ul><ul><li>Many problems with the basic system </li></ul><ul><ul><li>Coverage is far less than universal. </li></ul></ul><ul><ul><li>large unfunded liabilities for many of the early retirees </li></ul></ul><ul><ul><li>Most of the citizens covered under the plan are government or collectively owned enterprises employees </li></ul></ul>
  42. 42. Retirement
  43. 43. Retirement <ul><li>Other programs that offer benefits for the elderly such as the minimum living guarantee </li></ul><ul><ul><li>grants assistance to all elderly households that fall below the poverty line </li></ul></ul><ul><ul><li>The problem with the program is that China’s poverty line set very low (20 percent of per capita rural income and 16 percent of per capita urban income) </li></ul></ul>
  44. 44. Mandatory Bonuses <ul><ul><li>The Chinese Spring Festival </li></ul></ul><ul><ul><li>Special tax incentives </li></ul></ul>
  45. 45. Median Bonus by Job Country: China Country: China | Currency: CNY | Updated: 5 Nov 2009 | Individuals Reporting: 3,312
  46. 46. Purchasing Par ity <ul><li>GDP (PPP) $7.973 trillion in 2008 (3 rd largest). </li></ul><ul><li>Exports make up 40 percent of GDP. </li></ul><ul><li>GDP per capita calculated to be $6,000 (133 rd in the World) </li></ul><ul><li>Exchange rate: 6.8263 </li></ul>
  47. 47. Purchasing Power Parity
  48. 48. Housing Costs
  49. 49. Housing Costs <ul><li>Gross Rental Yield: The gross annual rental income, expressed as a percentage of property purchase price. This is what a landlord can expect as return on his investment before taxes, maintenance fees and other costs. </li></ul><ul><li>Rental Income Tax: The tax levied on the average annual income on a rental apartment/property in the country. </li></ul><ul><li>Roundtrip Cost: The total cost of buying and then re-selling a residential property, including all costs (except the sale price itself), expressed as percentage of the property value. </li></ul>Country Buying Price USD/Sq. M Gross Rental Yield Rental Income Tax Roundtrip Cost India $9,542 3.59% 8.11% 14.66% USA $16,216 3.75% 30.00% 9.07% China $2,834 3.55% 5.00% 5.26%
  50. 50. Hiring and Compensation Trends <ul><li>Base compensation rates have jumped more than 38% and total compensation packages increased more than 34% from January 2007 to January 2008 </li></ul><ul><li>Multinational companies are looking for localized talent as opposed to expatriates </li></ul>Country: China | Currency: CNY | Updated: 5 Nov 2009 | Individuals Reporting: 5,063
  51. 51. Hiring and Compensation Trends <ul><li>Top-talented employees are now getting more offers as many multi-nationals seek to diversify their offices and bring in more local talent </li></ul><ul><li>CEO salary packages and overall compensation packages have seen a huge increase over the last few years, salary levels are still far less than soaring CEO salaries in United States </li></ul>
  52. 52. Union Density Rate <ul><li>Unions in China are required to register with the All China Federation of Trade Unions to be recognized nationally </li></ul><ul><li>Massive organization was formed by the Chinese working class office </li></ul><ul><li>Trade unions are much more active in China than in the United States </li></ul><ul><ul><li>ACFTU has an overall goal to protect the overall interest of the whole people and better the voice of worker with their concerns in special interests </li></ul></ul><ul><ul><li>The unions actively support and participate in the country reform and in the formulation of laws and policies that are concerning worker rights and interest on a national and local level </li></ul></ul>
  53. 53. Union Density Rates <ul><li>169.94 million member unions </li></ul><ul><li>1.324 million are grassroot unions that form the core of the Chinese </li></ul>
  54. 54. Strike Activity <ul><li>Most incidents are a result of serious violations of ordinary citizens’ lawful rights and interest by local government officials </li></ul><ul><li>Mass incidents in 2008 (127,467). This is almost double than the last official released figure in 2005 which was 87,000 </li></ul>
  55. 55. Co-determination <ul><li>In January 2008, China implemented a new labor law </li></ul><ul><li>Target: Poor working conditions, low wages, and minimal benefit </li></ul><ul><li>Important: Must be employee representation on the board of directors </li></ul><ul><ul><li>At least one employee must be selected and represent the employees on the board </li></ul></ul><ul><ul><li>The purpose of this position is to report to employees and the government on the actions of the board </li></ul></ul>
  56. 56. CONCLUSION
  57. 57. Conclusion <ul><li>China provides a unique market opportunity for many international companies </li></ul><ul><li>There are many risks associated with entering the Chinese market including: </li></ul><ul><ul><li>Bureaucratic burdens, insufficient legislature, old customs, and other structural problems </li></ul></ul><ul><li>International companies that are adequately prepared can take advantage of the huge opportunity presented by the Chinese market </li></ul>
  58. 58. ?