China Market Entry Strategies


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This revision presentation provides an overview of the key considerations and options facing businesses outside China looking to enter the Chinese market.

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China Market Entry Strategies

  1. 1. China – Market Entry Strategies AQA BUSS4 Research Theme 2014
  2. 2. Generic methods of reaching emerging markets Exporting direct to customers The UK business takes orders from international customers and ships them to the customer destination Selling via overseas agents or distributors A distribution or agency contract is made with one or more intermediaries Distributors & agents may buy stock to service local demand The customer is owned by the distributor or agent Opening an operation overseas Involves physically setting up one or more business locations in the target markets Initially may just be a sales office – potentially leading onto production facilities (depends on product) Joint venture or The business acquires or invests in an existing business that buying a business operates in the target market, or sets up a new business in overseas partnership with a local business (JV)
  3. 3. Key international risk factors • Cultural differences – A business needs to understand local cultural influences in order to sell its products effectively. For example, a product may be viewed as a basic commodity at home, but not in the target overseas market. The sales and marketing approach will need to reflect this. • Language issues – Although the common business language worldwide is now English, there could still be language issues. Can the business market its product effectively in the local language? Will it have access to professional translators and marketing agencies? • Legislation – Legislation varies widely in overseas markets and will affect how to sell into them. A business must make sure it adheres to local laws. It will also need to consider how to find and select partners in overseas countries, as well as how to investigate the freight and communications options available.
  4. 4. Option: Exporting Direct Advantages Disadvantages Uses existing systems – e.g. ecommerce Online promotion makes this costeffective Can choose which orders to accept Direct customer relationship established Entire profit margin remains with the business Can choose basis of payment – e.g. terms, currency, delivery options etc Maybe subject to import duties (impact on pricing) Potentially bureaucratic No direct physical contact with customer Increased risk of non-payment Customer service processes may need to be extended (e.g. after-sales care in foreign languages)
  5. 5. Option: Sell Via Agents / Distributors Advantages Disadvantages Agent of distributor should have specialist market knowledge and existing customers Lost profit margin Unlikely to be an exclusive arrangement – question mark over Fewer transactions to handle agent and distributor commitment Can be cost effective – commission & effort or distributor margin is a variable Harder to manage quality of cost, not fixed customer service Agent / distributor keeps the customer relationship
  6. 6. Option: Open Overseas Operation Advantages Disadvantages Local contact with customers & Significant cost & investment of suppliers management time Quickly gain detailed insights into market needs Need to understand and comply with local legal and tax issues Direct control over quality and customer service Higher risk Avoids tariff barriers
  7. 7. Option: Joint Venture or Acquisition Advantages Disadvantages Popular way of entering emerging markets Joint ventures often go wrong – difficult to exit too Reduced risk – shared with joint venture partner Risk of buying the wrong business or paying too much for the business Buying into existing expertise and market presence Competitor response may be strong
  8. 8. Some specific considerations for market entry into China • China is not a “single market” – very province is different • A rapidly growing middle class and rising disposable incomes are spreading wealth across China • Rising wages are making China less competitive as a location for manufacturing • China’s industries are heavily regulated • Local partners may be key to success, but a risk of loss of technology and know-how • Increasingly strong local competitors
  9. 9. A strategic approach to market entry to China Assess the market Assess competition Size Fragmented? Growth Consolidated? Demand drivers How differentiated? Geography Cost Regulations advantages? China Govt support? Choose entry option Choose business model Implement! Short / long-term Does product or People with goals service need to be the right skills? localised? Consolidated? Where to start Resource needs (gateway)? Is a local partner needed? Is business model flexible to handle Takeover/merger change? Joint venture? Strength of relationships
  10. 10. Doing business in China is getting slightly easier – but it is still difficult!
  11. 11. The first step of any effective China market entry strategy is to identify the geographical location of the target market(s)
  12. 12. Western businesses have typically been drawn to coastal provinces such as Zhejiang, Guangdong and Shanghai, due to higher populations and incomes in those areas
  13. 13. The “Zhejiang spirit” “Zhejiang's main manufacturing sectors are electromechanical industries, textiles, chemical industries, food, and construction materials. Zhejiang has followed its own development model, dubbed the "Zhejiang model", which is based on prioritising and encouraging entrepreneurship, an emphasis on small businesses responsive to the whims of the market, large public investments into infrastructure, and the production of lowcost goods in bulk for both domestic consumption and export. As a result, Zhejiang has made itself one of the richest provinces, and the "Zhejiang spirit" has become something of a legend within China.” Source: Wikipedia
  14. 14. Guangdong – the “Factory of the World”
  15. 15. China has created a series of industrial “hubs” which have helped attract investment
  16. 16. However, there is increasing evidence that China’s traditional manufacturing locations are becoming less competitive
  17. 17. Many different methods of market entry
  18. 18. It is important that the method of market entry is aligned with the objectives of the investment Source: PWC China
  19. 19. Wholly foreign-owned enterprises (known as WFOEs or WOFEs) • The preferred method for businesses with an established product or service that can be relatively easily imported and sold in China • Attractive because they give investors 100% equity and control • WFOE has complete control over strategy, decision-making, operations, human resources and corporate culture • Lowers the risks of working with a local partner • Are allowed to convert Renminbi (RMB) into other currencies (therefore can remit profits to the parent company) • But not all industries in China allow WFOE / WOFEs
  20. 20. Licensing to distributors / franchising • Find a local distributor to manage products in China • Relatively simple and quick with minimal resource commitment • Main downside: a loss of managerial control over how the product is marketed & handled • One way to reduce risk - appoint different distributors in each target province
  21. 21. Case Study: KFC in China • Fast-food is traditionally a franchise model in developed economies • KFC (owned by Yum Brands) opted to expand by setting up whollyowned outlets • Wanted to keep control over it operations and brand in China
  22. 22. China: The Foreign Investment Catalogue It is a central policy of the Chinese government that foreign investment must be made in a manner that is consistent with Chinese policy and in a way that will promote China’s development. China therefore follows a policy of guided investment, and the Foreign Investment Catalogue is the guide
  23. 23. What kind of outside investment is permitted in China? • Encouraged: investment in activities in this category is subject to less strict administrative requirements and may enjoy certain tax and other benefits; • Permitted: the standard category, with no particular restrictive or favourable treatment; • Restricted: investment in activities in this category is subject to higher levels of scrutiny and stricter administrative requirements, and may be denied at the discretion of the approval authorities; • Prohibited: foreign investment not permitted
  24. 24. Encouraged industries in China Priority industries that are "encouraged" include high tech, environmental protection and new energy. China offers preferential tax treatment and other incentives to foreign investors in this industries, with the aim of attracting new advanced technologies, management and (most importantly) know-how to China!
  25. 25. China’s 7 “strategic industries” • Energy saving and environmental protection (clean energy technology) • Next generation IT (modernization of the country's telecommunications infrastructure) • Bio-technology (pharma and vaccine manufacturers) • High end equipment (airplanes, satellites, manufacturing technology) • New energy (nuclear, wind, solar) • New materials (rare earths) • New energy cars (electric and hybrid cars, batteries) Source:
  26. 26. Restricted industries in China Restricted industries have policies imposed on them to restrict foreign investment that will "impair China's sustainable development". For example, commercial banks in China cannot be more than 25% foreign-owned. In entering some of these restricted industries, multinationals may be required to enter into a joint venture or other local partnership.
  27. 27. Examples of restricted industries Certain agricultural, forestry, animal husbandry and fisheries Mining of precious metal and certain ores Certain manufacturing (tobacco, certain textiles) Electricity (adoption of low capacity generator) Certain telecommunications Certain wholesale and retail trade Electricity, gas, and water production Wholesale and retail of certain products Banking and insurance industries Real estate in high end property Public utilities Medical institutions Golf courses Production and distribution of radio and TV programming Land surveying Asset certification and appraisal Other industries restricted by the Chinese government Source: LehmanBrown
  28. 28. A good summary from The Economist “China classifies foreign investment as encouraged, restricted or prohibited, depending on the sector. In the past five years the list of prohibited and restricted sectors has changed but not shrunk much. Many of the fastest-growing technology sectors, such as internet businesses and cloudcomputing services, are on the restricted list, requiring joint ventures.”
  29. 29. Examples of prohibited industries Breeding and growing of precious, high quality breeds of animals Development of certain types of plant seeds Mining of radioactive materials Arms and ammunition manufacturing Construction and operation of power grids Air traffic control Postal Services Futures trading Social research Gambling Pornography Publication of books, magazines, and newspaper Source: LehmanBrown
  30. 30. Prohibited investments in China Investment in “prohibited” industries is completely off limits to foreign investment. Typically, investment in these industries is prohibited for project that would: Endanger state security or harm the public Pollute the environment or endanger human health Occupy a large amount of current farmland Endanger the use of military resources Use manufacturing techniques that are unique to China
  31. 31. Joint ventures A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They parties to the JV exercise control over the enterprise and consequently share revenues, expenses and assets.
  32. 32. Joint ventures are high risk! “Because there are so many risks, joint ventures should only be entered into if truly necessary. Potential investors should actively explore any reasonable alternatives, such as creating a WFOE, early in the planning stage.”
  33. 33. More on Joint Ventures in China • Another popular method, but less common now • Takes many months at least to negotiate and set up • JV partners share profits and losses depending on their equity stakes • Multinationals need to consider how they will exit the JV before it is set up • JV partners in China are potential competitors! • Chinese partner motives are usually strategic - to gain know-how, technology: i.e. more competitive than collaborative
  34. 34. Examples of JVs in China (1)
  35. 35. Examples of JVs in China (2)
  36. 36. Examples of JVs in China (3)
  37. 37. The perils of joint ventures in China… Why they initially proved attractive • Helped make sense of complex market • Combined foreign capital/know-how/brands with local capacity • Perceived as reducing risk • Often required by Chinese government in some industries Why most firms now avoid them • China has changed: lots of capital and rapidly growing domestic competitors • Track record of technology transfer and corrupt practices • If you’re serious about investing in China, keep control
  38. 38. What is a takeover? Where one business acquires a controlling interest in another business
  39. 39. Takeovers and Mergers in China Multinational companies are today turning increasingly to M&A as means to pursue their expansion plans for China. But finding a suitable candidate to acquire can be fraught with difficulty, and foreign managers are often tripped up by their unfamiliarity with China’s often unique business, cultural, and regulatory environments Source: Booz & Co
  40. 40. Why go for a takeover? • An exit for a joint venture that has run its course • Take control of strategic assets in China • Take stakes in successful Chinese businesses
  41. 41. Advantages of acquisitions • Quick access to resources & skills the business needs • Overcomes barriers to entry • Helps spread risk (wider range of products and greater geographical spread) • Revenue growth opportunities (synergy) • Cost saving opportunities (synergy) • Reduces competition • May enable economies of scale
  42. 42. Drawbacks of acquisitions • • • • • High cost involved Problems of valuation Clash of cultures Upset customers Problems of integration (change management) • Resistance from employees • Non-existent synergy • Incompatibility of management styles, structures and culture • Questionable motives • High failure rate • Diseconomies of scale
  43. 43. Heinz into Brazil and China HEINZ 2010: Heinz expanded in China by acquiring Foodstar, a leading maker of sauce for $100m 2011: Heinz bought an 80% stake in Quero, a leading sauces brand in Brazil. “The acquisitions in Brazil and China put Emerging Markets on track to generate more than 20% of our Company's total sales in 2012, up from 16% in 2011. The acquisitions are the latest examples of our successful "buy and build" strategy in Emerging Markets, where we have acquired and grown strong local brands and businesses in the key markets of China, India, Indonesia, Russia, Poland and now Brazil.”
  44. 44. Diageo’s Chinese Takeover Diageo 2012: Diageo expands its footprint in emerging markets with £600m takeover Global drinks giant Diageo is finalising a deal to buy the Chinese baijiu brand Shui Jing Fang, as it seeks to expand its footprint in China. It's reported that Diageo has offered $950m (£600m) for the company, which it would use to develop the market for Chinese white spirits elsewhere in the world.