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China is the world’s second largest economy after the US and is likely to become the first in the next few decades. With a population of over a billion people, China has the world’s largest domestic market in the world and as thus presents an attractive market for global companies. There are many reasons which make China an ideal market for companies that hope to establish a global dominance and those seeking to increase their profits. To ignore China is a recipe for disaster for any company and the question on whether to enter the Chinese market is a question of survival. But not all companies that have entered China have been met with success and some have closed down after failing to make profits. What this means is that companies must approach China in a unique manner and not attempt to use strategies that have worked in the West. Food based industries like Starbucks have succeeded in China due to their superior products, well known brand name and a unique approach in marketing.
There are several ways through which companies establish a presence in China. These include exportation of their products to China, establishing factories and divisions here and through acquisition and mergers. China has a large pool of skilled and unskilled labor and wages are relatively low attracting global manufacturers to outsource to China. The nation’s growing middle class and other workers provide companies with an empowered domestic market that provides international companies with good profits and in return they create employment for the Chinese people. Availability of raw material is a key component of the impressive growth experienced in China’s industries. But the main cause of this development and the reason why most international companies are entering China is the political and economical reforms instituted since 1978 and which continue even till today.
Methods for Entering the Chinese Market
The Chinese market as shown by the introductory part of the paper has undergone immense transformation from the days of communism. Nonetheless, economists and business analysts will tell those willing to listen that things are not perfect on the ground and bureaucracy still continue to hamper investors and corporate bodies hoping to enter the Chinese market. In addition, the Chinese culture is very different from that of Western companies and people who ignore these differences are likely to fail as Groupon found out the hard way. The Chinese government and society at large is plagued by corruption especially when considering the immensity of the Chinese government structure. While China has a strong national government, power is also decentralized to the provinces and businesses have to deal with local businesses in matters pertaining to licensing and other regulations.
Companies therefore have to decide which system is the best for them as they try to break into the enormous Chinese market. Some companies have opted to market and export their products to China without opening branches, factories or moving their operations there. China has a huge domestic market which has continued to gain large disposable incomes and provides a fertile market for companies to sell their products (McEwen 2006). Companies that do so try to avoid the huge cost of moving operations and instead focus solely on creating strategies aimed at winning the Chinese consumer market. Others like Starbucks and retail giants like Wal-Mart have simply expanded to China and opened new outlets to move their products. Needless to say that sales are above the roof and it becomes the norm to see a Starbuck anywhere within the confines of any major city next to several other western brands.
Outsourcing has become an important aspect of the Chinese economy to an extent that it worries Western nations. Outsourcing usually involves companies moving some of their divisions or all of their operations to China and other nations. There are many reasons why China has become an attractive destination for manufacturers and this has led to its christening as “the world’s factory.” There are several companies which have moved their operations to China; among them is General Electric which moved its X-Ray department recently. Companies are able to take advantage of cheap and skilled labor, tax incentives within several economic zones, large domestic market for their products and availability of raw material for the manufacturers among others. Here companies have to register their companies or divisions and seek the necessary approval to operate as wholly owned foreign enterprises.
Before the major reforms started by Deng Xiaoping after the failure of the Mao communist strategies, foreign companies were not allowed to set up companies in China. Mao and his government believed in socialism and capitalism was not only discouraged but also prosecuted. Deng was also a victim of his progressive approaches and once was sentenced to work in a factory for being deemed to capitalistic. But reforms brought with it good news for foreign companies since they were given some leeway to enter the Chinese market. This was however limited to some special economic zones established in the coastal cities. As more reforms become possible, one of the ways which the Chinese government allowed Foreigners to penetrate the rest of China is by investing into already established Chinese companies. This has continued even today as modern reforms made it possible to invest everywhere in China without the necessity to merge or invest in Chinese companies. Modern companies and investors have identified acquisition and mergers as an innovative way to penetrate the Chinese market, since doing so circumvents several laws and gives the new owners an entity with an existing market segment and strong customer loyalty.
Reasons why Companies are entering and succeeding in the Chinese market
There are many reasons why foreign companies are working hard every day to enter the Chinese market. In addition, China has several unique characteristics which make this new entrants succeed without necessarily harming local industries. Some of these reasons include availability of cheap and skilled labor to work in factories and as executives, availability of raw materials, presence of an empowered and enormous domestic market, political reforms and several incentives offered by the Chinese government. Companies can only ignore China at the risk of becoming insolvent or irrelevant especially in this highly competitive and globalized environment. It is necessary to evaluate in fine details some of these reasons in a bid to understand the true picture motivating companies like Starbucks to enter and find monumental success in China.
Political and Economical reforms
The history of China is full of strife but remains one of the oldest civilizations in the world. Communism found its biggest ally in China and leaders lie Mao tried to make China a purely socialist nation. They adopted Karl Marx teachings which argued against capitalism and saw it as the root of all global issues. These communist leaders envisioned a community where ownership of resources was communal and people only received what they needed. This saw the government to organize the Chinese people in communal work units and the produces distributed by government using the philosophy “To each according to his own needs.” People were not allowed or motivated to produce surplus products since this was viewed as a capitalistic practice. The government also locked out all foreign investments since a communist nation was not conducive for foreign investment. Most companies were government owned and this led to over production due to corruption and inefficiency. It became clear that this system was not working and radical changes had to be effected to improve wealth, reduce unemployment and lead to over all development.
Deng Xiaoping and his government instituted major reforms which opened up the nation to both local and international investments. This began by bringing an end to communal farming and encouraging the sale of surplus products to the market or government. They also encouraged the people to invest in businesses and other venture alongside increased government investments in business and infrastructure. The Chinese government’s opening up for the nation to foreign investment spurred economic growth and has continued to drive unparalleled development. They did so by setting up special economic zones and offering several tax incentives to foreign investors. The law has been amended several times to liberalize the Chinese economy and reduce the level of bureaucracy which is inefficient and corrupt. This has allowed acquisition and mergers and encouraged foreign corporations to make forays in to the Chinese economy. Liberalization of the economy has also made marketing and sale of foreign products easier and has attracted the retail wing of international companies to focus primarily on China (China Business, 2006).
Availability of Cheap and Skilled Labor
Labor is one of the factors of production that are necessary in improving aggregate production and meting the demand of certain commodities. The cost of labor usually refers to the amount of money or compensation persons are willing to sell their skills and time for the purposes of production. The price of labor therefore affects greatly the cost of production, level of production and size of the profit margins. Economic theories have stipulated that every business has an obligation to maximize profit and the easiest way to do so is to reduce cost. Finding cheap labor becomes an incentive for companies to relocate to regions where such labor is plenty; China being the biggest labor pool in the world. China is the most populous country in the world and this vast number offers manufactures and other corporations an unending human resource and other benefits that are associated with larger supply versus demand.
Western countries have been plagued by the issue of rising wages and labor unions which have driven up the costs. The availability of unskilled labor for jobs which do not require skilled personnel have also become scarce and the available labor demanding huge wages in accordance with western laws. China offers a better alternative due to its huge labor and low wages as compared to western standards. In addition, China has invested in the education of its citizens and most urban populace is well educated and skilled in different jobs including specialized ones. Companies therefore have access to affordable skilled and unskilled labor allowing them to minimize costs and maximize profits and give total value to their shareholders.
Availability of Raw Materials
China is a country blessed with several resources which make the availability of raw materials easy. Agriculture is one of the main sectors driving economic growth and second only to industry. China is the world’s largest rice producer and is a top producer in other products like cotton. China also possesses several minerals including crude oil which is a vital component in any industrial nation. This acts as a booster for improving manufacturing by reducing cost of acquiring raw materials.
China also has developed strong relations with nations that have abundance in raw materials. China’s relationship wit Africa and Latin America means that China has access to oil supply from oil rich nations to cater to its growing energy needs. In addition, China’s trade agreements with Africa will ensure access to Africa’s rich resources. What this means for foreign companies is that they are assured of enough resources for their manufacturing needs and energy requirements. This is at a time when the world’s resources are diminishing and access to them will largely depend on trade and political relations with resource rich nations. China is positioning itself to benefit from shifts in political allegiance; conditions which might lead to great losses in other world powers.
China’s Domestic Market
China’s monumental growth especially during the 90’s was driven by exports. While China is still the world’s major exporter of processed products, a lot of changes have occurred in later years that have seen a growing importance of its huge domestic market. China instituted great reforms which saw China attract a lot of Foreign Direct Investment and alter the course of this great and vast nation. But it was clear that exports alone could not sustain China’s growth and the government looked to improve its domestic market as a way of bolstering further growth. It has taken a combination of increased foreign investments in the country and sound government policies to turn the Chinese populace into a formidable market which attracts global focus.
Increased foreign presence in China has meant an increase in employment opportunities for the Chinese people. This has translated to better wages and significant reduction in poverty levels. It is no wonder that China has the world’s fastest growing middle class, a phenomenon that is highly beneficial to international and local companies. This empowered populace with an expanding disposable income fuels demand for products, basic and luxuries, driving supply up and improving the profit margins of all concerned parties. The demand for smart phones, for instance, has grown at a higher rate than that of consumers in the United States. This is also true for auto demand and that of machinery, equipment and related products. Companies like Boeing have attributed their increased profitability from demand by Chinese companies and Chinese tycoons.
The Case of Starbucks in China
Starbucks foray into the Chinese market can be traced back to 1998 with its initial branch based in Taipei, Taiwan. It used a licensing agreement form of a local firm, Mei Da, to open a new branch in mainland China in Beijing. Eleven years later, there were over 750 branches in the region known as greater China with more prospects to expand further. The company has used a unique personal approach to the issue of marketing which has propelled it to monumental success. Starbucks continue to use the local experience to create blends that are unique to the Chinese people and create a strong customer loyalty. Starbucks also contributed the education of the local people and in conservation efforts in a nation reeling under the pollution crisis (Starbucks, 2011).
This paper can clearly show that there are many reasons why companies like Starbucks have ventured into China and there is enough evidence to show that there is room for more companies to make it in the Chinese market. Some of the factors highlighted as being responsible for these monumental successes include political and economical reforms, huge labor pool, availability of resource and a large domestic market. The Starbucks case has also shown that companies must adopt a personal approach while marketing their products or face failure in a marketing that is dynamic, diverse and able.