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Case StudyMarket Entry Strategy China

Week 9

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Business in ChinaRisk or Reward?

China’s gradually opening economy, low-cost labour and 1.3 billion population constitute huge untapped markets.

But reports of politically motivated violence are on

the rise in China, and foreign companies are struggling against an ever-changing regulatory environment, serious copyright infringement problems and unmet profit targets.

“Right now, over 350,000 multinational corporations are operating in China, but less than 30 percent have made a profit”

Dr. Usha Haleyprofessor of business management at the University of Tennessee, Knoxville.

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Strategic Plan

What elements should be considered?

Which are most important?

Is the current product OK as it is?

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The Marketing Mantra

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Internal distribution

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Import and distribute

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Consider Strategy

How the Chinese "view" the foreign firm's product entering the market

Demand for its product Future growth of demand for its

product Firm's resources Commitment to entering this market Timeframe to enter

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Is China right?

If the plan is to penetrate the Chinese market

Could operations be controlled from elsewhere in East Asia to lessen the cost?

See cost comparisons (Vietnam - open for business?)

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3 Main Strategies

Export via a Hong Kong distributor

Export via direct channels in China

Set up a joint venture

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Advantages & Disadvantages Market entry via a Hong Kong Distributor is probably the easiest and

quickest way to enter China but may be the least desirable in terms of overall market penetration

Market entry via direct channels in China is probably more difficult and time consuming than entry via a Hong Kong distributor, but in time may be better off for a firm's overall penetration. This option may be a good mid-term strategy

Market entry via a joint venture of some kind may be more difficult and time consuming than the other two export strategies but probably yields the best overall penetration of China's market

But note Because China is a huge, fragmented market firms may need to utilize

more than one of the above strategies to adequately penetrate the market

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Potential risk areas

The size of the country and the differences between the regions

The Chinese economic situation and the infrastructure for distribution

Lack of knowledge about the market Chinas legal system still imposes

restrictions for Foreign Investment Enterprises in marketing and distribution (trade, wholesale, retail) for imported goods and also for goods made in China

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A failure to research The market survey of a German manufacturer for

household appliances showed, that there would be only three Chinese competitors within China.

Later they recognised, that this were only the Chinese competitors, who operated nation-wide, but there were a lot other manufacturers operating only on a regional basis.

The latter manufacturers have very good relations to local authorities which are in charge for technical approval of the goods manufactured by the German company

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Obtain regional knowledge Every region has a different characteristics which can be

divided into the following categories: Dialect Mentality Geographical location Population density Infrastructure Industrial structure Product knowledge … which can have a huge impact on marketing and distribution.

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Distribution methodology Import if there is..

Risk of transfer and abuse of know-how Low sales figures don’t justify investment Additional products to locally manufactured ones

Every company involved in I/E needs a special license (“import license”) issued by MOFTEC

Note Import normally leads to higher prices and lower

profit margin

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Pros & Cons of import methodologies

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Strategy should consider these elements

The objectives of your company (short term, long term) Nation wide or regional presence Availability of the kinds of products you offer Competition The goods itself Costs of distribution Additional services (repair, after sales service) Required control over the distribution process Customers requirements

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Seven step strategy

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Import or Manufacture?

Need to consider Local competition/MNE competition Distribution networks COSTS! Availability of means of production Bottom line must be profit!!!

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Examples of entry modesCoca-Cola

Coca-Cola re-entered the Chinese market in 1979. Over the past 20 years, it has established, with its Chinese partners, 23 bottling plants and 27 production locations. Total investment adds up to more than 1.1 billion U.S. dollars, and local employment reached 15,000

The idea is to become a local marketing company, taking advantage of the production capacity already in place, and at the same time seeking new locations for production to build the business in the western part of the country

The company is now moving its division office from Hong Kong to Shanghai, as part of its new strategy for the development of its business in China. It has also developed new soft drinks like ice tea that some local consumers favour

China could someday become Coca-Cola's largest market in the world

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Examples of entry modesFord

Ford started cooperation with Jiangling Automobile Co., Ltd. in August 1995, and now claims 30 percent of its holdings. The company is Ford's first auto joint venture in China

Ford's long-term objectives to establish strategic cooperation ties with Jiangling Automobile Co., Ltd. will not change and the American company is willing to make greater contribution to the development of China's automotive industry

Jiangling Automobile Group, the parent company of Jiangling Automobile Co., Ltd., is one of China's 520 major enterprises and is capable of manufacturing 60,000 automobiles per year

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Examples of entry modesKentucky Fried Chicken

See Case Study

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Is entry even advisable?

See Extract Japanese Carmakers Shouldn't Race

into China