International Market Entry Strategies of Multinational Enterprises in China

Table of content

1. Introduction

2. Analysis of the political economy in China (Root Model)
2.1. General instability risk
2.2. Ownership Risk
2.3. Operations Risk
2.3.1. Labour law
2.3.2. Import restrictions
2.3.3. Taxation
2.4. Transfer Risk
2.4.1. Foreign exchange
2.4.2. Currency risk and stock market volatility

3. Cultural differences

4. Opportunities
4.1. Modern convenience store
4.2. The Internet
4.3. Distribution infrastructure

5. Market entry strategy and recommendations

6. Appendix

Appendix A - Pest Analysis

Appendix B - Market entry strategy

Appendix C - Country and regional comparison

List of Figures

Figure 1: SSE Composite Index

Figure 2: Hofstede‘s cultural dimensions Figure 3: GDP (US$ billion)

Figure 4: Consumer spending (CNY HML)

Figure 5: Population and Internet user comparison Figure 6: Internet users in China

Figure 7: Percentage of people that used their mobile phone for Research while in an offline retail store

List of abbreviations

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1. Introduction

While, in the United Kingdom the grocery market is saturated and growth is only achievable by gaining market share of a competitor, the People’s Republic of China (PRC) has significant growth opportunities due to a large population and an increasing middle class with a growing disposable income. However, time pressure is high, as many companies seeking to exploit the high growth rates, accordingly investments will become more expensive. Although, China has strong growth potential, it is still a relatively poor and state-controlled country with a multitude of regulations and risks.

Hence, this report will assess risks and opportunities associated with a market entry in order to facilitate Sainsbury’s decision whether or not to expand its retail business to the Chinese market, as well as provide recommendations concerning an appropriate market entry strategy.

2. Analysis of the political economy in China (Root Model)

2.1. General instability risk

Although, Chinese citizens have basic democratic rights, such as eligibility to vote in parliament elections, the political system is characterised by totalitarianism, ruled by a single party - the Chinese Communist Party (CCP). For instance, the constitution states that the National People’s Congress (NPC) has the power to appoint the president, but in practice the CCP decides on this position, which illustrates how little the rule of law can be relied on. Therefore, there is a general potential for turmoil by activists protesting against the permanent monopoly on power, however, the governmental policies are strongly committed to political stability, enforced through the domestic stability mandate of the People’s Liberation Army. The CCP is intolerant towards activists, and regularly arrests citizens, who question their unicameral legislature. Further, the media is thoroughly supervised and censored by the Party’s Propaganda Department in order to prevent political movements. External aggressions towards China are unlikely due to the increasing number of trading agreements that China has established within the past decades (Lawrence and Martin, 2013).

2.2. Ownership Risk

When the PRC was established, the CCP promised the citizens to transform China into a socialist and communist republic, in which all property would be state-owned instead of being controlled by capitalists (Joseph, 2010). Hence, a majority of firms used to be state-owned enterprises (SOEs). However, especially since 2011, when China joined the World Trade Organisation, restrictions for foreign firms have been reduced, as economic growth seemed of higher importance than the pursuit of communist interests (Lu, 2010). However, although the government is gradually moving towards a market-based economy, any foreign company that invests into China has to be aware of the risk of expropriation and collusion. Examining the Chinese Internet giant Alibaba, the asset Alipay was sold in 2011, although, the foreign investor Yahoo, who owns a 43% share in Alibaba, did not authorise the selling. It is assumed that Alibaba has colluded with the Chinese government when it took the asset from the foreign investor (Baker, 2011). Accordingly, China scored only 36 out of 100 achievable points in the 2014 corruption index, which indicates that China is among the more corrupt countries (Transparency International, 2014).

Arguably though, the risk can be minimised by a careful selection of firms to cooperate with or by entering the Chinese market as a wholly foreign-owned enterprise (WFOE). Hence, the ownership risk can be mitigated with the choice of the market entry strategy.

2.3. Operations Risk

In order to establish a business in China, an organisation has to invest a relatively large amount of time as well as money in order to gain governmental approval. The World Bank’s analysis on the ease of doing business in China implies that conditions have improved, as China climbed the ranking from rank 93 in 2014 to 90 in 2015 (World Bank, 2014).

In particular, the retail sector has undergone some fundamental changes and now only 5% of the retail sector is state-owned (OECD, 2015a). Since 2004 the Administrative Measures for Foreign Investment in Commercial Sectors have not imposed geographic limitations on the establishment of foreign retail enterprises throughout the country, and this has facilitated the expansion of foreign supermarkets, such as Wal-Mart, Tesco, Metro and Carrefour. Furthermore, foreign retailers are now allowed to sell their products through more than 30 branches according to the amendment of the Catalogue of Industries for Guiding Foreign Investment in 2015 (Invest in China, 2015). However, the reduced regulations might increase Sainsbury’s competition.

2.3.1. Labour law

Minimum wages are relatively low for a supermarket worker (US$ 245.39 per month in Shanghai, age 19, with one year work experience) and no major restrictions are imposed on night or holiday work, but the termination of a contract might be difficult in some cases (World Bank, 2014). Since 2008 the Employment Contract Law allows employers to agree on only two fixed term contracts until an open-ended contract has to be signed with the employee, which complicates the termination of the relation. The length of the fixed terms should therefore be chosen wisely. Expatriate (foreign) staff are not limited but foreign employees require a working permit, which is usually valid for only one year (Baker & McKenzie, 2010).

Although, it is not the firm’s responsibility to establish labour unions, there is a strong political pressure to establish unions, as it constitutes a financial source for the CCP as well as a vehicle to exercise political influence. For example, Wal-Mart, which was highly reluctant to allow labour unions, decided in 2006 to allow unions as it recognised that the purpose of Chinese unions is to build a harmonious society (Lague, 2006).

2.3.2. Import restrictions

The law of the PRC in Foreign Trade introduced a registration system under which foreign companies are able to import and export goods. However, the cost of importing and exporting goods substantially differs among the regions in China. While importing a 20-foot full container load costs US$ 1,026 in Beijing, it only costs US$ 615 in Shanghai. Furthermore, it requires 24 days and 5 documents (bill of lading, commercial invoice, contract between exporter and importer, customs import declaration and packing list) on average to import one container (World Bank, 2014). However, import rights do not imply that the firm has the right to distribute the goods (Baker & McKenzie, 2010).

2.3.3. Taxation

The electronic system for filing and paying taxes has been refined since 2014; however, tax rates are still considerably above the average in OECD countries (World Bank, 2014). According to the World Bank (2014), “on average, firms make 7.0 tax payments a year, spend 261.0 hours a year filing, preparing and paying taxes and pay total taxes amounting to 64.6% of profit“.

2.4. Transfer Risk

The regulations on transferring the business or its profits are dependent on the organisational form. While Equity joint ventures are subject to a multitude of regulations, cooperative joint ventures are more flexible; the WFOE is the most autonomous form and therefore is becoming more popular (Baker & McKenzie, 2010).

2.4.1. Foreign exchange

The State Administration of Foreign Exchange (SAFE) is responsible for the supervision of China’s foreign exchange market. Foreign exchange transfers are only permitted through accounts at designated banks. However, enterprises with greater than 25% foreign investment, are not as restricted as domestic firms, for instance, they are allowed to take loans from foreign institutions as long as the loans are registered at SAFE. Despite this, foreign exchange is not permitted to move freely within Chinese territory. Furthermore, the enterprise has to apply at SAFE in order to remit after-tax profits or dividends in a foreign currency (SAFE, 2015).

2.4.2. Currency risk and stock market volatility

Since mid-2009, China has deregulated its financial markets and the Renminbi has started to appreciate against the US Dollar (Deutsche Bank, 2014). However, the Chinese stock market experienced a major crash in June 2015, which is often described as a burst bubble (Hunt and Stevens, 2015). If the collapse resulted in an overall economic slowdown, it would have a detrimental effect on Sainsbury’s business.

Figure 1: SSE Composite Index

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Source: Yahoo Finance, 2015

3. Cultural differences

Considering Tesco, it becomes apparent that the organisation had difficulties in China due to cultural differences. Therefore, the cultural nonconformity between United Kingdom and China should be considered. A major difference is that business is usually based on “guan xi” ( ), which means relationship and highlights the importance of trust rather than rationality. Hofstede (2015) depicts six cultural dimensions; the dimensions that involved the highest discrepancy between the United Kingdom and China will be examined in the following section.

Figure 2: Hofstede‘s cultural dimensions

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Source: The hofstede centre, 2015

The Chinese ideology is characterised by Marxist roots and is therefore highly influenced by socialism and collectivism. This value is also reflected in the committee of seven, who form the Politburo Standing Committee and lead the country collectively rather than individually. Organisations usually have a very clear structure, in which ranks are clearly defined. The information flows “top-down” and inequalities are usually accepted. China has a highly restrained culture, in which it is of great importance to keep control in order to maintain face. Criticism is not welcomed, while showing respect and the expression of courtesy is essential in every-day-life. This attitude also implies that Chinese consumers are reluctant to criticise a product or to confess that the product’s price might be above their ability to spend. Therefore, traditional market research methods are not applicable in the Chinese market. Instead, firms are required to thoroughly observe the consumers’ shopping habits and let them interact through the Internet rather than in person (Deloitte, 2009). The long-term orientation of a country indicates how reluctant the society is to give up traditions. A score of 87 indicates that China is a very pragmatic country, which focuses rather on the future than the past. Further, Chinese have high abilities to adapt to the current situation. A strong saving culture comes along with the Chinese pragmatism (The hofstede centre, 2015). The high saving rates are partly induced by culture and partly by the Chinese social system. SOEs used to be responsible for pensions and healthcare; however, since many firms have been privatised people tend to save for their retirement in order to maintain their living standards (A.T.Kearney, 2014).

The risk of cultural differences can be minimised by engaging a cultural consultant, as well as by the choice of the market entry strategy. In a joint venture (JV), for instance, the domestic firm can provide local knowledge as well as native speakers, which is essential, due to the language barrier. A JV would also have the advantage of reducing the difficulty to find and retain local managers, as expatriates tend to return to their home country after some years. The recruitment of local managers has become increasingly expensive due to the increasing demand. Further, these also tend to exit the firm after some years of learning, as they prefer to work in a domestic firm without cultural barriers. A JV would not eliminate cultural difficulties, however, it would serve the foreign firm with an understanding of the domestic market (Baker & McKenzie, 2010).

4. Opportunities

China is the world’s second-largest economy with a GDP of US$ 10360 billion. Although its GDP growth is expected to decline, its 7.4% growth rate is still far beyond the world’s average (OECD, 2015b). Further, China is a permanent member of the United Nations’ Security Council and part of the G20s, which reflects China’s economic as well as political power (World Bank, 2015).

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