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Sainsbury’s in China. Risks, Opportunities and Strategy

Essay 2015 23 Pages

Business economics - Trade and Distribution

Excerpt

Table of Content

1. Introduction

2. Political
2.1 General political Situation
2.2 Potential political threats for Sainsbury's
2.2.1 Instability of the country and its economy
2.2.2 Distribution rights
2.2.3 State interventions
2.2.4 Enterprise income taxation
2.2.5 Import Restrictions
2.2.6 Labour

3. Economical
3.1 General Economic Situation
3.2 Potential economic threats for Sainsbury's
3.2.1 Economical situation
3.2.2. Corruption

4. Sociological
4.1 Demographic shifts
4.2 Cultural aspects, which could thread Sainsbury's business, contrasting China and United Kingdom

5. Technology
5.1 R&D Spend
5.2 Number of Internet user

6. Opportunities
6.1 Economic and direct related opportunities for Sainsbury's
6.2 Sociological and direct related opportunities for Sainsbury's
6.3 Technological and direct related opportunities for Sainsbury's
6.4 Changing shopping habits and upcoming trends

7.0 Contrasting opportunities and threats - Entrance Strategy

Reference List

List of figures

Figure 1: Share of SOE in China

Figure 2: GDP Development China and UK

Figure 3: Population Growth China and UK Figure 4: Hofstede criterias

Figure 5: Internet use as percentage of population

Figure 6: Value of e-commerce transaction

Figure 7: GDP level by region, Tier 1 and tier 2 cities

List of abbreviations

illustration not visible in this excerpt

1. Introduction

Globalisation increases the pressure for companies to expand in foreign markets in order to stay competitive in the market. Due to the fact that expansions represent high stakes strategic decisions with far reaching consequences for Sainsbury's, a detailed analysis of the market is essential in order to a) decide whether to invest in the market and, if appropriate, b) which market entry strategy is most convenient for a successful investment in China.

Comparing the business potentials of a range of countries leads to the conclusion to analyse the Chinese market in more detail in order to conclude whether the opportunities outweighs the risks. China, which is the second largest economy in the world, is due to its high population, a potentially lucrative market for retailers. The booming middle class, the increasing disposable income and the extremely positive GDP development are only a few factors, which indicates the potential of the Chinese market.

A PEST analysis is a common approach to analyse the general business environment and should be informative about the environmental factors, which could threaten Sainsbury’s business development. Therefore this report will examine political and economic conditions as well as cultural and social aspects for Sainsbury's in the Chinese market. It should be noted that some aspects are not directly related risks but should also be considered in order to successfully operate in China.

2. Political

2.1 General political Situation

Since 1949 China has been a one-party state ruled by the Communist Party of China (CPC), which has absolute control over the country. The standing committee of the politburo has the most political power in China, however never was faced with a competitive election. Therefore the political system can be categorized as totalitarian, based on the principles of a Marxist theory and (Siemons, 2010; BBC News n.d.).

The strong left-wing of the political party is reflected in a low score in individualism (20), one of the Hofstede criteria, which is an indication of a highly collectivistic country

The state is the majority shareholder of around 150.000 enterprises (3.1% of all enterprises in China), with a decreasing trend, due to the recognized inefficiency of state owned enterprises (SOEs) (Wildau, 2015a; Wildau, 2015b). However, 30% of the total assets of Chinese enterprises are held by SEOs (Xu, 2015). Due to the fact that SOEs still play an essential role in the economy and enterprises are still faced with many restrictions, it can be concluded that the Chinese market is still regulated, however, a trend towards free markets is observable.

2.2 Potential political threats for Sainsbury's

2.2.1 Instability of the country and its economy

Due to the recognized importance of the economy, the probability of drastic changes within the political leadership is relatively low. Further, the likelihood that the Chinese government become unstabilized, is due to the fact that most Chinese advocate the change and deregulations toward a more open economy is negligible. Accordingly, the risk that the government will be destabilized is at -0.55 (UK: 0.48), where the best rank is 1.45 and the worst is -2.75 (Worldwide Government Indicators, 2015; China Briefing, 2015).

2.2.2 Distribution rights

Recently, on the 10th of March 2015 the PRC published the update of the 2011 established “Catalogue for the Guidance of Foreign Investment Industries” with major changes for foreign retailers in China. Accordingly, from the 10th of March foreign retail companies have been allowed to hold the majority of shares even when selling diverse retail products such as vegetables, oil, sugar, crude oil and others, in more than 30 branches or shops (Invest in China, 2015; China Briefing, 2015)

2.2.3 State interventions

SOEs within the retail industry are relatively low. The share of SOEs is around 5% in China's retail industry. Accordingly, 15% of the whole industry revenues are gathered by SOEs (OECD, 2015). Due to decreasing regulations especially in the retail branch and the relatively small share of SOEs lead to the conclusion that the retail industry experienced a higher degree of privatisation than the average.

Figure 1: Share of SOE in China

illustration not visible in this excerpt

Source: OECD 2015

2.2.4 Enterprise income taxation

According to the PRC, state council non-residual companies are subject to pay taxes only on their income generated within the PRC. By 2012, new foreign investors usually faced a tax rate of 25% on their generated revenue (Baker & McKenzie, 2010).

2.2.5 Import Restrictions

Since the PRC published its Registration Measures in 2004, both Joint-Ventures, as well as whole foreign owned enterprises are able to obtain import and export rights for a variety of products but not for goods subject to the state trading (Baker & McKenzie, 2010).

2.2.6 Labour

Due to the fact that most companies only pay the minimum wage of about $270 per month, labour costs are low in China. Moreover, McKinsey found that labour productivity has increased from 2007 to 2012 by 11% (The Economist, 2015).

Wal-Mart was pushed by unions and the Chinese government to allow labour unions. While this is a clear indicator that the power of Chinese labourers is increasing and further points out the power of the Chinese government concerning the regulation of foreign investors (Cheng and Spears, 2006).

3. Economical

3.1 General Economic Situation

China accounts for 16.3% of the world's GDP and 10.5% of the world’s export, and therefore has the highest macroeconomic figures worldwide. The annual percentage increase of the GDP in 2014 was 7.4% (UK: 2.6%). The forecast predicts a minimal decrease, however processing at a high level. Furthermore China has a low unemployment level of 4.6% (UK: 5.6%) and a low inflation rate of 1.6% (UK: 0%) (OECD, 2015).

Figure 2: GDP Development China and UK

illustration not visible in this excerpt

The World Bank, 2015c

Further, China was ranked on position 100 of 174 (1=low corruption, 174= high corruption) in the 2013 corruption Index report (Transparency International, 2015).

3.2 Potential economic threats for Sainsbury's

3.2.1 Economical situation

The actual as well as the forecasts of the OECD and the world economic outlook predict a positive economic development, however the actual stock market development in China could be an indicator for lacking stabilisation of the economy and a potential upcoming recession. Accordingly, compared with 2012, the Shanghai stock market lost 40% of its value.

In order to avoid an economic bubble, the government has not tried to continue with the enormous economic growth, which begun in 2000 but has tried to normalise and stabilize it further (Hunt and Stevens, 2015)

3.2.2. Corruption

Voreacos (2014, para 6) noted, “Chinese companies were the least transparent and most prone to corruption of 100 enterprises of 16 different nations, including India, Russia and Brazil”. Due to the lack of transparency and the clampdown of the government concerning bribery, managers do not know how to react adequate. There are persistent rumours that Wal-Mart has bribed Chinese officials to get access to the Chinese market. According to the Forbes “it would appear impossible for a company the size of Wal-Mart to gain access to the market without following this practice [of bribery]” (Cohan, 2012, para 6).

4. Sociological

4.1 Demographic shifts

According to a number of demographic predictions the actual inhabitants of 1.360 billion will reach the peak of 1.6 billion inhabitants in 2040. Due to poverty and missing prospects in rural areas, most inhabitants prefer to live in cities, which has lead to enormous urbanization in China. Some forecasts predict that at the end of the century around 90% of the inhabitants are living in urban areas (The World Bank, 2015a; Andrieu, 1999).

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Details

Pages
23
Year
2015
ISBN (eBook)
9783668455214
ISBN (Book)
9783668455221
File size
1.1 MB
Language
English
Catalog Number
v364468
Institution / College
Edinburgh Napier University
Grade
1,7
Tags
sainsbury’s china risks opportunities strategy

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Title: Sainsbury’s in China. Risks, Opportunities and Strategy