Over the next few weeks I will blog about some of the considerations that firms need to think about when doing business in China. The example is based upon a mobility scooter factory located in Shenzhen. This framework was developed by Laubie Li from UniSA and is based upon his diagram.
Doing Business in China Diagram
#1 Industry Factors
Chinese industry is usually lo-tech importing high end component to install into machinery made in China. However, companies are starting to move into more high-tech a part of a planned Government strategy to develop more high technology products (Liu, 2007, p. 35) in China.
Similar to other Chinese enterprises the high technology components are not produced in China, but rather imported (Sull & Wang, 2005, p.5).
An example is mobility scooters. There are over 650 suppliers of mobility scooters in China with 500 in Shanghai alone. Most of the Shanghai locations are sales offices with factories in Guangdong. Guangdong also has another 113 Scooter companies based in the province (www.alibaba.com, 28/4/10). This means that there is competition for staff with so many companies competing in the area. The opportunity for foreign businesses is that with so many producers it should be easy to switch supplier providing that the mobility scooter build and the battery is identical to that being used by Crescive. Therefore switching costs will be low.
#2 Market Factors
A major factor of doing business in China is the market. By using our mobility scooter example we can unpack this more. Many factories are located in Shenzhen in the South East corner of China. In 1980 Shenzhen was one of the four original special economic zones (Qian, 2000, p.155) developed by Deng during the reform period.
As Shenzhen was one of the first areas in China to open up it has considerable numbers of migrant workers from rural areas (Magni & Atsmon, 2010, p. 31). 93% of the 16 million population are migrant. There is a risk that if conditions and wages increase in their home cities, these staff may be flight risks leading to reduced staff production capacity for local factories.
In addition the future population of Shenzhen is predicted to fall by 7.5% in 2015 (Magni & Atsmon, 2010, p. 31). However GDP is predicted to remain buoyant with a growth of 4.3%.
The GFC has hit hard in areas such as Shenzhen due to the reduced demand for exports destined to developed nations. This has lead to reduced wages for workers and social unrest including mass protests in this region (Zhang, 2010, p.35).
Chou (2010) says that the best opportunities in China are west. Migrant workers are from these regions and if they can find suitable work in their homelands then there is a tendency for them to remain. The key opportunity for foreign companies is to plan for relocation into a western city such as Central or the Yangtze Mid/Lower areas that have both population growth and good consumer confidence (Magni & Atsmon, 2010, p. 30-31).
#3 Political Factors
China and Australia have been in negotiation for a free trade agreement (FTA) since 2005. It has stalled mainly due to agricultural issues. Australia is generally in the top 10 trading partners with China (www.mofcom.gov.cn, 2010) and even with disagreements in some areas (such as Rio Tinto) the relationship is generally friendly.
However there are three risk factors for foreign firms – potential social unrest, Governmental policy change and the interpretation of policies and laws.
There is a growing divide in the nation’s wealth between rich and poor and this can lead to social unrest (Zhang, 2010, pp.30-31 & 34). This divide is also between cities and the poorer countryside. Saich and Shahid (2008, p.195) believe that this growing divide in addition to the social and economic problems faced by people could lead to social unrest in the future. According to Zhang (2010, pp. 84-87) technology, such as the internet is allowing people to become organized as well in regards to social problems and the gaps between groups of people. The Government has recognized this issue and has introduced reforms to counteract the GFC (Political Risk Services, p.19; Zhang, 2010, p.34) and social pressures. These reforms include upgrading the health system, health insurance and other social services. There have also been reforms in the countryside with increases in payments to farmers and incentives for people to stay in their homelands (Chou, 2010). As a result people in the west of China have more income and are becoming a target market for MNCs to sell into.
The other risk is that at times the Chinese Government may change policy and this can either affect the industry you are purchasing from or increase tariffs on components purchased off shore, such as motors. In China the Government is the pace-setter and guide for all enterprises and usually policy change occurs with little notice (Haggard et al, 1991).
The final issue is that central government policies and laws are subject to local interpretation and enforcement (Sull & Wang, 2004, p.4; Zhang, 2010, p.33) meaning that companies in Shenzhen could be operating under different rules than another manufacturer in the nearby city Guangzhou or another province.
Next time we will cover:
* Legal Factors
* and Financial Factors