China Case on IB

7/30/2019 China Case on IB

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China Case

International Business

Hamneesh (08) PGDM-Exec

4/22/2013


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China Case International Business Hamneesh Roll No.8 PGDM Exec


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Year Political Economical Legal

1970-1980 China in political terms

is a communist regime

in which monopolistic

communist partydominated the state.

There was a general

acceptance that the

state as a 'father

figure' should guide

the decisions of private

as well as public

bodies. In 1972, China

indicated to UN that

Hong Kong will be

regarded as part of

China. In the Chinese

case, major political

changes came after the

end of Mao Zedongs

rule in 1976. His

vaunted rural peoples

communes collapsed,

and vast rural areas

reverted to more

traditional ways.

Moreover, the flood of

policies to reorganize

the Sovietstyle

ministries and state-

owned enterprises

(SOEs) began a process

of institutional change

with profound

implications for central

control and

bureaucratic planning.

The near explosion in

telecommunications

and access to foreign

people, knowledge and

cultural values

dramatically altered

political and social

discourse.

The beginning of new

policy of reform and

opening to the outside

world started in year

1979. All the reforms

Late 1970s saw a

thriving market

economy in China

despite the survivalthere of monopolistic

communist rule.During

that era china was

predominantly an

agricultural economy.

Till 1978 China had nolegal system.Since 1979, when thedrive to establish a

functioning legalsystem began, morethan 300 laws andregulations, most ofthem in the economicarea, have been

promulgated. In 1979,

Government issued

law which governed

the joint venture

operations.


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were led by Deng

Xiaoping . Major

changes also include

decollectivization of

agriculture.

1980-1990 Three foreign investedenterprises are

established in China. In

early 1980s urban

areas undergo

comprehensive

enterprise-centered

reform measures. As

China'sindustrial sector

advanced, there was

increasing movement

of the population tourban areas. China's

population itself had

surpassed 1 billion

people by 1982 and

was experiencing an

annual rate of increase

of 1.4 percent.During

late 1988 China made

assurance to US that it

will cease silkworm

missile sales to Iranand US continue to

make desired

technologies available

to China. In February

1988 Beijing China

achieved its long-

sought goal of

establishing diplomatic

relations with Uruguay,

one of the few nations

that still had state-to-state ties with Taipei.

With this

accomplishment China

increased its

diplomatic exchanges

to 134 countries, while

Taiwan's official

representations were

reduced to 22. In the

year 1988, riots

erupted in China and itcaalled for an

When the economicreforms began to take

hold in cities in the

mid-1980s, the

incomes of urban

residents surged ahead

of those in the interior

villages. In order to

attract foreign and

private investors,

provincial

governments reducedthe business levies that

earlier had provided

subsidies for the

farmers. While the

results varied from

place to place, many

peasants abandoned

their farms for the

illusory promise of

employment in

the towns, and thosewho remained took

their grievances out on

local officials. In some

instances, these

officials even

encouraged the

villagers to protest

against their higher

authorities. In parts of

southern China,

especially Hunan,Jiangxi, Sichuan, Anhui

and Guangdong

provinces,

thousands of peasants

repeatedly stormed

government buildings,

pleading

for lower taxes and

fees and accusing the

officials of corruption.

Thesituation worsened as

In 1982, the NationalPeople's Congress

adopted a new state

constitution that

emphasized the rule of

law under which even

party leaders are

theoretically held

accountable. This

reconstruction was

done in piece-meal

fashion. Typically,temporary or local

regulations would be

established and after a

few years of

experimentation,

conflicting regulations

and laws would be

standardized.


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independence of Tibet.

Many People were

killed and some got

badly injured during

the riots. During this

decade state councilwas restructured and

streamlined. Fourteen

ministries were

dissolved and ten new

ones--the State

Planning Commission

and ministries of

personnel,labor

materials,

transportation, energy,

construction,aeronauticsand

astronautics industry,

water resources, and

machine building and

electronics industry--

were established.

Many of the ministries

that were dissolved

were converted into

business enterprises

responsible for theirown profits and losses.

urban unemployment

forced tens of millions

of

rural immigrants back

to their home villages

and police repressionfailed tostem the rising

tide of discontent.

Laid-off workers are

offeredone-off

compensation without

pensions or welfare

protection. In addition

tens of millions of

workers had their

wages cut or

postponed. Primarycause of urban unrest

were widening gap

between rich and poor.

1990-2000 The Communist Party

survived the critical

period after 1989 and

has been revitalised

since then instead of

tumbling into decay.

Unlike so many other

post-Communist

regimes,its elites were

not force out of powerbut on the contrary

consolidated their rule

over the last decade.

Throughout the 1990s,

China had sought to

initiate negotiations

with Taiwan and to

solve a number of

border disputes. The

guiding principle was

to maintain a lowposture, solve external

Shanghai Stock

Exchange was

established. China

renewed economic

liberalization from year

1991-1996. it had

worked doggedly to

join the World Trade

Organization (WTO)

and to host aSummer Olympics.

In the year 1994

Administrative

Procedural Law came

into power. This law

allowed citizens to sue

officials for abuse of

authority. In addition,

the criminal law and

the criminal

procedures laws wereamended to introduce

significant reforms.

The criminal law

amendments

abolished the crime of

"counter-

revolutionary" activity.

In the early 1990s the

People's Republic of

China's trademark law

had been modified andthen offered significant


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conflicts and avoid

wars in decade to

come. Yet Chinas

international

objectives enunciated

at the onset of the1990s did not work out

as planned. With

unsettling regularity,

USChina relations

flared to near

hostilities as Chinas

Taiwan policy faltered

in the wake of rising

independence forces

on the island. Within

the mainlandpopulation, increased

nationalism weakened

the commitment to

stability and growth if

that meant vitiating

the one-China

principle. Maintaining

the domestic priority

may yet prove to be

the weak link in

Chinas policy-making.Government decided

to privatize most of the

enterprises.

Government also

decided to

decentralize on many

fronts and it gave more

political authority to

provinces . All these

reform project were

taken over by JiangZemin. Jiang also

curtailed many of the

former

decentralization

policies

protections to foreign

trademark owners. The

APL also provides that

only those laws

adopted by the

National PeoplesCongress or its

Standing Committee,

administrative

regulations

promulgated by the

State Council, and local

regulations adopted by

the local peoples

congresses may

impose administrative

approvalrequirements.

Individual ministries or

agencies (central or

local) do not have such

powers except in

specified

circumstances.

2000- 2013 Jiang was the one who

pushed through the

official acceptance of

private entrepreneurs

as regular Party

members in 2001,thereby seriously

Hu Wen administration

regulated and

controlled the

economy.

New Economic Policy

in 2004 led to abolitionof tax on agriculture.

In 2003 Administrative

Permission law was

enacted. The APL

requires all laws and

regulations that

subject any civil act toapproval requirements


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Country Analysis of China

Opportunities in China

Chinas economic growth has been very good for quite some years. MNEs should utilize the

chinese resources for the profitability of the firm. Biggest leverage china has is its

inexpensive labour as compared to other parts of the world. As far as consumer markets are

concerned, MNEs shouldunderstand Chinese demographics when reaching out to the

potentially lucrative Chinese markets. China has a population of 1.3 billion people but 60percent of that 1.3 billion, or 780 million people, are classified as rural farmers who are not

likely to be part of marketing ventures. Another 25 percent of the Chinese population is

classified as "workers," non-rural people who run the gamut from minimum wage jobs to

skilled laborers who earn a decent wage by Chinese standards. The Chinese working class

may be a source of revenue depending on the product or service offered. The Chinese middle

class amounts to only 8 percent of the population, with another 4 percent classified as

businessmen and senior managers and 3 percent work for the government. But this 15 percent

has complete control and most of the money in China, and totals nearly 200 million people.

Some of the key sectors which show opportunities in China are as follows :

1. Automobiles and Auto Components Sector :

knocking the CCP's

proletarian-peasant

tradition and class-

struggle ideology.

Professionalisation,

efficiency, ideologicaladjustment and the co-

optation of the most

modern segments of

Chinese society into

the Party are all

considered political

reforms in the context

of economic

developmentalism,

and as such they are

understood as creatingnew bonds between

the people and the

Party-state that

strengthen the latter's

legitimacy.

to be published.


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Automotive industry in China has seen a spurt of growth in the recent few years.

Foreign auto manufacturing companies should look for investment in automobiles

sector because of the growing middle class of China. Even tractor manufacturing

companies should look for opportunities in tractor market as 60% of the people in

China are farmers. As the China has mastered the art of mass production therefore

global auto manufacturing companies should look out for auto components based outin China. As these parts can lower down the cost of vehicle and companies should

leverage on this cutting edge advantage of China.

2. IT and IT enabled services Sector :

In China around 900K IT and electronics engineering students graduate every year. IT

companies can leverage on these opportunities and use this talent pool to take care of

the Chinese clients as well as Taiwanese clients.

3. Real Estate, Construction and Infrastructure :

As China is focussing a lot since 2010 Asian games. The high end office leasing

market in northern and southern China experienced rental increases and high

occupancy rates, which were mainly driven by growing demand. Two and Three tier

cities in China are developing and trying to keep pace with the developed cities and it

is a good opportunity for MNE to invest in the infrastructure sector.

Political Risks in operating business in China

1. There is a constant conflict between state and central government which affects the

business of foreign companies.

2. Chinas rapid growth has caused raised many environmentalconcerns. China's rapid growth

causes many environmental problems, and citizens are concerned about health problems

caused by pollution. Greenhouse emissions are very high in China. In case government

changes its policies related to it in future it can be a trouble for business houses.

3. Chinas political and legal systems foster time consuming busywork and tend to stack the

odds against foreigners who are bold enough to forge ahead in the face of an elaborate

bureaucracy, a fledgling legal system and a context of pervasive corruption.

4. Corruption in China is a challenge for the foreign companies. Many foreign companies

routinely battle bribes and attempts to steal property while struggling to establish clear

titles to land and physical equipment.

5. Both Chinese and foreign companies suffer as a result of weak IP protection in China.

According to US government statistics, about 20 percent of consumer products in China are

counterfeit. Despite vocal and policy support from the PRC central government, the concept

of IP sovereignty has taken a long time to filter down to the provincial and local levels.


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Economic Risks for MNEs in China

1. Problem of State Capitalism : a large role for state-owned companies; an even larger

role for state-owned banks; resource nationalism; import-substitution

industrialisation; and financial protectionism and controls on foreign direct

investment

2. With the growing inflation and improving standard of living of middle class, Chinese

workers will demand more wages which will not let foreign companies to have any

sort of competitive advantage with their operations in China.

3. Slowing of growth can be a problem for foreign companies which are looking

forward to do business in China.

4. Chinas membership to WTO requires it to accept the global trading rules on

protection of intellectual property rights and trademarks which has been the

concern for many MNEs.

Catastrophic Risks for MNEs in China

China had historically been frequently hit by natural hazards. There are lot of catastrophic risks

which can stifle the operations of MNE in China and these catastrophic risks include Earthquakes,

droughts , floods and hurricanes.

Government of Chinas present perspective on foreign companies

Chinese government is urging foreign companies to play a key role in the development of the nation.

In the end of 1970s Chinese leadership began to change its long time thinking that foreign contract

would disturb the nations political system and pollute its culture. Since then it is working on the

making business environment congenial for the foreign nations. Today China has worked on freemarket principles. As of now, China has tried to amend its intellectual property rights related issue

which was the biggest concern with the MNEs looking forward to operate in China.

For an MNE (based of your choice) which is not currently present in

China, Outline the China Strategy for that company (i.e Business Model

for China)

For an instance a tractor manufacturing company of India lets say TAFE or FARMER wants to enter

into the China market in order to expand its business. It considers China market as a huge business

opportunity as in China 60% of the population works with the agriculture sector.

Entry Level Strategy can be to go for joint venture with any of the big farming equipment

manufacturing firm of China rather than going for direct imports as this will give cost advantage to

the company as local company can access local raw materials and produce tractors at competitive

prices. This can also be used to export to neighbouring countries which are price sensitive.

Sourcing can be done with the help of local partner as it will provide cheaper raw materials. As China

follows collectivist approach and Chinese officials prefer to establish both formal and informalrelationship within the business community, with the joint venture less intervention of government


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is expected and it can build trust with the government bodies. Company can understand the Chinese

customers better with the help of local partner which in turn will help to frame marketing strategies

better.

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