International Business Group Assignment IAt

Hamdan Bin Mohammed Smart UniversityMay 1st, 2015.

Aldina El Halabi 200004293Ruba Sheain 101010011

Shatha Khalifa 200003256

Table of Contents

Introduction........................................................................................................................ 3

China – a cost effective country....................................................................................4

Why to offshore to China?............................................................................................... 5

Elements of national business environment that could affect the move........6

Obstacles to overcome in international business environment........................7

How will managing the company be different when undertaking international activities?............................................................................................................................. 7

Challenges in managing new employees...................................................................9

Conclusion......................................................................................................................... 10

References:....................................................................................................................... 11

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Introduction

In this project we focus on the business of manufacturing sunglasses. We are interested in benefits and implications of shifting our manufacturing processes to China- a cost effective country. We will compare it to national economic and political situation, assessing the advantages and disadvantages of both offshoring manufacturing processes to China versus manufacturing in UAE.

In business, offshoring refers to a practice of relocation of business processes from one country to another.

Globalization has triggered a change in the way nations interact in the field of trade and economy. Nowadays, not only does it allow the exchange of final goods between producers’ and consumers’ countries, but also it permits the globalization of production. In other words, it allows offshoring of manufacturing processes.

Major motives for offshoring include reduction of production costs; financial savings from lower international labor rates and lower tax rates are a great motivator for large companies. Additionally growing governmental policies and regulations in the origin country of the brand can encourage businesses to shift their processes elsewhere. Lack of resources is another reason companies do the offshoring. Great example includes United States largest companies shifting most of its manufacturing activities to Mexico, or China. Likewise major fashion brands, such as Prada and Gucci offshore some of its operations. Production of sunglasses, for both of the brands, for example, is mainly done in China. Mostly it is with goal of reducing manufacturing cost, due to low labor and taxation cost. The internationalized operations affect many economic aspects such as the structure of wages and the demand of skilled and less skilled labors in different countries. This practice is mutually beneficial for all relevant parties. Benefits of offshoring business processes:

Lower labor rates – labor arbitrage Lower tax rates Lack of resources in country of origin High cost of resources in country of origin Growing governmental policies and legislations in country of origin Access to qualified personnel in the destination country Increased volume of output Increased corporate profitability.

Developed manufacturing giants in countries such as the United States of America, Germany, France and Italy reduce their production cost, when each of its operation is relocated abroad to one of the cost-effective nations, while the low-cost countries will find it advantageous for the growth of their economies through the increment of the income. They also benefit from reduction of the unemployment ratios by creating a pool of job opportunities for their local labor force.

An interesting stratification of the nations involved in global production is:

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High Cost Countries

Germany, U.S., France

Product stream from low to high cost countries

Low Cost Countries

China, Mexico, Brazil

Technology stream from high to low cost countries

Most of the sunglasses manufacturers around the world have already offshored production to China. Luxottica, the largest manufacturer of sunglasses in the world, whose brand portfolio includes names such as Ray-Ban, Oakley, Chanel and Prada, just to name few, has shifted part of their manufacturing processes from Italy to China. It provides them with competitive advantage. It would be hard, or practically impossible for any sunglass manufacturer to maintain in the market, and earn profit without offshoring smartly. Therefor, we are considering, as a part of our assignment, offshoring the manufacturing processes of our sunglasses brand to China.

China – a cost effective country

In recent years, China has been through some major economic development becoming one of the most powerful economic forces in the world. Outsourcing and offshoring played quite the role in the transformation of China’s economy, especially so after joining the WTO in 2001, labeling China as the Workshop of the World. According to Evans China’s current outsourcing market is showing a significant growth of 30 percent per year, which allows businesses to manufacture a large variety of output, larger volumes at significantly lower cost, and to offer prices 30 percent to 50 percent lower than competition that does not outsource their manufacturing process. (2014). “Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role” (Central Intelligence Agency, 2015).

Why to offshore to China?

Becoming an economic force in the world, partly due to outsourcing capacity, has created a great environment for businesses to relocate their manufacturing processes to. Large skilled and cheap labor pool is probably the main advantage China can offer to firms looking to relocate the manufacturing. Affordable lands and factories, as well as favorable governmental policies and laws create excellent business environment.

Following business environmental factors make China a great destination to offshore manufacturing of sunglasses to:

Large labor pool – as largest nation in the world with population of over 1.357 billion (The World Bank, 2013) China has a large labor base of 813.5 workers and unemployment rate of 4.3 percent (Overby, 2010)

Cheap labor – average wages are much lower in China comparing to the rest of the world ranging from 8 to 18.7 RMBY per hour across different proveniences, which equals to 1.29 to 3.01 US dollars respectively.

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Skilled labor – China has a large pool of skilled labor; one of China’s best strengths in offshoring is a large talent of skilled labor, technicians and engineers (Wright, 2009). Adult literacy rate in China is 96 percent according to UNESCO.

Cheap resources – comparative to UAE whose natural resources are scarce and relatively expensive, China presents manufacturers with a significant cost-reduction possibility.

Affordable lands, properties and factories – high prices of properties in UAE represent a large cost for businesses. Large properties suitable for building plants and factories are relatively cheap in China, when compared to UAE.

Strong infrastructure – China government has made large investments in modern transportation systems, telecommunications, power supply, and high-speed broadband.

Low tax rates – China government in 2009 made efforts to reduce tax rates and implement subsidies in order to encourage offshoring practices.

Strong business and economic environment – China’s Business and economic and environment index is 5.6.

Governmental support for outsourcing and offshoring – government has developed several regulations and projects that encourage outsourcing and offshoring. They have done so by:

oFunds and incentives to improve technical skills though trainingoFunds and incentives to upgrade quality standardsoImprovement of copyrightsoIntellectual rights and patents laws and legislations developmentoLoans and credits as an encouragement for outsourcing and offshoring firms

Fewer and more lax workers’ rights laws. Fixed currency to a basket of economies. Few environmental legislations and lax enforcement of it – UAE has more

environmental laws more rigidly enforced, such as Waste Management Law (No. 21), Law No. 16 and similar.

Location – relative proximity to UAE means lower shipping costs.

All of these characteristics make China a suitable country to shift manufacturing process of sunglasses. Due to cost reduction, increased production volume becomes possible, as well as increased profitability.

Elements of national business environment that could affect the move

While UAE economy is quite developed, China still has a large advantage at lower cost manufacturing processes. UAE has smaller labor pool, with population of 9.5 million, according to UN estimates (Central Intelligence Agency, 2015). Not only does UAE have significantly smaller population in comparison to China, but also its workforce has a significantly higher turnover, due to the fact that almost 80 percent of population is expatriates, and country has unfavorable naturalization laws. Also, UAE has higher average wages. UAE resources, apart from crude oil, are relatively scarce and more expensive. Also, lands and properties are quite expensive, making it hard to build large manufacturing plants and factories. UAE, particularly Dubai as heavily hit by crisis, and is still recovering from it,

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making a harsh environment for businesses to thrive. Further, Expo 2020 that Dubai will be hosting is further to push UAE toward service-centered economy. All of these factors are encouraging for businesses to shift their manufacturing processes elsewhere, or China in this particular case. However, UAE economic environment has few elements that show advantage over China economic environment elements. Those factors include:

Scarce labor law and legislations – UAE has no laws set to protect foreign workforce, nor does it have set minimum wage. Companies find that very favorable.

Strong business environment – economic situation is picking up in UAE, making it a business hub of MENA region. It has high per capita income, and favorable annual trade surplus. However, economy is mainly depended on oil resources, and service sector, particularly tourism.

Strong infrastructure – UAE has in recent years heavily invested in modern infrastructure, fast broadband, strong telecommunications and power systems. UAE has the strongest infrastructure in the region.

No taxes and 100 percent foreign ownership in Free Trade Zones – as an incentive to foreign investors UAE has opened free trade zones, such as Jabel Ali, RAK Freezone, and Fujairah Freezone, as examples.

Fixed currency tied to US dollar – UAE Dirham is tied to a dollar making it a very stable currency.

Government incentives – UAE provides large incentives for manufacturers; they allow 0 percent customs rate (no customs) on imported raw materials. UAE nationals are encouraged to keep their manufacturing processes domestic by being offered free land, and large investments to help set up plants and processes.

These factors encourage domestic manufacturing, and could possibly affect the company intentions to offshore their manufacturing processes elsewhere.

Obstacles to overcome in international business environment

China offers great business environment and opportunities for outsourcing and offshoring of manufacturing processes for companies who are looking to increase profit through cost reduction. However, there are some elements in China’s business environment foreign companies should look out for:

Labor wages are slightly increasing – there is consistently a lower number of cheap workforce willing to work long hours for low wages. (China Labor Bulletin, 2013). With an increasing rate of China’s population gaining higher education, the salaries are seeing slow but sure rise.

Low English language proficiency – although in increase, only low percentage of China’s population speaks English.

Bad PR – recent and often product recalls due to quality and safety issues gave products manufactured in China bad reputation.

Complex legal system – China laws are often quite complex and hard to understand. Corruption – high corruption rate still deters large number of businesses. Currency appreciation and lower stability – previously closely tied to dollar,

nowadays the currency is tied to economic basket, making it slightly less stable. Cultural differences – most of the businesses find the differences in cultural values

and beliefs to be a hard obstacle to overcome when dealing with China.

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Intellectual Properties and Patents Rights Protection – China’s government is making an effort in this field by setting laws and legislations in place. However, those are not rigorously enforced, and the problem for most companies persists, especially when there is sensitive data involved.

Quality concerns – due to low cost of resources and manufacturing processes, customers equal manufacturing in China cost strategy with low quality. Lack of standards sometimes does in deed lead to low quality.

Increased international competition – by transferring processes abroad, with transfer of know-how, it is not uncommon for foreign competition to arise.

All these factors in foreign business environment present company with significant challenges to overcome in offshoring strategy.

How will managing the company be different when undertaking international activities?

Managing international business operations is a significantly more difficult task than handling a local business is. Once dealing in international business environment, business is much more exposed to the macroeconomic environmental factors than before.Below are some elements that make the international business management more complex:

Diversity in workplace – when shifting operations abroad, companies face difficulties in managing diverse workforce.

Different cultural values and beliefs – shifting processes abroad means conducting business in foreign environment, and challenges with adapting to foreign beliefs and values, which often vary from national values. China and UAE have significant differences in culture, which have to be overcome in order to conduct business efficiently.

Less mobility of factors of production Diversified customer markets Differences in business practices and regulations – Companies must adopt to foreign

policies and regulations in order to succeed in foreign business environment. Variation in political systems – political systems of China and UAE vary

significantly. People’s Republic of China has a socialist single-party government, while UAE is a Federation of & hereditary monarchies. When offshoring companies must adjust their business practices in respect to both of the political systems.

Different currencies – difference in currencies posses difficulties when recording transactions and financial state of company.

Quality concerns – often the commodities carrying label Made in China are perceived of inferior quality due to lower costs of production.

Brand reputation – national brands often have stronger reputation, since they present symbols of national production. Shifting processes elsewhere can lead to brand dilution.

Different business cultures – business model has to be significantly modified to tackle international business challenges and utilize opportunities.

Communication issues – cultural misunderstandings due to miscommunication can arise when conducting business abroad. More complex the issues, bigger chances for miscommunication to arise.

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There are some variations between managing international and local business, in the following aspects:

Qualifications -the span of domestic trade is more simple and limited when compared to the scope of international business which includes taking into consideration the diversified cultures, the hosting country political and economic system, the governmental regulations, this needs different and higher qualified personnel to run an international business benefits.

Communication - wider range of benefits/risks will be encountered in an international business activity; all these must be managed and identified clearly for the stakeholders and relative parties, through the use of advanced technologies and effective communication techniques, on continual basis.

Market Fluctuations - when running an international business, a company must be skillful and capable enough to study and classify the seasonality in every country they operate in, to avoid losses and use the fluctuations positively to increase their profits.

International Formalities - many formalities must be completed to establish an internationally based business.

Technology - International business should be up to date on the technological advancements in all the regions they operate in, to secure high quality production.

Political Associations - operating internationally obliges all parties to respect one another political decisions and situations, internationally operating business owners must be always ready to adapt to the possible changes.

Business Culture Understanding - not only the employees and stake holders must be tolerant to the different cultures involved in their international business, but the whole organization culture, values, vision and mission must be adjusted accordingly, the employees of an entity in an international frame work lives in a different culture, which makes it vital to the business owners to understand their culture and custom the working environment based on it, so that the employees’ production will reach to the peak.

Environment - international business owners must take into consideration the health status in the hosting country, the crime and security, safety and corruption, all these factors must be identified, assessed and analyzed to decide whether establishing a factory in a particular country will be beneficial in both the short and long run.

Operation Management - all operation management levels must be taken to an international level, such as creating an international customized manufacturing strategy that suites the hosting country, global sourcing of materials and inputs, the multinational structure of business organizations, enhanced telecommunication networks, and cross-cultural variations in arranging the workplace create new opportunities for international business management.

Companies must carefully consider all elements of international environment, including threats and opportunities, not only domestically, but also internationally. This duplicity calls for careful consideration when forming a business strategy to conduct international operations.

Challenges in managing new employees

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Shifting and conducting business operations, or business to international environment poses significant challenges for companies. More so, challenges are pronounced in managing employees abroad.

This is what managers may face and how they can overcome these problems: Control challenges – managing and controlling employees is a challenging task for

most of the companies, especially so in international environment. To ensure efficiency and effectiveness strict control performance measures and practices must be put in place. Regular summaries, reports, as well as performance reviews are necessary. Also, regular video conferencing and visits are a must to ensure proper functioning.

Cultural differences - every country has its own culture, which is a set of values, beliefs, and rules held by a group of people. Therefore, managers must do their best to understand how do the people in this new culture think, and why they behave the way that they do; managers can accomplish that by adopting cultural literacy, which will improve managers ability to manage their new employees in a new culture or country. Also, managers must keep in mind that each country has different religions, so managers must respect it, always being mindful of different holidays and different practices and customs. Of course managers must make sure the way they behave with foreign employees won’t offend their religion, nor their values.

Language barrier - when moving to a new country that has a totally different language, managers might find it hard to communicate with their new employees. Managers can overcome this problem by hiring a reliable translator who can communicate the strategy properly to the employees. It is important to create a high level of clarity when communicating the strategy.

Body language - managers must understand that different cultures have different gestures and facial expressions with different meanings; they have to be careful with gestures and body symbolism in order to not be misunderstood or offensive.

Different Manners and Customs - each culture has its own manners and customs, and managers must understand those manners and customs because it will make it easier on them in managing operations in different cultures.

Managers must take care of all of these challenges and try their best to overcome them, because by doing so they will show their employees that they respect and appreciate them, which will lead to satisfied employees that will do their jobs effectively.

Conclusion

Companies worldwide have successfully conducted offshoring for decades now. Despite some of its disadvantages, companies hardly can manage to achieve competitive advantage without outsourcing. In the world where customers are looking for better quality, and cheaper goods, offshoring presents businesses with opportunities to utilize international resources to achieve lower cost, higher output volume, better quality, competitive advantage and increasing profit. With all the changes that are practically erasing national boarders, and making the world a small village, people, organizations and countries must adapt and accept

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globalization and what it does. Globalization made a huge change in the way we live; it made it a bit easier to get what we need just by pressing a button, and as we said before organizations took a good advantage of this not by only selling products overseas, but also by moving the factories to other countries with cheaper costs. Globalization also made it easier on organizations to improve their work quality, by getting access to technical expertise, access to different, and cheaper resources. Of course globalizations opened new market opportunities for organizations all around the world, and we believe that organizations must take good advantage of it. With most of the sunglasses manufacturers offshoring their processes to China, after careful analysis, we are now able to understand the benefits and challenges of shifting manufacturing processes abroad. In highly competitive world, companies must calculate the risk, utilize resources, improve processes, and reduce costs in order to be able to achieve profits making offshoring a way to go.

References:

Central Intelligence Agency. (2015). China. In The World Factbook. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

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Central Intelligence Agency. (2015). United Arab Emirates. In The World Factbook. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html

Evens, C. (2014). Manufacturing In China Can Give Your Business Competitive Advantage. Forbes. Retrieved from http://www.forbes.com/sites/allbusiness/2014/02/07/manufacturing-in-china-can-give-your-business-the-competitive-advantage/

The World Bank. (2013). Retrieved from http://data.worldbank.org/country/china

Overby, S. (2010). Offshore Outsourcing: 24 Ways To Compare India Vs. China. The CIO Agenda. Retrieved from http://www.cio.com/article/2413117/outsourcing/offshore-outsourcing--24-ways-to-compare-india-vs--china.html

Wright, N. (2009). China’s Emerging Role in Global Outsourcing. China Business Review. Retrieved from http://www.chinabusinessreview.com/chinas-emerging-role-in-global-outsourcing/

Wages in China. (2013). China Labor Bulleting. Retrieved from http://www.clb.org.hk/en/content/wages-china

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