China’s Economy and Growth Potential

Discuss about the Determines MNC Subsidiary Performance.

China is the most populated country of the world with population of 137 Crore, and it is undoubtedly one of the fastest growing economies in the world. The company had a GDP of 11.2 Lakh crore in the year 2016, which makes it one of the most versatile markets to rest of the world (Grant, 2016). This is one of the strong reasons plethora of Multinational companies are setting up there business in China to exploit the endless opportunity of Growth. JWT entered the Chinese market in the year 1990 with its first office in Beijing, a year later it opened up an office in Shanghai and presently the company is located in almost all the business cities of China (Crane & Matten, 2016).

JWT is one of the largest advertising companies in the world and ranks at number 4 in terms of marketing communication network. The company which is owned by WPP group has evolved over the years from traditional advertising firm to an integrated marketing communication which derives almost half of its profits from promotion, marketing, trade marketing, event management, customer relationship management and digital services. According to the projections, there would be around 270 million Chinese consumers with good disposable income; hence the future of JWT in China looks extremely promising. The company has been doing really well by adopting to the best practices to work in China. Similarly, LEGO which is a privately owned company with headquarters in Denmark has been doing exceedingly well. The Danish Toymaker company has teamed up with multiple companies to penetrate the Chinese market.

The purpose of the report here is to identify the top three success factors for foreign owned companies to succeed in China in the longer run. The report will also highlight the top qualities which a CEO needs to be successful in China and what are the new avenues of development foreign firms can seek to tap into the China’s new national policies. Towards the end certain recommendation will be suggested for change, improvement and learning from the discussion.

The Chinese economy is one of the largest economies of the world however the GDP has been falling since 2010. China over a couple of years have made efforts to move from investment driven economy to consumption based economy to boast the domestic producers and at the same time opening the doors for Multinational Companies. According to one of the recent studies conducted by the World Bank group, the country ranks 96^th out of 189 countries in terms of ease of doing business, the lower ranking is because of the high regulation in the Chinese economy (Wang, Chen & Benitz-Amado, 2015).

Challenges for Foreign Companies in China

The challenges for foreign companies in China can be contributed to the slow economic growth, maturing markets and the rise of very strong local competition. The Chinese government have been trying hard to lure the foreign investors; however the companies are facing a tough time to beat the local competition. A recent example of it has been the exit of Uber from the China market; the company failed to understand the mentality of the Chinese population and had to sell of its business assets to Didi CHuxing. The other half of the problem for the foreign investors is the political, policy and regulatory environment in China. The increased regulation in political, policy and other regulatory environment in China are giving hard time to the foreign companies to watch and evaluate their steps before getting into the Chinese economy.  Another problem has been trade frictions between China and other major economies. The country is at loggerheads with USA because of which a number of US MNC have to face a number of problems (Prajogo, 2016). It is thus advised that companies should rethink their China strategy for better strategic direction and business sustainability:

• Creation of industrial policy to strengthen local competitors to MNC(Li & Liu, 2014)
• Strong regulation, more active enforcement and more compliance risk.
• A broader stakeholder map which complicates engagement (Schaltegger & Burritt, 2017).

Problem requiring new approach

• Securing a place in the market with less space for MNC to thrive in the market (Kew & Stredwick, 2017).
• Comprehending to the industrial policy change in the respective industry.
• Avoiding or responding to aggressive regulatory enforcement or business disputes (Huang & Verma, 2018).

Touchstones to develop companies approach

• Political, policy and regulatory factors have become important than ever, thus the MNC have to adapt to the changing political and regulatory environment (Barney, 2014).
• Companies have to take government and the Chinese policies seriously and approach the stakeholders separately (Tian, 2016).
• It is said that complex challenges require a much comprehensive solution; hence the MNC’s should focus on the solution from boardroom strategy to local execution and integrate multiple solutions (Hamilton & Webster, 2015).

China holds around 13.3% of the global GDP and is the world leader in export and is top economic powerhouse. In a recent survey done by IMF, China is surpassing US in terms of GDP and purchasing power parity since 2014. China in the recent years has been experiencing a wave of reforms which are directed towards increased foreign direct investment and export. The recent fall in the Chinese economy can be contributed to the economy undergoing a transition from producing economy to a service based economy (Mao & Zhang, 2016). Although, China has made internal consumption a priority, still the company is eying for further foreign investment, the economy however is a mystery to plethora of industries. Some of the measures which the MNC could encompass in its strategic direction to succeed in the Chinese economy are:

China is probably the biggest example of a heterogeneous country, with more than 56 different ethnicities and as much as 94% of the population is concentrated in a few pockets, and a country which is trying to balance between the powers of modernity and tradition (Yuan & Pangarkar, 2015). Due to the above contributing factor, the consumer behaviour varies vastly between regions and event cities in China. As an example the wages are set in accordance to the local level, however they differ from state to state, thus companies have to understand the market and calculate the cost before setting up business in any part of China. Hence, being such a complex market it is extremely important for MNC to conduct a thorough level of research before stepping foot in China Market (Tanaka, 2016). Lego has been doing a good job in the Chinese market; the company has won many legal battles in China owing to better understanding of the complex market. In the Similar way JWT also became a behemoth in China by a good understanding of the market. The company took each and every step after evaluating potential risk associated with each step, which can be understood as the prime reason for the success of the company (Fitzgerald & Rui, 2016).

New Approach for Foreign Owned Companies

(Source: Zhou, Wu & Shi, 2018)

The table above shows the declining Chinese economy in terms of GDP and the rising inflation, however this is seen as a calculated move by the Chinese government to speed up the production and then reduce the inflation rates (Tian & Slocum, 2014). Thus, it becomes excessively important for foreign owned business to do their study of the Chinese market in the first place.

China is an extremely complex market because of the Republic government and as mentioned in the earlier paragraph, similarly the legal environment is quite complex and evolving, thus a good understand of the complex legal environment is essential to keep a firm foot in the Chinese market. The state has a good control and regulation over the money which flows into China and thus receiving approvals from the concerned authorities becomes the pivotal step for foreign businesses (Yu & Mucchielli, 2016). The FDI in China has been on a surge, the investment increased from USD 34.72 billion in January to March 2018, showing a surge of .5 Percent. In order to understand the type of investment sanctioned by the state, the MNC’s have to consult with the foreign catalogue of investment, according to which it is divided into 3 categories:

• Sectors which are encouraged for Investment-The Country has good exemplary infrastructure and can give any country a lesson or two to learn owing to its infrastructure facilities. Thus construction and management of subways, creation of retirement homes, industrial design, textiles, architectural design, toy companies, advertisement etc. are some of the sectors where the country is encouraging investment. LEGO and JWT thus fall in to the sectors where the investment is being encouraged, hence successful evaluation of the FDI market (Shimizu, 2018).
• Sectors where investment is restricted-These are primarily the sectors where the company is looking for a fair bit of competition in terms of technology and wants to assess what foreign companies can do in the Chinese market and broaden the landscape of product in the country. Building education institutes, car manufacturers, airline maintenance are some of the markets where the FDI is restricted or heavily controlled (Hansen & Gwozdz, 2015).
• Sectors where investment is highly prohibited- These are the sectors where the country is safeguarding the interests of the local producers and pushing them to produce more in order to be self-reliant and export to the foreign countries, also these are the sectors which are of prime importance to the country. Such sectors include production and maintenance of nuclear fuels, production of audio recordings, online publications and many more.

The foreign owned companies can choose from the following investment options given by the Chinese government:

• Representative Office-This is basically a corporate office of the company and is not involved in direct selling or direct purchase activities.
• Equity joint venture or cooperative joint venture- In this type of model, the company joins hand with a local player, this type of business model is highly anticipated by the Chinese government due to joining hands with a Chinese partner. LEGO is an example of equity joint venture in most of its business models in China. The recent collaboration with the Tencent group to come up with partnership in the digital space is the most recent example of it.
• Wholly owned Foreign owned enterprise- This can be seen as the most versatile option available for the foreign companies. This model allows them to bypass the Chinese investors and gives them a far greater autonomy, flexibility and control. JWT is an example of wholly owned foreign companies.

Law applicable to the contract: Law on Contracts

Advisable Incoterms: FOB or CIF incoterms

Intellectual Property

Organization: National office of Intellectual Property (SIPO) and Trademark office (SAIC)

Regional Organization: IPEG (Expert group on Intellectual Property rights)

International Membership: A member of WIPO (World Intellectual Property organization) Signatory of Paris convention and membership of the TRIPS agreement.

National Regulation and International Agreements

The country has plethora of institution for Arbitration such as China International Economic and Trade Arbitration Commission, and the law is inspired from the CNUDCI model. Hence, it becomes important for companies to focus on the complex legal environment of China.

It can be said with utmost certainty that any company if it tries to take on the Chinese market on its own is an extremely difficult task, can be quoted as impossible as well in certain industries. Thus, it is highly important that the MNCs assess the Chinese market, understand the business environment and then goes on to find a right local partner in the Chinese economy to collaborate and by co creation benefit the state and the company. It is said that any company which is looking to explore opportunities outside its home market has to opt for a simple strategy “Go Global by thinking Local”. JWT did exactly the same, the company with itself did not bring its US culture, but the company adopted the Chinese culture of doing business in its working. It also encompassed the Chinese culture in the organization, hired thousands of local people to boast the employment and gain the trust and support of the local people and the government authorities. Another big advantage of finding the right local partner is the support and the access to the existing market to perform at a higher level becomes easier. The right partner also helps the company in overcoming the existing obstacles at the hand and helps the company to grow by understanding the regional bias, market forces and also the competitive landscape of the Chinese industry. The sectors in which it is highly important to collaborate with the Chinese company are alternative energy, biotechnology and even advanced machinery. These are the sectors which are extremely strategic to the Chinese economy and thus it requires more participation and involvement of the domestic counterparts. There are a number of organizations which can help the foreign companies in choosing the right partner at the same time legal bodies helping in the smooth business collaboration. Moreover what matter to the Chinese population is the persevearnce of the domestic manufactures and contribution to the Chinese economy? Hence, finding the right partner for Collaboration is one of the most important factors for a company to be successful in China. JWT and LEGO have been able to tie up with good strategic partners to aide them in growing the business.

Consumer Behaviour and Market Research

Chinese government is on a mission to make it extremely easier for foreign firms to invest in China and at the same time put regulation on the domestic companies to buy assets overseas in a bid to restrict the capital outflow. In the year 2016, Chinese companies spend around 130 billion pound in overseas investment, a little surge from the 86 billion pound in the previous year. At the same time, the foreign investment in China was around 92 billion pound, thus restricting the net capital inflow to 39 billion Pound; the country thus is looking to contain foreign investment from Chinese Behemoths.  In a national blog published by the Chinese government, they mentioned that they would significantly reduce the restriction imposed on the foreign firms and make it extremely easier for foreign companies to spend money in the People’s Republic of China (Yuan & Pangarkar, 2015).

In accordance with the 2017 report of the world investment bank, China was ranked at third position after US and UK in receiving FDI. The country’s economy has been ranked at number 2, preceding the US for the year 2017-19. The country is one of the most viable and suitable market for most of the foreign companies due to excessively low cost of production, low cost of labour and domestic population of 137 crore to feed the produce. However, the obstacles which restrict the investment in the Chinese economy still remain; lack of transparency, uncertainty in the legal environment, corruption, regulatory measures to protect the domestic players and so on(Gammeltoft & Fasshauer,2017).

(Source: Lv, Liang & Spigarelli, 2018).

(Source: Pareja-Alcaraz, 2017)

Hence, all the above mentioned tables give a clear insight on the new avenues of Foreign development firm can seek to tap into China’s new national policies.

Leadership is a trait and art which is imbibed in the successful leaders across the globe to push their teams to deliver the best, push the envelope of business practices and take the business to the heights envisioned. Leadership has to be both dynamic and flexible to succeed in the present business environment, more so when the companies are looking for Global expansion. It is a bit complex for a foreign owned company to keep its foot strong in any other nation, more so in China, where the culture and business nuance play a very critical role. In China, there are a couple of complex concepts such as the “face” and “guanxi” which can easily override the traditional leadership markers on the likes of strategic thinking and creativity (Mao & Zhang, 2016). In order to succeed in China, the three inherent qualities which are required from a CEO are:

• Vision to dream big
• Ability to see things before anyone else figures out
• The inherent ability to inspire and capacity to overcome any kind of obstacle in the path of success.

Legal Environment and Regulations

Foreign leader are absolutely coherent in their business speech and soft skills, they have mastered the art of business ecosystem thus have been sitting at the top of the organization. However, in order to replicate the same level of success in the Chinese market, the same set of skills might not be applicable. They have to evolve, understand the business culture, the demographics of the population, consumer behaviour and many more such factors which will finally make them a true global leader or get them success in China. In China the strategy to be adopted by the Business leaders have to be more on the likes of “Go Global and Thin Local”. It would be a futile and an act of imbecile to replicate the same strategy of success in the China market as has been done on the home turf. People in China value academic credentials and diplomas. They like the leader to be vocal, for example Jack Ma of Alibaba group. They expect the leader in China to be absolutely well versed with his speech, good understanding of Chinese culture and execution of Chinese values in the business process. Chinese population expect the leader to be vastly open in communication and an ability to cater to a large audience with his speech. Thus, the CEO has to be a people’s person in order to win the hearts of Chinese population, they love someone with whom they can connect easily and trust (Shapiro, Vecino & LI, 2018).

As mentioned in the earlier section of the report, China is vastly a different market in comparison to other countries, thus the strategies to succeed in the China market are somewhat different. A leader in China has to be forethought; he has to think beyond the traditional competitive advantage, he has to go beyond the set tradition of the home turf and approach at China with a more focussed approach which goes far beyond assessing the domestic competition, employability skills and product availability. In China there is a problem of protecting the Intellectual Property rights, with the laws getting far more stringent in China, the leader has to take a proactive approach here.  The Chinese market with a sprawling population of over 137 crore people and a tag of being the second largest economy has a much stronger competition and is vast than any other country. Thus, with the leader being more focussed in his approach, being proactive in assessing the potential risk and being more forethought can succeed in the biggest domestic market.

Collaboration with Local Partners

It can be easily said that entering into the China market is one thing, while successfully leading the business is entirely different thing. Persistence is the key towards sustainable business in the Chinese markets. Lego and JWT have been successful in China due to their persistence to deliver unmatched solution and deliver the best. The same has to be understood by every CEO eying to capture the sentiments of the Chinese population. For the Chinese market it is said that it takes three years to be an expert, five years to be a master and 10 years to be an expert. This is the level of persistence required from the CEO in the Chinese territory. The CEO has to learn very quickly in China, they have to be really adaptable, learn from the markets which are being unfavourable and move to different markets.

This is the most successful quality in the CEO who has plans of creating a successful in the Chinese economy. The strategy is to find a local business counterpart who can brief him on the existing situation of the industry, the region, the economy and introduce him to the business landscape of the country. The counterpart also helps the leader to pick up the appropriate knowledge and the relevant leadership style to succeed in the Chinese market. Plethora of businesses have failed to excel in the Chinese economy primarily because of missing the third wheel in the perfect machinery, the recent example of it is Uber. Lego and JWT, both the companies have been really focussed on the Chinese market and have been able to do fairly good in terms of revenue and give a good competition to the Chinese industry by the virtues of a highly successful private collaboration

Conclusion

China is the second largest economy next only to US, thus it becomes a crucial market to be successful in this vast economy. LEGO, the toy maker company moved into China with high aspiration and the vision to co-create shared values in the People’s Republic of China, the company successful innovated, learnt from its business failure, complied with the regulation and was highly transparent. These were the virtues which lead the company to the realms of success. Similarly, for any MNC trying to enter into the Chinese market, they have to understand 4 things in the first place; Importance of a local counterpart, Being a people’s company/Person, Co-creating values for the economy, creating immeasurable growth opportunities and understanding the legal compliances in the Chinese economy

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