Business environment

2

Business Environmental Analysis

Part III

5. Identify a city in a foreign country that provides an opportunity for the company to expand internationally.

Shenzhen, China

6. Conduct a PESTELE analysis for this city.

P – Political: From a political point of view, Shenzhen, and overall China, has a complex political scene. Despite being a large economy with international ties, the current government and legal framework is very different from typical Western economic powers. The Communist Party of China is the ruling political party, and although the country is part of a relatively stable political environment, the lack of political freedom is an area of major concern. With regards to government regulations, there are formal and informal rules that are highly regarded by everyone and all firms must comply with these in order to be in good standing. Norms and regulations are taken very seriously and the smallest issue could bring serious trouble. In fact, the political power is probably the most unsettled force in China. There are also some legal issues that will be furtherly discussed in the next sections of the PESTELE analysis that relate to the political party in power. The main concern regards the e-commerce. In China, e-commerce is still at an early stage with regards to drafting legislation in this matter. Topics that are still not fully regulated include intellectual property, rights protection, and tax, while elements like privacy, consumer rights, and validation of electronic contracts completely lack supporting regulations. Although the government has recently been working on addressing some of these issues, the administration is still behind on these matters. (Clark, 2019).

E – Economical: In the course of the past few years, China’s economy experienced significant growth. Looking at the GDP in Shenzhen from 2015, which was 1,750.3 billion yuan ($270 billion) and its current GDP of 2,779,448,100,000.00 yuan ($429 billion), we can observe that the city GDP almost doubled in 5 years (The World Bank, 2021). The main factors that affect the economy and that support the prediction of a promising future for it include: high rate of savings, abundant labor with lower costs compared to western countries, export business still in the growth stage, and urban development that also still has a lot of potential for growth.

That being said, there are some worrying trends that might affect this impressive growth rate. The first one is the high property prices, the price per square foot in Shenzhen is US$783. To have a term of comparison, I searched property prices in New York City, which is one of the most expensive cities in the US, and the price per square foot there is $541. This shows that the real estate market in Shenzhen is likely overheating (Liu, 2021). The second factor of concern regards the increased interest rates of the People’s Bank of China. Moreover, the reserve requirement for commercial banks has also increased and the central bank recommendation to bank is impose limits on home purchases and overall, lend less (Cattlin, 2021). These shows that the administration is also trying to slow China’s growth rate down.

S – Social: Similarly to the political scene, the social scene also has some enrooted aspects that are fundamental to the culture. For example, family size and other social behaviors often impact how decisions are taken. Moreover, social factors such as the lifestyles, education, and religion play a major role when doing business in cities like Shenzhen. The culture is funded on a specific set of beliefs. Among the most important values, the following are crucial to know in order to do business with the locals: importance of the family, hierarchical structure of social life, cultivation of morality, and emphasis on hard work. Also, the Chinese society is collectivist, meaning that the wellbeing of the community or of the family is privileged over one’s wellbeing (ChineseHighlight, 2021).

T – Technological: One noticeable factor with regards to the technological environment is the internet usage of Chinese people. There are almost 450 million internet users in China, which is a very promising factor for the growth of online shopping and e-commerce. However, the lack of stable online payment methods in China and barely negligible credit card penetration is a factor that is preventing the growth and development of online marketing.

Besides e-commerce, China actually views innovation in science and technology as one of the pillars for the future of the country. In fact, the country launched a ‘mass entrepreneurship and innovation’ program in 2015, which aims at spreading entrepreneurship in the country by moving from a labor-intensive work environment to an innovation-driven one. Shenzhen is also considered “China’s Silicon Valley” given that is home to many tech giants. The city in fact invested more than 64 billion yuan (HK$80.46 billion) in research and development (Huifeng, 2018).

E – Environment: The environment is probably one of the weakest spots for China and especially for large cities, like Shenzhen. The rapid development it underwent had severe impacts on the environment. The industrial waste led to high levels of water and air pollution, deforestation, and climate change. The Chinese government has taken a number of initiatives to address the environmental concerns, but the current state is still critical. Shenzhen, being a big city, is polluted. However, among other big cities in China is one of the best ones with only moderate levels of pollution (The World Air Quality Index project, 2021). Besides the concern for the environment itself, it is worth considering that sooner or later stricter restrictions will be put on companies and factories with regards to waste, which might impact earnings and future growth rates.

L- Legal: There are many laws that regulate business and employment in China, such as those regulated in the PRC Labour Law 1995, the PRC Labour Contract Law 2007, and other administrative regulations. The Catalogue of Industries for Guiding Foreign Investment regulates Foreign Direct Investment in China and divides types of businesses into four categories: encouraged, restricted, prohibited, and permitted.

Nike, similarly to all clothing companies, is permitted. However, it needs to comply with investment restrictions, such as a mandatory shared ownership that allows for partial Chinese control. The majority of foreign businesses are, in fact, subject to FDI restrictions that can be addressed through setting a joint venture, absolute or relative Chinese control, or other minimum domestic shareholding conditions (Practical Law China, 2017).

Overall, China and larger cities like Shenzhen have become increasingly integrated with other parts of the world. Although it is not easy to manage business with China, it is a growing market with a lot of potential.

7. Identify and explain one opportunity and one threat from the foreign business environment.

An opportunity identified in the Shenzhen market is the rising income level that will be able to support private consumption. The average salary in Shenzhen is now around $49,000, which is similar to an average salary in the US (AverageSalarySurvey, 2021). Overall, the growing market is promising and the economic environment future forecast is optimistic.

The biggest threat instead is the legal environment and the strict regulations that promote China’s control over FDIs. Considering that the government acts in this interest, investors might find themselves in an increasingly strict legal environment that can affect the return on their investments and hinder growth and development.

8. Give your team’s recommendation on how to respond to the opportunity and threat.

Given the space for growth that a city like Shenzhen shows to have at the moment, I would tackle this market as soon as possible and take advantage of the momentum. Nike is already present in Shenzhen with a few stores that generate a high level of revenue, but due to the size of the city which has a population of 12.5 million citizens, there is still space for growth (MacroTrends, 2021).

With regards to the threat, I would formulate a plan with the help of local and international lawyers in order to safeguard as much as possible of the ownership of the foreign branch of the company and forecast any potential future issue to be ready to assess them. Cooperating with trustworthy local professional is very important since they not only will be knowledgeable about local laws, but their cultural background and experience will provide useful insights when redacting a business plan in a foreign country.

References

AverageSalarySurvey. (2021). Shenzhen: Average Salary Survey 2021. Shenzhen | Average Salary Survey 2021. https://www.averagesalarysurvey.com/shenzhen-china.

Cattlin, R. (2021, April 28). People's Bank of China and Chinese interest rates explained. https://www.cityindex.co.uk/market-analysis/peoples-bank-of-china-and-chinese-interest-rates-explained/#:~:text=The%20Chinese%20interest%20rate%20refers,over%20recovery%20from%20the%20pandemic.).

ChineseHighlight. (2021). Chinese Culture. Chinese Culture, Customs and Traditions in China. https://www.chinahighlights.com/travelguide/culture/.

Clark, E. (2019, January 9). ​China's new e-commerce law: A step in the right direction. ​China's new e-commerce law: A step in the right direction - China.org.cn. http://www.china.org.cn/opinion/2019-01/09/content_74355741.htm#:~:text=On%20January%201%2C%202019%2C%20China's,e%2Dcommerce%20law%20took%20effect.&text=Under%20the%20new%20law%2C%20operators,conditions%20or%20fees%20on%20merchants.

He Huifeng. (2018, December 12). Top 5 tech giants who shape Shenzhen, 'China's Silicon Valley'. South China Morning Post. https://www.scmp.com/lifestyle/technology/enterprises/article/1765430/top-5-tech-giants-who-shape-shenzhen-chinas-silicon.

Liu, P. (2021, April 12). What can HK$6 million buy in Shenzhen's sizzling property market? South China Morning Post. https://www.scmp.com/business/china-business/article/3129077/shenzhen-property-how-home-prices-chinese-tech-hub-compare.

MacroTrends. (2021). Shenzhen, China Metro Area Population 1950-2021. MacroTrends. https://www.macrotrends.net/cities/20667/shenzhen/population

Practical Law China. (2017, January 12). Foreign investment catalogue: the debut of nationwide negative list in China. Practical Law UK Signon. https://uk.practicallaw.thomsonreuters.com/w-009-1430?transitionType=Default&contextData=%28sc.Default%29&firstPage=true#co_pageContainer.

The World Air Quality Index project. (2021). Air Pollution in Shenzhen: Real-time Air Quality Index Visual Map. aqicn.org. https://aqicn.org/map/shenzhen/.

The World Bank. (2021). GDP (current US$) - China. The World Bank. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN.