2 homework for management

Cases 613

at 818 per U.S. dollar. The dramatic fall in the value of the kyat is expected to stimulate demand for exports from Myanmar and help the economy grow.

To further encourage economic growth, the govern- ment signaled that it would welcome foreign direct invest- ment and encouraged foreign enterprises to enter into partnerships with domestic enterprises in its underdevel- oped telecommunications sector. General Electric and IBM are among the companies stating that they may in- vest in the country. Between 2010 and 2014, Myanmar recorded the largest increase in inward FDI of any coun- try in Southeast Asia apart from the Philippines, although admittedly from a low base.

In November 2015, general elections were held in Myanmar. These were the first free and fair elections in 25 years. The results were stunning. The opposition party, the National League for Democracy, led by Anug San Suu Kyi, won 81 percent of the seats in parliament, sweeping the military-backed government out of office. It now seems likely that Myanmar will finally emerge from its isolation.

Sources Lex Rieffel, “Myanmar’s Economy Confronts Tough Policy Challenges,” East Asian Forum, July 31, 2012; “Opening Soon: Myanmar Gets Ready for Business,” The Economist,

March 3, 2012; “Myanmar on the Move,” The Economist, Novem- ber 21, 2012; CIA World Factbook, 2015, www.cia.gov/library/ publications; “An Unfinished Peace,” The Economist, March 11, 2015; “A New Era,” The Economist, November 14, 2015.

Case Discussion Questions

1. What explains the economic stagnation of Myanmar until very recently?

2. What do you think motivated the government of Myanmar to start undertaking political and eco- nomic reforms from 2010 onward?

3. How would you characterize the nature of the economic reforms now being implemented in Myanmar? What is the government trying to do here? What do you think the results will be?

4. What potential impediments do you think might stand in the way of further improvements in Myanmar?

5. In November 2015, the democratic opposition won a landslide victory in a general election. How do you think this will affect Myanmar’s economic growth trajectory going forward? What are the risks here?

China is expected to have some 200 million people in the middle- and upper-income categories by the early 2020s. This is a tenfold increase in people with significant pur- chasing power in China in the last decade, from only about 17 million people in these income brackets as re- cently as in 2010. China’s purchasing power for virtually all products and services has strong potential, and foreign companies now strategically try to take advantage of these market opportunities.

What have we learned culturally that can help compa- nies establish themselves in China’s marketplace? What went wrong early on? The experience of well-known com- panies such as Best Buy and eBay can serve as a learning experience for others. From a retail perspective, the moti- vation for many foreign companies to enter China some years ago—beyond those companies that have been in China for decades to achieve low-cost production—was the triple growth of the Chinese economy that was seen from 2000 to 2010.

With this growth, China overtook Japan to become the second-largest economy in the world behind only the United States, and its large population makes for an enor- mous target market. Investment from foreign companies was the largest driver of China’s growth. Many compa- nies also increased their exports to China. The United States, for example, saw its companies increase exports to

China by 542 percent from 2000 to 2011 (from about $16.2 billion to $103.9 billion), while total exports to the rest of the world by U.S. companies increased by only 80 percent in the same time period. Exporting to China has become somewhat stagnant in the last few years, now representing about $113 billion.

Interestingly, domestic consumption as a share of the Chinese economy has declined from 46 percent to 33 per- cent. This consumption decline—coupled with slower growth globally—has raised questions about China’s mo- mentum. Right now, around 85 percent of mainstream Chinese consumers are living in the top 100 wealthiest cities. By the early 2020s, these advanced and developing cities will have relatively few customers who are lower than the middle- and upper-income brackets by Chinese standards. The expectation is that these consumers will be able to afford a range of developed nations’ products and services, such as flat-screen televisions and overseas travel, making the Chinese customer much more of a tar- get for a wide variety of consumption.

But can the unprecedented Chinese growth really con- tinue, and would it come from increased consumption? The resounding answer is yes, according to McKinsey & Company. McKinsey found that barring another major economic shock similar to what we saw in 2008, China’s gross domestic product (GDP) will continue to grow,

Will China Continue to Be a Growth Marketplace?

614 Part 7 Cases

specifically (built-in instant messaging) shaped a lot of the problems that eBay ran into in China. Some 200 million shoppers are using Alibaba’s Tmall and Taobao platforms to buy products, and the company accounts for almost 80 percent of online transaction value in China.

Uniquely, Taobao’s built-in instant messaging system has been cited as a main reason for its edge over eBay in China. Basically, customers wanted to be able to identify a seller’s online status and communicate with them di- rectly and easily—a function not seamlessly incorporated into eBay’s China system. Clearly, built-in instant text messaging is a solvable obstacle in doing business in China. It sounds easy now that we know about it, but it may not always be the case when we take into account all the little things that are important in a market. How can a foreign company entering China ensure that it tackles the most important “little” things that end up being huge barriers to success?

Sources Frank Lavin, “China Marketing: Five Keys for a Crowded Mar- ket,” Forbes, March 25, 2017. B. Carlson, “Why Big American Businesses Fail in China,” GlobalPost, September 22, 2013; Y. Atsmon, M Magni, L. Li, and W. Liao, “Meet the 2020 Chinese Consumer,” McKinsey Consumer & Shopper Insights, March 2012; “Exports to China by State 2000–2011,” The US–China Business Council, 2012; A. Groth, “Best Buy’s Overseas Strategy Is Failing in Europe and China,” Business Insider, November 4, 2011.

Case Discussion Questions

1. Will China maintain its strong economic growth in the years to come? Some suggest it will until 2050. What do you think?

2. If China will go from 17 million to 200 million middle- and upper-income people by the early 2020s, would the scenario presented by Best Buy not be applicable anymore? Would newly rich Chinese customers engage in this purchasing in the 2020s?

3. With Alibaba’s ownership of the very popular Tmall and Taobao online shopping systems (similar to eBay and Amazon) and its spread across the world, will a Western-based online shopping culture ultimately infiltrate China?

albeit not at the historic levels seen between 2000 and 2010, when it grew about 10.4 percent annually. The growth in the 2020s is expected to be about 5.5 percent per year (until 2030), which is still far above the expected growth for the United States (2.8 percent annually), Japan (1.2 percent annually), and Germany (1.7 percent annu- ally). And the key is that consumption will now be the driving force behind the growth in China instead of for- eign investment. The consumption forecast opens up op- portunities for foreign companies to engage with Chinese consumers who are expected to have more purchasing power and discretionary spending.

But culturally translating market success from one coun- try or even a large number of countries to the Chinese mar- ketplace is not necessarily as straightforward as it may seem. Often, a combination of naiveté, arrogance, and cul- tural misunderstanding have led many well-known compa- nies to fail in China. Lack of an understanding of issues such as local demands, buying habits, consumption values, and Chinese customers’ personal beliefs led to struggles for companies that had been very successful elsewhere in the world. And as global as China is becoming, cultural differ- ences still get magnified in the Chinese marketplace. Let’s take a look at Best Buy and eBay as two examples.

Best Buy, the mega-store mainly focused on consumer electronics, was founded in 1966 as an audio specialty store. Best Buy entered China in 2006 by acquiring a majority in- terest in China’s fourth-largest appliance retailer, Jiangsu Five Star Appliance, for $180 million. But culture shock hit Best Buy, best described by Shaun Rein, the founder of China Market Research Group. First, the Chinese will not pay for Best Buy’s overly expensive products unless they are a brand like Apple. Second, there is too much piracy in the Chinese market, and this reduces demand for electronics products at competitive market prices. Third, like many Europeans, the Chinese do not want to shop at huge mega- stores. So, these three seemingly easy-to-understand cultural issues created difficulties for Best Buy.

eBay, the popular e-business site focused on consumer-to- consumer purchases, was founded in 1995. The company was one of the true success stories that lived through the dot-com bubble in the 1990s. It is now a multibillion-dollar business with operations in more than 30 countries. But China’s unique culture created problems for eBay. Contrary to the widespread cultural issues that faced Best Buy, one company in particular (Alibaba) and one feature more

Toys for children are made in numerous countries and then exported to buyers throughout the world. In some countries, such as the United States, certain protection exists to make sure that toys are safe for children. The U.S. Consumer Product Safety Commission (CPSC) reg-

ularly issues recalls of toys that have the potential to ex- pose children to danger such as lead or other heavy metals. Lead may be found in the paint and in the plastic used to make the toys. If ingested (e.g., children chewing on toys), lead is poisonous and can damage the nervous

Lead in Toys and Drinking Water