Sun Life Financial Individual Case Report
yinghual li
S4EstablishingaBusinessinChinaSlides.pptxEstablishing Business in China
Session 4
1
Issues
Is China a good market for your products/services? (opportunities/risks/costs)
If it is a good market, what entry strategy should you use? (timing/entry modes)
Due diligence
Seeking approval for FDI projects/Administrative Licensing
Entering China – Opportunities vs. Risks/Costs
Three levels of analysis:
Macro level
PEST analysis
Industry Level
Porter’s Five-Force Analysis Framework
Company Level
Strengths and weaknesses
3
Entering China – e.g., macro risks/costs
Bureaucracy
Ever-changing regulations
Slowdown of economic growth
Guanxi and corruption
Outright fraud
Environmental issues
Shortage of labor and aging population - Rising labor costs
Social tension and rising inequality
Piracy – intellectual property violation
Sharing two articles:
“Fools rush in”
“Dealing in the dark”
THE SAME FRAMEWORK CAN BE USED TO CHOOSE A LOCATION IN CHINA, AS CHINA IS SO DIVERSED.
4
Is China Strategically Important?
LOW
HIGH
Learning Potential
LOW
HIGH
Market Potential
5
Choice of Strategic Markets: Market Potential
Current market size
The second largest economy
Growth expectations
Slowed down but still higher growth rate (7.4% in 2014; 6.9% in 2015; 6.7% in 2016; target- 6.5% in 2017)
Transition from investment- and export-oriented economy to domestic consumption model (consumption only 37% GDP now vs. in U.S., 70%)
6
Does Chinese market Provides Learning Potential?
Sophisticated and demanding customers
Force a company to meet tough standards for product and service quality, cost, cycle time, etc.
Accelerate its learning regarding tomorrow’s customer needs
Force it to innovate constantly and continuously
The pace at which relevant technologies are evolving in the market.
Leading-edge customers
Innovative competitors
Universities and local research centers
Firms in related industries
7
BUT WITHIN CHINA, SOME LOCATIONS PROVIDE MORE LEARNING POTENTIAL THAN OTHERS.
Does the Company Have the Ability to Exploit the Market?
Entry Barriers/Costs and Risks
Entry barriers are lower if there are no regulatory constraints on trade and investment.
Entry barriers are lower if new markets are geographically, culturally, and linguistically proximate to the domestic market.
Entry barriers are lower if the intensity of local competition is lower.
Consumer goods indsutry vs. Banking and financial services, telecommunication.
Hong Kong/Taiwan/ vs. U.S.
E.g., Ebay, amazon have trouble competing with Alibaba in China; Uber cannot win Didi Kuaidi in China.
8
Framework for Assessing Timing Decisions
High
Low
Low
High
Firm’s ability to exploit global opportunities
Strategic
Importance
of Market
Phased-in entry
(create beachhead first)
Google gradually enters the
Chinese speaking market
(Beachheads: Hong Kong
and Taiwan)
Ignore for now
Rapid entry
Google enters the English
Speaking markets, i.e.,
approximately 2 billion
people around the world
Opportunistic entry
Google incorporates six
African languages in the
search engine
Source: Adapted from Vijay Govindarajan and Anil K. Gupta, The Quest for Global Dominance. San Francisco: Jossey Bass, 2001: 28-30.
9
Phased-in: Disney
Exporting
Licensing/Franchising
Joint Venture
Wholly owned Operation
How to Enter Target Markets
10
11
Selecting a Mode of Entry
TRANSACTIONS:
Exporting:
-Spot transactions
-Long term contract
-Through foreign distributor
(Foreign trading companies)
Licensing technology or trademarks
- e.g. Disney
Franchising
- (e.g., McDonald)
DIRECT INVESTMENT:
Joint Venture:
-Marketing and distribution only
-Fully integrated
Wholly Owned Subsidiary
-Marketing and distribution only
-Fully integrated
- Acquisition
- Internal Development
11
There are several components of international strategy. One must begin by selecting a mode of entry.
In other words, there are different ways to go international:
As you move from left to right, from top to bottom, the risk is higher but the level of control by the parent firm is also higher. Firms typically prefer more control, but if it comes with higher risk, they have to make the tradeoff.
For example, if the cultural difference is large: the risk is high, then firms should start with low risk alternatives.
In addition, if the firm has very little knowledge or experience in the foreign market, then it should choose low risk alternatives first, then as it becomes more experienced, the firm can move to other options. For example, many firms start to go international with JV, then buy up the stake in JV to become wholly owned subsidiaries in order to have more control.
Examples of Concerns
Administrative Licensing
“Licensing in China: Challenges and Best Practices”
Due Diligence
“Dealing in the Dark”
“Cat Scammed”
“Iicensing in China: Challenges and best practices” – In China, extensive, complex, and at times onerous licensing system at all levels of government can result in significant delays, added costs, and lost revenue for companies. Five areas of problems: transparency; expert panel reviews; disclosure requirements; third-party consultant recommendations; licensing associated with JVs.
12
Licensing in China
Administrative licensing: getting approval for doing business in China
Five problem areas
Transparency
Expert panel reviews
IP and disclosure issues in the licensing process
Third-party consultant recommendations
Licensing in JVs
13
Transparency: Problems
Transparency: applicants’ ability to easily apply, monitor and determine the status of their applications
Public information on licensing processes is often vague or insufficient and vary across regions
Inconsistencies in policy interpretation and implementation at the local level
Government timelines for review and approval of licensing applications. The official timelines are different in practice
Transparency: Solutions
Build relationship with the local government officials who oversee licensing processes and investment promotion
Emphasize the expected economic, tax and employment benefits to the community
Actively provide input on rules made available for comments to reduce the conflicts between regulations
Expert Panel Review: Problems
The government has the authority to nominate experts, which may include employees of Chinese competitors.
The experts may access the sensitive information provided
Lack of input foreign companies have over the expert nomination process
Expert Panel Review: Solutions
Develop strong relationships with the government bodies that oversee panel nominees.
Intellectual property (IP) and disclosure issues
Approval process in China is less clear and objective
To deal with this challenge,
Try to minimize the disclosure while still maintain respectful to local authority
Selectively limit the decision-making authority of the local China offices of the company, who is often under pressure of local officials
Negotiate what information is made publicly available and what remain undisclosed
Third Party Consultant Recommendations
Local government often recommends or mandates the specific third-party consultants, such as environmental reports, tax, legal and other requirements
Many companies feel that they have to use government recommended consultants, or run the risk of extended delay and strain government relations. However, the third party may not have necessary knowledge to do the work
Can perhaps negotiate with local government to add additional third-party providers so they can have choices.
Licensing in JVs
Chinese partners can deal with this but they may ask for more information than needed
Solution: clearly define that the technology used in the production of any final products can only be sold in certain markets
Due Diligence
Due diligence refers to an assessment of the legal risk, evaluation of the viability of the target, and a review of disclosure obligations.
Problems of Due Diligence in China
Scarcity of information
Unreliability of information (e.g., Caterpillar story)
Multiple set of accounting books
The valuation methods may not be same as internationally accepted methodologies
Consultants who do due diligence may be under investigation by Chinese government
In 2009, China law made it illegal for working personnel of state agencies and organizations in the fields of finance, telecom, transportation, education or healthcare, to sell or illegally provide information to others.
Companies may need to get information from informal contacts in China
Unreliability of information: Chinese companies often have multiple sets of accounting books, leading potential investors distrust the information provided by Chinese companies.
The valuation method used by Chinese companies may be very different from the internationally accepted methodologies.
22
