Global Strategy Research Paper - Netflix in China
joanaveronezi
Week2and3.docx9
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Netflix in China
Week 2 and 3
JOANA OLIVEIRA VERONEZI
SOUTHERN STATES UNIVERSITY
BU536: GLOBAL STRATEGY AND MANAGEMENT
DR. KIM, RACHEL
04/28/2019
Political, Economic and Legal Environment of China
China is a communist country with twenty-two regions, being five independent regions, four municipal cities and two specials regions Hong Kong and Macau. (Statista, 2019). The main language is Mandarin, and it is the largest population in the world being about 1.4 billion in 2019.
The large population situation is a topic that was always discussed since 1970’s where they created the country’s family planning policy restricting families to have more than one child. This plan made “China’s population growth rate decreased to 0.51% in 2015. And for the demographic not to change that much, the one children policy was relaxed in 2016, allowing families to have two children.”. (Statista, 2019). As the years past by, the age distribution in China from 2007 to 2017 has been shifting to older age during the past decade. See graph below from Statista:
Also, because of the birth control in China, the population growth in China have decreased over the past decade with an annual population growth of below 0.5%, as the graphic below demonstrate, and its ranked the lowest worldwide. (Statista, 2019)
China was the second largest economy in terms of GDP, around U$ 10.93 trillion by 2015. And the GDP per capita was around U$7,999 which was 14% of the GDP per capita of the U.S.A in 2015. China is very economically strong on the industrial sector. “Its high productivity, low cost labor and relatively good infrastructure have made China a global leader in manufacturing”. (Statista, 2019).
China enter on the WTO (world trade organization) in 2001 and it had a trading power with a surplus of $ 593 billion dollars in 2015. (Statista, 2019). It was considered the primary trade partner of many countries in the whole world. And as Statista (2019) shows in their research, “China wants to reduce reliance on merchandise exports and focus on domestic’s consumption of its manufactured goods and facing the lack of demands on the global market.”.
“China is the biggest producers and consumers of agricultural goods in the world but is lacking cultivable lands because of the country size. And those agricultural lands are transforming into industrial land. The fast industrialization and urbanization of China made the country the largest producer of CO2 in the world. And this turn out to be a challenge for China’s government to balance its economic development and environment maintenance.” (Statista, 2019)
The Legal process of China is very different from other countries. In other countries there are common law and civil law. In China, it can be considered a mix of those two. Nowadays, changes are going to happen in the Legal department of China, but how still works is that basically law are discussed based on what Kings have said.
As for the culture of China, there is a Hofstede Chart below that makes it easier to understand:
The power distance in considered high in China, with 80 points. So, Chinese people cares about permissions and statements that are given. China is a collectivism country; They are more about family. As the graphic show above, it has only 20 points on individualism. In masculinity China has higher points (66), which means people are more self oriented, they live to work and money and things are important. China is a country that can be considered to accept changes, as the graph shows, the uncertainty avoidance is considered moderate. China has a high long term orientation, they are very focus on the future and their indulgence is considered low, whereas it means they are more likely to be a restraint society. “Whereas gratification needs to be curbed and regulated by strict norms.” (Hofstede insights, 2019).
The HDI (human develop index) of China is low. It doesn’t matter if GDP is higher of if it’s the second largest economy in the world. We can say in simple words that GDP is quantity and HDI is quality. China, as it was said above, has high productivity and lower labor cost. Which means, they work much more for less.
Strategy Fundamentals and Corporate Strategy
There are types of corporate level strategies to enter global market, being them: Merge and aquistion, alliances, equity, greenfield, licensing, joint venture, turkey project, exporting, franchising and subsidiary.
Being said the fundamentals of strategy and also all the Political, economic and legal situation of China. Now it’s time to put in practice the idea of my project, which is, Netflix to enter Chinese market.
Netflix is working in almost every country, except for China, Crimea, North Korea and Syria because of law enforcement. Since the law is having some changes in China, the idea of being part of the most populated country’s market is huge for Netflix. However, going into Chinese market means be ready for competition. There is a journal from Forbes (2018), whereas it is written: “A fiercer competition is underway. Local companies are spending billions competing for a bigger slice of the country’s fast-growing online video market by developing their own original programs.”. (Armstrong and Wang, 2018). According to a research from IHS Markit (2019), “video streaming in China will more than quadruple from $3.5 billion in 2015, to $17.6 billion in 2020.”.
As Armstrong and Wang (2018) mention, the online video platform that is in charge in China is called iQiyi. The Chinese company already had licensed two streaming from Netflix, being Black Mirror and Mindhunter. iQiyi have their own production show called The rap of China which is a huge success and the only access for this content is by monthly payment membership. They have more than 500 million active users, with 50.8 million fully paid-up subscribers.
Right behind iQiyi, comes Tencent Video and Youku Tudou. Both companies have had success with their own productions, bringing 4.8 million activate users for Tencent Video and 4.2 million for Youku Tudou. (Armstrong and Wang, 2018). All those video streaming companies are very equal to Netflix model and their strategy is actually producing original programs, because licensing shows are getting more expensive to get. (Armstrong and Wang, 2018).
Even though with all this rapid growth of users, iQiyi’s expenses are also growing and the company has been in the red since 2010. Also, Youtu Tudou and Tencent Video are in the same situation. (Forbes, 2018). Studies shows that Chinese are not willing to pay much and this make the monthly membership not enough to cover production costs for now. For example: While Netflix charges about $11, most Chinese companies ask for only $3 per month. (Forbes, 2018).
With all this information about companies that are in the same segment as Netlfix and being said that licensing movies for them are getting expensive and their actually revenue is on red, I have reasons to believe that the best corporate strategy for Netflix to get inside of Chinese Market is buying a inside Company, for example, buying iQiyi. In other terms, this would be considered an acquisition.
Netflix has already a lot of productions of their own, and paid a lot of license to stream TV shows and movies in their platform. Buying iQiyi, the HR (human resources) will have less problems, since a lot of workers will continue doing what they already do, specially will help R&D (research and development) with cultural analysis of the company getting into Chinese Market. In the Finance part, Netflix’s annual revenue has grown from 1.2 billion to over 11.6 billion in just 10 years and it is estimated 37% of the world’s internet users use Netlflix. (Statista, 2019).
Netflix produced 300 original contents titles in 2017 and it is expected to grow much more in the future. And with the acquisition of iQiyi, Netflix will also maintain Chinese productions and will continuing producing movies locally in China, since Chinese people values more their own content.
References
Statista. Age distribution in China from 2007 to 2017. 2019 Retrieve from:
https://b113ca75n-mp02-y-https-www-statista-com.proxy.lirn.net/statistics/270163/age- distribution-in-china/
Statista. Population growth in China from 2007 to 2017. 2019. Retrieve from:
https://b113ca75n-mp02-y-https-www-statista- com.proxy.lirn.net/statistics/270129/population-growth-in-china/
Statista. Netflix – statistcs and facts. 2019. Retrieve from:
https://www.statista.com/topics/842/netflix/
Hofstede Insights. China. 2019. Retrieve from: https://www.hofstede-insights.com
Country Economy. China human development index . 2019. Retrieve from: https://countryeconomy.com/hdi/china
David, F and David, F. Strategic management: Concepts and cases, a competitive advantage approach . 2017. Pearson Education. 16th edition
Armstrong, P and Wang, Y. (2018). The billion-dollar race to become the Netflix of china . Forbes. Retrieve from: https://www.forbes.com/sites/ywang/2018/03/07/the-billion- dollar-race-to-become-the-netflix-of-china/#3a294d573495
