1-CASE 1 Understanding Entry modes into the Chinese market
China became a member of the World Trade Organization (WTO) on December 11, 2001 and is currently in the process of completing a seven-year transitional period. Overall, the Chinese economy has shown exceptional economic growth over the last five years, closely associated with China’s increased integration with the global economy.
With a population exceeding 1.3 billion, continued economic growth and a large supply of inexpensive and productive labour, China lures businesses from around the world. China’s population is approximately 23 per cent of the world’s total. China’s integration into the global economy is fueling accelerated change in many markets and global economic growth. It is likely that China will continue to grow at a rapid pace for some time. In 2005 and 2006 China’s economy increased by nearly 10 per cent each year. Despite tremendous progress, China remains a developing country, albeit one with vast potential. Spread over a population of 1.3 billion, China’s 2 trillion USD economy (2005) does not represent a large amount of disposable income for each person. Per capita income in China is approximately USD 1,538 (2005).
However, the income distribution within the country is highly uneven with urban centres, such as Beijing, enjoying a per capita income of almost USD 5,000. China’s middle class, those with per capita income over USD 8,000 is estimated at over 200 million. At the same time, the Chinese government estimates that several million Chinese are very poor with per capita income of USD 300 or less.
Corruption remains widespread in China. Although the government continues to emphasize anti-corruption campaigns, these efforts are hampered by the lack of truly independent investigative bodies. Despite these criticisms of its unwieldy bureaucracy or lack of disclosure of corporate accounting practices and governance, most global companies agree that companies cannot be globally successful if they ignore this huge emerging market.
Companies considering doing business with China, have first to determine the best way to enter the market. Most foreign firms utilize some form of collaborative arrangement with local firms when entering China.
In this segment, we will discuss about how companies can enter the Chinese market; the various factors they need to consider if they enter into a collaborative arrangement and some of the tactical steps they need to take in the early stages of their Chinese operations.
There are four key ways to enter the Chinese market:
• Exporting to China (externalization)
• Licensing, including franchising (intermediate modes)
• Equity joint ventures (intermediate modes)
• Wholly owned foreign enterprises (WOFEs or Woofies ) (internalization)
These are not mutually exclusive ways to enter.
Independently whichever entry model you choose personal relationships (‘guanxi’ in Chinese)in business are critical. Guanxi is deeply rooted in Chinese culture and is basically ‘a tool to get business’ and ‘a way of getting things done’. It often takes months, perhaps even a year or more,
to establish guanxi. It is important for exporters, importers and investors to establish and