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Emerging Markets and China

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Mark Dickson

on 2 February 2016

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Transcript of Emerging Markets and China

Emerging Markets and China
The extent to which China creates opportunities and threats for businesses
The risks and rewards involved in trading with or operating in China
The factors affecting the success or failure of businesses trading with or operating in China
The relative advantages and disadvantages of the ways in which businesses might operate in the Chinese market (e.g. exporting, joint ventures, mergers, or setting up production or sales outlets)
The ethical and environmental issues involved in trading with or operating in China
Compare and contrast the experince of different businesses
Be aware of recent trends in key economic and demographic data for China such as national income, income per person, wage costs, exchange rates and population trends
Be aware of the relative significance of trading with or operating in china for different businesses
You are strongly recommended to:

How business strategy might be affected by developments in China
2013 - Been in China for 13 years already
60% of market share of emerging coffee shop market
Initial presence spread from 1st tier cities
to 1500 outlets planned by 2015
Employment set to rise to 30,000
Howard Schultz - "got to build the foundations"
(no gold rush - there will be failures and already have been)
Think different
Smart entry strategy
Deliver on high quality
Work with local partners
Commit and invest for the long term
In a tea drinking nation - the traditional SB menu had to be adapted
It built brand awareness with popular local products, and aimed at aspirational, and young, Chinese
No compromise on quality
Recognising that China is very diverse culturally, and in terms of income they've entered three joint partnerships to expand into the North, East and South
It takes time to recruit and train staff and to built brand loyalty. Employee turnover is lower than the Chinese average because of high pay, careers packages, and good quality work environment
Competition -
Costa coffee Pacific coffee
Less resources
Not yet stable
Fast-growing markets
Possibility of tax redution if you wish to invest
'The bigger the risk, the
They say
bigger the reward'
but is that really

the case here?
China's coastal centres of commerce are so developed and established that wages demands have driven big manufacturing employers into the Chinese interior seeking more workers, and lower wages.

Watch the youtube clip here
Foxconn who assemble for Apple are struggling to recruit from a workforce increasingly reluctant to work on production lines and in conditions largely seen as poor.
Workers rarely stay long, they complain and staff shortages have contributed to accusations of unethical behaviour like using workers as young as 14
Chinese companies are historically characterised as low-cost, low quality. But there is growing evidence of a new breed of Chinese companies emerging to compete on the world stage -
Huawei - in telecommunications
Chinese companies have two options for growth - organic or by acquistion. Most initially preferred organic but now there three good reasons that many are looking for inorganic/acquisition strategies -
established distribution channels
to acquire foreign technology
benefit from long established brands - e.g. Lenovo buying IBM's personal computer division
a good e.g. of an EMMC -
US venture capitalists (KKR) have just taken a 10% stake ($550m) in China's largest refrigerator and washing machine manufacturer -
. For
- they say they want a premium brand rather than just to compete on price. They have 27% mkt share in China and global mkt share is 9%. This investment will help Haier to build on the "opportunities of continued urbanisation and increasing income". The US investor is attracted to the influx of rural residents to urban areas - forecasts say soon there will be 200 cities with 1m + people
(Emerging Market Multinational Corporation)
Business strategy isn't just influenced when companys are looking to go into China - Chinese companies are coming to the world too...
George Osborne talks of China in terms of opportunity - if the government is as committed as he suggests (and a week long visit is a notable event) then the goal to ease relations, improve visas and tourism, sell more to, and encourage more investment from is a very positive sign for British business who are prepared to agree its an opportunity not a threat...
have merged their 131 stores with an existing Chinese company (
Chinese Resources Enterprise
) and now own just 20% of the new company. CRE are China's 2nd biggest operator of hypermarkets.
131 stores made it China's 8th biggest grocery chain only, with just 2% market share.
It has made trading loses for 9 years - with each store averaging 150m yuan (breakeven is commonly thought to be 250m) each year.
(French giant) in struggling.. partly rationalisation in the face of demanding markets 'back home' but also the rapid growth of e-commerce in China, so the benefits associated with their growing middle class are being challenged by a new generation of online retailers who offer rapid delivery services to compete
Best Buy
opened 9 branded stores in China but captured just 1% of the market in China - Chinese companies like
, and
were more aggressive and agile
They instead focused on buying and expanding the more profitable domestic chain
Five Star
- so they paid $180m for control of
Five Star
which was China's 4th largest electrical retailer - and it then tried to expand using the
Best Buy
formula but this failed. It was at odds with Chinese customers purchasing decisions - and the traditional store and sales layouts. The
Best Buy
strategy of high quality service and a good shopping experience was less important to Chinese customers than price.

Depth beats breadth - larger share in fewer regions or markets is better than spreading resources too thin in many markets
Be Open to Joint Ventures
Local knowledge can build scale quicker
Invest heavily in localisation -
tailor the retail format, product range and location to meet local needs (e.g. as
have done so well)
Invest in local management and staff
expat management not as reliable as building and developing teams drawn from local woring population
Apple has to compete with popular Chinese brands:
Xiaomi - develops and sells smartphones and apps. In China, their latest phone the Xiaomi MI3 outsold the iPhone 5c.
Zopo Mobile - Chinese smartphone manufacturer. The Zopo C2 runs on Andriod and is sold at a cheaper price to the iPhone (1,500 yuan compared to the iPhone 5c which is 4488 yuan).
Meizu Technology - Made its name with MP3 players before moving into smartphone market. They will release a new model of their MX3 phone and the older model, the MX2, will drop in price (like Apple iPhones do when a new version is brought out).

Workers in China are unhappy and feel that they are underpaid for the quality of the work they provide. They are more likely to strike meaning you might not get a steady supply of products. There is also a lack of skilled people in China.
One billion consumers
A strong financial service sector: It has evolved to meet the needs of a modern economy with global trade. The government has no debt, comsumers keep saving money and the banks have money to lend to to new emerging businesses.
Because the market is fast-growing, there will already be established Chinese competitors operating in the market.
Apple has defended its ethical standards after a newspaper reported factories in China rely on child labour, 24 hour days and unsafe conditions to manufacture iPhones, iPads and computers. In the company's latest report, it found at least 90 factories were asking workers to work for more than 60 hours a week, the company's own guidelines, which are themselves significantly over the 40-hour limit imposed by Chinese law. Apple also found five cases of child labour at factories.
There may be high transportation costs.
The product or service may not be compatible with the market.
The exchange rate might not be favorable
Straight Extension - Same product, promoted the same way.
Communication Adaptation - Same product, different promotion
Product Adaptation - Change in product, same promotion
Dual Adaptation - Change in product and promotion
Joint Ventures
Ads- are able to access market knowledge from a business already established in China.
-venture with an established business= cheaper and have access to their assets and brand reputation.
- spreads the overall risk that you would have had if you went in alone.

Disads- control lost and means potential profits lost also.
-Poor communication (language barrier?) = diseconomies of scale (Danone, Wahaha)
-Difference of opinions i.e. different strategic goals in China= disagreements and potential loss?
- Expensive to back out of the joint venture.

Might not have a good understanding of the market
eBay failed to compete effectively with established competitors (Taobao) due to lack of market research.

Laws and regulations
Apple vs. Chinese government - censorship laws.
GSK - ethics.
A fast growing middle class
Market research
Tesco failed to understand their customers (Chinese prefer small convenience stores).
An aging population - potential for businesses to market development.
Method of entry
Joint ventures - risk of failure reduced due to increased knowledge.

High costs to successfully compete
Ads- already established business with market share and high prospects.
- Able to cut costs due to duplication of roles/assets= lower costs= more efficient

Disads- they take onboard all operations and risks involved.
-Less likely to have knowledge of the market and so less guidance into the market.
- Duplication of roles= less efficient- staff made redundant >:(
Competitor action such as blocking access
Off-shoring is becoming a problem as Chinese suppliers begin to demand higher pay for their services. It is becoming cheaper to stay at home.
Larger market as a growing more affluent middle class suggesting that there is a growing market for new companies to exploit within China
Government hostility toward western takeovers and entrance by tightning the rules for this means that it is increasingly harder to enter and has larger risk. This is caused by a high unpredctability of the Chinese political environment.

Might not choose the right strategy to successfully compete
Global companies can benefit from economies of scale.
Market conditions
E.g. growing middle class, reduced poverty.
Jaguar Land Rover have targeted the growing middle class.
Some aspects of legslation are lenient, allowing businesses to benefit from cheaper labour.
Exporting - transport costs, tarriffs, cost of agent/retailer who distributes for you.
Some aspects of legislation are strict, making it difficult for some businesses to operate. They may have to make some changes which can be expensive and time consuming.
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