Type: Process Essays
Sample donated: Doyle Palmer
Last updated: April 21, 2019
Many companies ask themselves this question. Due to saturated markets, increasing costs and low growth rates in the developed western countries, going to Asia might be the only possibility to sustain healthy growth rates. With more than one billion people living in India and China respectively, including a huge middle class and growth rates are more than double as in western countries there are huge opportunities for companies. The benefits of globalization made it possible to enter these markets. But these opportunities come also along with risks, therefore it is vital to have a closer look at these two countries to identify these risks and decide then which country fits to the company and where you think you can handle the intercultural differences best.Business development and opportunities:The key drivers that made the globalization possible were also in favor of the business development in China and India.
The evolution to more democratic systems and open market systems enabled the opening up of the market and the falling barriers made it possible to enter these markets. Technological advances especially in the communication and transport sector made it profitable to ship products back and forward and outsource services.Western companies are actually forced to go abroad to make profits because of saturated markets in their home markets or in the western hemisphere. Often they invested a lot on R&D and only if they are global player the gain sufficient returns on investments. They also want to take advantage of the low cost resources and the expanding market demand in China and India. The worldwide demand is more homogeneous than ever before.
It is also important to obtain first mover advantages to be ahead of competitors.Half of the world’s population is living in the newly developed countries. Cavusgil (2002) states that in these countries one target group is bigger than the population of an individual country in the western world. The growth rates are impressing in comparison to what we are used in Europe or North America. The emerging middle class that desires western products creates a huge consumer market. Cavusgil (2002) states that the perception of these countries has also changed because of the economic reforms.
The risks seem manageable and they are technological competitive. The increasing purchase power creates a sufficient market. But these countries are not only interesting because of their large markets, but also as location for high quality and low cost resources.These countries offer often subsidization and tax relief for enterprises. People in these countries are very motivated and ready to work harder and longer to achieve goals.The CIA states that before the reforms stated in 1978, China was a soviet-style centrally planed economy.
The state determined the products, the amount, the price and the distribution. Collectivism was emphasized and State owned companies were the rule. But because this system failed to bring the desired economic development, the Chinese government decided to modernize the economy towards a more market orientated system, which would be more open to the world. It changed the collectivism in agriculture to ‘a system of household and village responsibility’. It permitted ‘small privatized enterprises in services and light manufacturing’. Alltogether there is less government control.
Furthermore it opened to FDI and trade from abroad. These measures made it possible to attain a huge GDP growth and finally made it to the ‘second largest economy after the USA’.Due to these reforms 30 years ago it has great advantages. It is the country that receives the most FDI in the world. It offers low labor costs, as well as low cost for land and other expenses. Furthermore it offers tax exemptions and low tax rates as incentives to allure foreign companies to invest. As the most populated county at the moment and with growth rate of 13% the last 10 years it is very attractive. China mostly concentrates at labor intensive work in the industrial sector, for example assembling and processing.
It serves as a worldwide supply base where goods are produced and exported. It has a good educated workforce that is able to conduct these tasks. In these areas it is the world leader and has a lead over competitors.
An opportunity is also the low cost of advertising and the low level of competition in this area. It offers a good industrial base and short term and long term profit potential.Hill (2005) states that when India became independent, it chose to adopt a democratic system, but a mixed economy that was largely based on state owned companies and a central planning. It had quotas, high import tariffs and restricted FDI.
This system did not generate growth and economic process. Poverty and low standards of living were prevailing. Due to this situation the government decided to execute reforms. In 1991 it has begun to open up its economy for the private sector, reduced tariffs and taxes and FDI is welcome. Furthermore it decided to privatize its state owned enterprises. The results were obvious. GDP experienced a stable growth, FDI came into the country and the service sector, with the software development is booming. There is a growing middle class that can afford buying shopping and specialty goods.
But a lot is still to be done, India needs to continue its reforms and reduce the tariffs further. Poverty is still a huge problem that needs to be solved.Because India has begun its reforms later, it is not as far in its development as China.
But for example it will overtake China as the most populated country in the future and it will be a young and agile society. An advantage is its increasing middle class, which is already enormous with 100-250 million people. This market segment is relatively wealthy and can afford to buy also western products and services. It provides a huge opportunity for western companies to target this segment.
The youth market is this middle class is especially interesting, because they grew up with being exposed to western ideas and products. The demand is expected to double in the next 10 years and high income households are increasing as well. The population and industry is more evenly spread in the cities all over the country.India has a sophisticated, efficient and fond financial system with a healthy banking system and the Indian Stock Exchange.
The Rupee is free convertible and India has a good private sector. It reduced income taxes and gives tax incentives to attract new businesses. Trade organizations offer help for foreign companies.Because of its colonial past it is familiarized with the western nature and English is one of the most important languages in business and politics. Many people in India are therefore English speaking, can be easily trained to work for western companies and are computer-literate. India’s workforce is well educated, qualified and motivated. They have world class universities that emphasize math and engineering. India educates more engineers than anywhere else in the world.
There is no shortage of managers either. These highly trained employees work for a fraction of the cost of western countries. This low-cost-high-quality workforce and a knowledge based industry are the main factor in the competitive advantage of India. Nobody can offer this combination elsewhere in the world and that is the reason why the service sector is booming in India. Software development, call centers, customer care, movies, tourism, biotechnology and pharmaceutics are the main industries. Western companies see opportunities in outsourcing services to India, for example banks and insurances (Allianz and Deutsche Bank) as well as car makers like BMW and VW. Pharmaceutical companies outsource their research for example Roche, Glaxo SmithKline and Pfizer.
India is also ‘a very entrepreneurial society’ (Hill, 2005, 104)Risks:Political and General Instability RisksChina is a communist state, with a one party system. There is no political opposition that has any real power. It is a totalitarian regime and a collectivist society. Even tough it has transformed its economy to a free market, there is little political change. The regime still maintains tight political control and restricts the personal freedom, e.
g. ‘it limits the internet access for government and university employees’ (Hill, 2005, 69) and there ‘is no access to foreign newspapers’ (Country Profile, BBC). Other media is controlled, as well. The question is how a wider opening of its market and further economic development will be linked to sufficient political liberalization and reforms or to a stalemate of the authoritarian system. Will it be a gradually step by step transformation, or is it possible that a revolution will take place; because the government is not willing to give in. Can the authoritarian system survive a fully open market system?Another issue is, if the huge central state is able to survive this or will the political development lead to a collapse.
China has disputes with India and Pakistan over Kashmir, as well as with North Korea, Tibet, Vietnam and Taiwan, but there is no immediate threat. Terrorism is not more of an issue than in other countries.India developed to the biggest democracy in the world after it gained independence from Great Britain. It also proofed its stability over the last 50 years, even when it encountered crises. News and media are free and can work without any restrictions. Free elections are held regularly. There are several political parties and a real opposition exists.
That the democracy is working became clear at the last elections when the government was voted out and the opposition came to power. The risk of a revolution is not given, because people can change the political environment with democratic means. External aggressions as the dispute with Pakistan and Chins over Kashmir are still in effect but seem to have softened. A crease fire is in effect and the relationship is slightly improving. Terrorism from Afghanistan is not higher than in any other country.
I think in political and general stability terms, India is not as risky as China. Even tough China would probably not take any actions that would scare off investors, there is still more risk potential. In India changes can be made only the democratic and legal way. Companies can best manage political risks if the pay close attention to the political evolution and assess how it might affect them.
Then they should decide if it is worth to enter these markets.Ownership and Control RisksIn India the risk of nationalisation, expropriation and forced sales is low, because the reforms of 1991 attracted a lot of foreign investors and that had positive effects on the economy. The government does not want to scare off investors and retract the successful process of opening up its market.China may not enforce these measures either, for the same reasons as India. But there is a slightly bigger risk, because it is a communist system and the government does not have to legitimate its decisions.
My view is that neither in India or China is a significant risk that the government will take these actions, but in China it would be easier for them to do so. Companies could join with domestic companies, to prevent these actions. These risks are closely connected to the political risks and the best recommendation is to pay close attention to political events and trends.Operations RisksSetting up a business in China can include very long winded and exhausting negotiations with authorities. In the example of Qualcom, which offers technology for wireless phones, it took years until the final contract was signed. When the business is finally set up it has to deal with a difficult taxation system and other government policies.
A confusing, complex accounting system, which is not based on profits, is also complicating the business. It is not comparable to western standards and the China will not adopt international standards. It is very complex to do business in the highly regulated environment of the communist system.
Political lobbying is seen as a part of the negotiation process and plays a vital part in it. Corruption slows the economy down and distorts competition. Bureaucracy is also very widespread and disturbing.
To rely on agents or partners in a Joint Venture for example is also very difficult, because you might not have enough control over them and no contact to the market. Conflicts can arise because there are differences of interest between partners and they might be violations of confidentiality.China has many import tariffs and restrictions and FDI is still restricted and involves long negotiations with the government.A poor infrastructure and a lack of sufficient distribution channels make it difficult to reach all parts of China. Hill gives the example of Coca Cola.
It is in the poorer and rural areas even more expensive due to the transportation costs and transportation is its main restraint. 50% of its sales are in the major cities, where just 8% of the population lives.In terms of labour supply and quality you have to take into account that there is a generation due to the Cultural Revolution that lacks education. The understanding and the willingness to accept the western way of doing business is not very widespread. As a result finding local managers is very difficult.
In India a huge problem is still the remaining tariffs and quotas that need to be further reduced. You also have to deal with delays and unprofessional practices. It is also hard to set up relationships with partners and agents. Joint Ventures and Strategic Alliances have the disadvantage that the Indian partners might exploit them to get access to the sophisticated technology of the partner company. Another problem is as well that FDI is still restricted.Political lobbying is as well important and India struggles with corruption and bureaucracy.It has problems with distribution systems and a poor infrastructure in the rural parts.
Envron for example was always closed on Mondays due to lacks of power supply.Both countries have still huge problems with providing a good infrastructure in their rural areas, but ‘India’s much-criticized infrastructure is still probably better than China’s, particularly now that communications, power, electricity and airlines are being privatized’ (Dale 1994). Companies can manage the infrastructure problems when they try to set up their own infrastructure and distribution systems and built plant closer to the rural areas. Hill (2005) gives the example of Coca Cola in China and Unilever in India, they both found new ways of reaching people in rural areas. Unilever established a physical presence wherever people gather and Coca Cola build a plant closer to the rural area. It even has sales representatives that go by foot and bike to customers.India and China need to reduce government intervention, restrictions and tariffs, to facilitate trade.
A solution to bypass these restrictions is to set up a wholly owned subsidiary in the host country that would avoid as well problems with partners in Joint Ventures, Strategic Alliances or Licensing. You would gain access to the markets and to the resources but you are also able to protect your knowledge. The benefits of this measure also include tighter control, closeness to the market and reduced transportation costs. The downturn of this market entry is that you might have to negotiate extensively with the government, but I think it is worth it. You can also gain first mover advantages that would help you to be successful against competitors. Hill (2005) states that your product would set a norm; you would reach considerably economics of sale before your competitors and prevail in distribution and communication.