Sofia Castelli id:20622206

Final assignment Strategic Management in China

Final Assignment Strategic Management in China

1. What are the current key opportunities and threats for doing business in China for MNCs?

When multinationals companies (MNCs) enter in Chinese market they are most of the times intimated by the
challenges and pitfalls that must be negotiated. There are many obstacles on the way, however the
opportunities and rewards are immense and very attractive for foreign companies. Once someone said “in
China everything is possible, but nothing is easy”, and this is totally true for foreign companies that are
trying to do business in China. The country is characterised by being a fast changing country, the pace at
which its markets are evolving is the fastest on Earth. For this reason, there is not a unique rule or
straightforward approach that foreign companies should follow when entering in such market. Each company
has its own strategy depending on several factors that vary from industry analysis, product type, size of the
company, as well as long-term goals and global corporate mission. Talking about opportunities, there are
many for foreign companies starting from the fact that Chinese population is very large; China has almost 1.4
billion consumers and they are expanding continuously. As the economy is growing, consumers’ disposable
income grows as well and so their spendings. The emerging Chinese middle class is rapidly growing and
more and more people will be seeing beyond daily necessities, accessing better education and information
sources, and acquiring new aspirations around self-actualization1. Since companies need customers in order
to market their products and China has many with increasing purchasing power, the Chinese market
represents a great opportunity if foreign companies are able to attract and capture Chinese consumers.
Furthermore, another big opportunity is the high consideration of western brands in China. Chinese people
are ​wannabe a​ nd they love to seem as western people and for this reason they prefer many times western
goods and products. For example, some luxury brands have reached enormous popularity in China because
the local people perceive them as being representative of a certain social status or lifestyle. An example of
this behaviour is the traditional brand ​Tiffany & Co, ​which enjoys of an high reputation in China, similar to
the one it has in the US. A research conducted by Hurun revealed that in 2016 the company was the preferred
American luxury brand by chinese consumers. Furthermore if foreign companies are able to attract Chinese
influencers and celebrities to use their brands, they will be automatically able to attract Chinese consumers.
This strategy is frequently used by cosmetic companies, for example by brands like ​M.A.C. ​and ​Bobbi
Brown​, whose products are used by many Chinese makeup artists which turn to be very influential on social
media platforms such as Instagram and Facebook. As a result, they were able to attract a large Chinese
audience that turned to those influencers for beauty advices.
On the other side there are several threats that MNCs face when entering in the Chinese market. Firstly,
when foreign companies decide to enter in this market, they frequently rely on establishing Joint Ventures
(JVs) with local companies to help them in their Chinese operations. However, it resulted that JVs with local
companies are very difficult to manage due to lack of control, different ambitions and incentives, different
expectations and partners assigned by government rather than commercial sense. Therefore when considering
their local partners foreign companies must be very careful, for example when Groupon failed to entry into
China was mainly for two reasons, the first is that the company didn’t fully understand the culture they were
going to encounter and the second, is their aggressive entry. Groupon firstly entered in the market by
establishing a JV with the chinese company Tencent, the result of the partnership was aimed to create
GaoPeng. However, even before GaoPeng started its operations, many conflicts started between Groupon
and Tencent. The marketing director left the company because in the commercial released at the ​Super Bowl
in 2011​, Chinese felt offended by the advertisement message. In the commercial, the American company
stated that the Tibetan culture was risking to disappear but that Americans could still enjoy a discount at all

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Article: Opportunity Knocks- Designing for the Emerging Chinese Middle Class

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Final assignment Strategic Management in China

the local Tibetan restaurants through their platform, Groupon. This message was perceived inappropriate by
their partner Tencent and gave the company a very weak brand image in the Chinese market2. Additionally,
the company hired mostly American employees in their offices in China and most of them didn’t speak the
language. According to GaoPeng manager, many Western managers that were selected in China were not
sensitive to Chinese culture and since Groupon’s strategy is based on selling local deals to local consumers,
they needed to have a local approach in order to attract customers. Moreover Groupon tried to enter too
aggressively, in the first six months, GaoPeng had almost eighty offices around China, with more than three
thousands people before starting proper operations. Groupon didn't consider Tencent, they set up everything
before considering properly the partner and they solely focused on public relations rather than on the
business itself. The biggest mistake of Groupon was that they did not adapt to Chinese market, and they did
not understand the relevance of their local partner.
Furthermore, in my opinion, another big threat is represented by the central Chinese government which rules
all the local business operations. For example, when ​Coca-Cola ​wanted to acquire the Chinese company
Huyian Juice ​for $2.3 million3, the government rejected it because it was considered a case of monopoly that
would have threatened competition. Huiyuan controls almost 9% of the country’s fruit and vegetable juice
market and 40% of pure juice market; on the other side Coca-Cola already owns more than half of China’s
soft drink market and 12% of its fruit and vegetable juice market. The case of Coca-Cola demonstrates that
companies must always comply and respect chinese laws and it shows that the government doesn’t want
foreign firms to buy controlling stakes in large national players not in need of financial and management
help.

2. Using company examples other than those in the McKinsey’s article, please illustrate why it is
important to treat China as a 2nd home

As the article states, very few multinationals companies (MNCs) are using their resources and giving enough
management attention to Chinese markets. They should change their traditional approach because China is
becoming a leading market where global competitors are determined, and if companies are able to succeed in
China, they will be able to gain competitive advantage in other markets as well. Foreign companies
expanding their businesses in China should take into consideration Chinese’s long-term importance, as it is a
market that grows very fast and where opportunities arise constantly due to changing needs and evolving
population. Therefore, foreign companies should be aware of the importance of this market and rethink their
strategies before entering in China. MNCs should focus on management attention instead of only focusing on
market share, sourcing volumes, productivity, performance and R&D. Additionally, the most important
aspect is to understand the habits and behaviours of local buyers that are the potential consumers of foreign
companies, and therefore it is crucial to conduct in-depth market research to better understand the needs and
behaviours of local consumers.
To illustrate this point, I would like to examine the strategy used by Volkswagen Group in the Chinese
market. The Group always understood the importance and potential of this market and has treated it as a
second home since the beginning. Top executives are constantly highlighting the role of China for VW, for
example the CEO Herbert Diess during ​Auto China 2018 said that the Chinese market is key for the
international auto-industry, and it is key for the company’s success. The Chinese market is still growing fast,
as well as the demand for vehicles, and Volkswagen is amongst the most used brands in the country.

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Article: A Case Study on International Expansion: Groupon’s Cultural Mistake in China
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Case: Coca-Cola in China (seen in class)

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Final assignment Strategic Management in China

According to VW in the period from January to March 2018, more than one million customers chose a car
from Volkswagen Group China and its two Joint ventures, SAIC VOLKSWAGEN and FAW-Volkswagen4.
The company always had clear which segment to target and they understood the consumers profiles that
characterised the market; through their research, they discovered that chinese car buyers are much younger,
more digital-driven and more active in social media. To serve this market segment, the company is planning
to produce a smart, self-driving device embedded in a digitalized ecosystem.
VW teams are already working hard to achieve this objective, they are currently developing an innovative
human-machine interface together with the leading Chinese AI-company Mobvoi and they are also thinking
about expanding into a ride-hailing and car-sharing partnership with Chinese partner Shouqi. Additionally, in
order to follow China’s transition to e-mobility, VW Group is planning to undertake massive expansion of
the portfolio of vehicles offered; the expansion will bring changes for production sites as well. The company
recently announced that by 2021 they will open at least six factories in China where they will start the
production of battery-electric vehicles. This means that batteries for Volkswagen’s electric cars in China
will be directly produced in China. During the same conference in China, the CEO also said that “We are
working together on the best solutions for our customers”5.
VW is a clear example of how a company is not simply exporting and selling its products to the Chinese
market, but it is using the country as a base to produce vehicles that will be used by local consumers. They
are treating China as a second market and they are constantly trying to come up with new technologies that
will serve the needs and new trends of the market.

3. Please illustrate what multinational corporations should do to make China as a second home

In order to successfully compete in China, foreign companies shall treat the country as a second home, as
described in the article, they should bring their best practices to the five main areas: technology and product
strategy, marketing, operations, human resources and government relations.
In terms of ​technology and product strategy,​ multinationals entering in China should offer the same quality
of products in China as they do in their home market and develop products that satisfy and answer the needs
of the Chinese consumers. For example, when ​Google6 tried to enter the Chinese markets, the company
didn’t fully understand that the market they were targeting was very different from the Western one, the new
targeted customer segment had a completely different language made by symbols, which are very difficult to
type on a smartphone. The Chinese language is highly complex, with many words having more than one
meaning. Google was defeated by the Chinese competitor Baidu which search algorithms give a lot of
importance to the context in which the words are used in the content. The case of Google represents an
example of the need of designing products that are based on local needs and not imported from western
countries. Google, both as business and as technology, appears to have struggled on these fronts in China.
Talking about the second area, ​marketing,​ foreign companies need to place enough importance in knowing
their targeted customers and need to conduct as many primary market research studies as they do in their
home market. It is important that companies understand Chinese needs and design products for the emerging
Chinese middle class7. For example, when ​P&G ​entered in China they did not conduct a primary market
research and once understood it, they conducted an in-depth research on Chinese consumer and discovered
that one of the major concerns of parents was the influence of the quality of a baby’s sleep on their future

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​Volkswagen Website, ‘news’ section
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​Volkswagen Website, ‘news’ section
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​Case Google vs. Baidu (seen in class)
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Opportunity knocks: designing for China’s emerging middle class

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Final assignment Strategic Management in China

development. After analyzing the research results, the company launched the ​Golden Sleep Campaign ​in
20078.
The third area that companies should take into consideration is ​operations,​ foreign companies should set
same operational-performance levels in China as they do in their current home markets as well as investing
resources and expertise. To illustrate this point, I would like to take ​KFC9 as an example. KFC was the first
western fast food restaurant that entered in China and that has always posed to its local customers high
importance and a control mechanisms to ensure standard levels of quality, service and cleanliness (QSC).
Moreover, since the company entered into the Chinese market very early, there were no trained distributors
that would have taken care of part of KFC operations, therefore the company decided to build warehouses
and build its own fleet of trucks to manage the distribution. Thanks to this quality concern and distribution
networks, KFC has gained the positive image in China of a Western fast food restaurants with high
reputation and cleanliness.
The fourth area is ​human resources, as companies should hire a management team and employees that are as
trained as the ones in the home market, and also have top executives that have a full understanding of the
local market. Referring to the example previously stated, one of KFC success factors was to choose local
executives with local know-how and understanding of customer needs and tastes. ​There are many benefits of
hiring Chinese managers, first their local market knowledge and deeper understanding of Chinese business.
Second, not only lower wages and insurance costs for local employees, but Chinese employees frequently
have strategic contacts with suppliers, customers and local government authorities that can be considered an
advantage for foreign companies.
Furthermore, the last area is represented by ​government relations​, which represent a crucial factor when
doing business in China as regulations are sometimes very strict and having a local government support is
fundamental to market products and services in China. Additionally it is important to understand in which
industrial sectors the government is interested in growing and developing the economy and which are the
incentives given to foreign investors. Also it is fundamental to understand which licenses are required to do
business in China and who are the authorities that give them. For the reasons stated previously, the
knowledge and approval of the government is necessary to operate in the market. The ideal situation would
be to have a framework agreement like in the ​Silk ​Belt initiative between China and Italy where both
countries are benefiting: Italy becomes a global competitor by opening up its ports to China, and on the other
side, China expanding its trade network in the western countries.
In conclusion, it is clear that companies must be aware that when entering in Chinese market they need to
have a clear understanding of the consumers and the outstanding rules. The products marketed in China can’t
be the same produced for western consumers, the quality has to be the same but the products must be adapted
and developed to match the different culture. Foreign companies must do several things before entering in
the Chinese market, first they should do some initial background research on the country and on the market;
after they must understand the targeted customer and segment the market by geography, income levels and
habits. After having analysed the previous factors, they are ready to determine which is the best entry
strategy and which partners would work better for their purpose. When deciding the entry strategy, they
should also undertake ownership decision, whether establishing a wholly owned subsidiary (WOS) or a joint
venture (JV)10. Before entering in any partnership with local companies, MNCs should research the market
thoroughly and they should never assume that they will face similar market conditions as their home
countries.

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​Pampers in China: From Market Sleep to Golden Sleep by Nada Rifki
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KFC Case (seen in class)
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Article: Ownership decision of Chinese outward foreign direct investment (FDI)

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4. Compared with the McKinsey article, do you have any different views on Chinese market or on doing
business in China, are there any weaknesses in this article on its analysis of doing business in China?

Some aspects I believe have not been analysed with enough importance through the article are the strong
language barriers and the cultural differences, two factors that are highly challenging business deals in China.
It has been proven that poor communication and language barriers are costing foreign companies a lot of
money, however executives aren’t doing enough about it. The ​Economist Intelligence Unit has interviewed
approximately 600 senior executives of Western companies doing business in China and more than fifty
percent of them has admitted that misunderstandings and ​messages lost in translations ​have slowed major
business deals for their companies11. Most of Chinese employees are not fluent in English and most of
Western people do not speak Mandarin at all; this problem results in a lack of transparency and lack of direct
communication. Furthermore, there are many cultural differences between Western countries and China, and
I believe that there are many traits and uses that foreign companies are underestimating and that are highly
affecting their business deals in China. For example, the communication style can be a source of
misunderstanding, some studies have shown that Chinese people have a preference for indirect and high
context communication12. This means that sometimes they don’t talk directly but they imply many things,
therefore huge misunderstandings could arise between business partners. Another factor that foreign
companies must consider is the principle of ​Guanxi - which means ​relationships ​or connection- ​that ties
friends and partners, aimed to promote trust and cooperation. If a person or a business entity violates
Guanxi’s principle, there is the risk to lose face and reputation and honouring this principle is a way of
accomplishing every day task in the Chinese culture. As Guanxi, there are many others cultural traits that are
common in the Chinese culture that are applied also to the business sector, and many foreign companies fail
to recognize these traits and behaviours when doing business in China.
Furthermore, foreign companies sometimes tend to forget that China is governed by a communist party,
factor that highly influences people’s lifestyles and their way of doing business. During my trip in China, I
had the chance to talk to local people and they told me that it is very important to avoid topics regarding
religion and politics.
During the course of Strategic Management in China and during my trip in the country, I was able to think a
lot about this topic and I understood that the first step when doing business in China is to recognise the
cultural differences and for this reason, I strongly suggest foreign companies to establish a cultural training
program aimed to teach their employees about the main uses and traits of Chinese population. Through a
programme like this, foreign companies will we able to develop an intercultural workforce and develop
strategies able to embrace all the cultural differences.

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Economist Intelligence Unit , Article: Language barriers are costing companies tons of money
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Challenges of doing business in China