Analysis from the Economic Viewpoint
Economic Overview. China's economy development since the great revolution has changed from communism or socialist economy towards open market concept. In 2010, China was the global number one exporter and their economy in terms of size overtook Japan and only remains behind United States. China’s continuous and gradual reforms started with phasing out agriculture activity; followed by liberalization of prices, fiscal decentralization, open banking and financial system, creation of share market, large amount of private sector investment, and large foreign direct investment. China’s GDP recorded at USD 7.9 trillion and compounded annual growth rate of 11% for the next five years proves that the country is creating many opportunities to businesses. Foreign Direct Investment stands at USD 108 billion (Huang et. al., 2010; Central Intelligence Agency, 2010).
Regarding economic problems China currently faces are inflation and increasing local government debt. Inflation rate of 6% had surpassed the government's target of 3%. China is expected to have some form of tightening to control the rising inflation in 2011. Another pressing economic matter is the rising local government debt, which swelled as a result of stimulus policies, and is largely off records and potentially low-quality debt. China economic challenges are (a) to encourage local demand through reducing its household savings; (b) creating and maintaining ample employment opportunities for its citizens; (c) fight graft; and (d) control environmental pollution and social disparity related to the economy's rapid transformations (Huang et. al., 2010).
In 2009, world recession reduced foreign demand for China’s exports, but China rebounded quickly, outperforming all other major economies in 2010 with GDP growth around 10%. The economy appears set to remain in the double digit growth rate in 2011. China’s ruling government knows that they cannot depend too much on their exports for continuous growth but instead to focus on improving its local consumption (Central Intelligence Agency, 2011).
Analysis from the Socio-Cultural Viewpoint
Population Overview. China has 1.38 billion people and has annual population growth rate of 0.66%. 19.8% of the population is below 15 years of age, 72.1% of the population aged between 15 to 64 years old and remaining 8.2% age 65 and above. Median age for China is 35.2 years, 34.5 years for males and 35.8 years for females. 43% of the population lives in urban areas with average growth rate of 2.7%. The growth figure shows many of its citizens in millions are actually migrating to urban areas. Literacy rate in China stands at 91% for adults aged 15 years and above. (Central Intelligence Agency, 2011)
Society and Culture Overview. Language used throughout the country is mandarin, consist of Chinese characters, both written and spoken. Most university graduates put emphasis on their students to learn English; however it is best if foreign investors entering China to learn up their language (Fong et. al., 2007).
According to Qiu (2010) most societal values are from the teachings and practice of Confucianism, Buddhism and Taoism. The schools of thought are influential and have evolved through out the years to form Chinese way of thinking, acceptable values and practices. China business culture put emphasis on guanxi; which means relationship, thus business practices in China focuses on building relationship rather than following protocols in business practice (Fong et.al., 2007). Chinese values thrift and persistence; the business culture also reflects this values where actions today influences the future generations is of great concerns. Griffin & Pustay (2007) research shows four important cultural characteristics in China, (i) which is persistence (i.e., willingness to strive for excellence), (ii) respect for relationship (i.e., guanxi in dealing with all matters), (iii) thrift (i.e., always look for ways to reduce cost and minimal expenses), (iv) and sense of shame (i.e., importance of guarding against actions that may cause or bring bad image to self and family).
Hofstede’s Framework classify China as a collectivism country where decision making process depends on group consensus; high power distance; Chinese people accepts the reality of inequality, weak uncertainty avoidance; ambiguous situations accepted, aggression and emotions not shown. Tend towards masculinity in business dealing where competitions and performance are important success factors. Lastly weak time orientation where waiting time for interviews and business dealings can lasts as long as the meeting requires (Fletcher & Brown, 2005).
Another culture emerging in China is that the people, especially the upper and middle class society now have developed a sense of materialism where owning luxury goods and designer items gives them status in the society. Therefore industry that appeals to this segment of people has recorded increased sales even during the global financial turmoil (Dicken, 2007).
Analysis from the Technology Viewpoint
Currently, China an emerging country, technological advancement in the nation is still relatively slow compared to developed countries. However, China has recognized the importance of technology in ensuring development has created a pool of human capital well versed in engineering, telecommunications, manufacturing and information systems. The talent pool supply has helped China improved its manufacturing industry. Improvement in science and technology creates job opportunities in the manufacturing sector and also improve quality of life (Dicken, 2007).
Many high end technology companies have set up base in China as their hub for their Asia operation. For example, Google, Dell, Apple and Microsoft have its offices in China and have their own research center which employs talented Chinese locals. Through foreign direct investment and technology transfer from developed countries, China is catching up in terms of technology advancement (Mellahi, 2005).
Analysis from the Environmental Viewpoint
Environmental Overview. Chinese governments consider environment sustainability as one of its top priority in approving business which has impacts on the environments. However there are many loopholes and high corruption in the system that makes the enforcement weak. Many laws and restrictions were drafted to protect the environment and government bodies are working with non-governmental organizations to achieve sustainable environment management (Daniels et. al., 2008).
Analysis from the Legal Viewpoint
Legal and Legislature Overview. China’s legislature is mainly derived from the soviet and continental civil code of principles. The judiciary consists of Supreme Peoples’ Court; where judges are appointed by the ruling party, Local People’s Courts consists of High, intermediate and basic courthouse to handle cases of various degree of differences and importance. Constitutionally, the court system exercises judicial power independently and technically is free of interference from administrative and public organizations, and individuals. The Supreme People's Court oversees the process of justice by local courts and special courts, while courts at higher levels supervise the judgment of courts at lower levels. Business dealings usually are arbitrated and seek for out of court settlements as the preferred method in China. In order to speed things up for businesses to solve sour dealings, China has set up international trade and economic arbitration to assists in mediating international and also local cases (Central Intelligence Agency, 2011).
Rationale to venture into China
China world’s largest country by population and is regarded as the sleeping giant. Most of the large luxury brands have entered into China and has recorded high sales and profitability as a result from its rising middle class. It is common to assume that Multinational companies need to look for new market opportunity in emerging country, mainly to Brazil, Russia, India and China.
Paul Smith Ltd. has already ventured into many other countries but has not set foot on the promising and emerging countries. With its operation in Hong Kong and success in Japan, Paul Smith Ltd. should consider venturing in and tap the market in China, as the best among the BRIC countries. Therefore it makes sense to expand only to China as the country offer the most profitable potential for Paul Smith Ltd. China has the infrastructure, facilities, high income and fashion conscious population.
Entry Modes suitable for Paul Smith Ltd. expansion to China
Based on PESTEL Framework analysis we can conclude that China do have the necessary qualities for Paul Smith Ltd. to consider in its expansion plan. Paul Smith Ltd. main products are its clothing line which has the unique taste of United Kingdom and appeal to the middle and upper middle class society. To enter into China Paul Smith Ltd. should consider mixing the following option as its strategy:
Direct Exporting
Direct exporting is the entry strategy of selling the goods or services produced in one country to other country (Dickens, 2007). First of all, Paul Smith Ltd. needs to employ sales representatives in the China. The main idea is to set up its office to handle the sales and promotional effort of Paul Smith Ltd. Not only that the office must provide after sales support to the sales representatives and customers in China. Even though its products are clothing and accessories, it is important to gain feedback; i.e. after sales services to gauge the level of acceptance among the Chinese marketer and customers regarding the product (Dicken, 2007). Alternately Paul Smith Ltd. China may appoint product distributors. The product distributors will import and then to resell in China. With direct exporting entry mode, Paul Smith Ltd. have the assurance of the quality of its product are not compromised and it can be targeted to specific markets.
Licensing
Licensing is either an exclusive or non-exclusive licensing agreement is provided to a foreign firm, for the rights to manufacture a proprietor’s product for a fixed term in a specific market (Fletcher et. al., 2005). Licensing is considered a relatively easy entry mode to new markets. However, Paul Smith Ltd. may consider licensing as an entry mode to China, but have to be wary of the high counterfeiting and abuse of license agreement by the local vendors. Paul Smith would have to ensure quality and exclusivity of their product when entering into China.
Through licensing the product carried by Paul Smith will be manufactured by the license owner and this provides Paul Smith with relatively low capital investment to enter into China. The risk associated to this method of market entry also is minimal because all capital investment lies with the license owner. Drawback is that this method usually has lower profitable margin due to the nature that the company is actually getting back in terms of the licensing terms. It is however not suggested as a mode of entry into China as it has high counterfeiting rate and also poor legal system to protect the company in the event of such cases happening.
Strategic Alliances
Through strategic alliances Paul Smith actually can fully utilize the expertise of its local partner to ensure smooth operation and distribution of the brand in China. Sharing resources and expertise to engage the China Market will help Paul Smith to capture the target market and manufacture designer items to the taste of the Chinese (Griffin & Brown, 2005). However, Strategic alliances entry mode usually is a very lengthy process and require capital investment from both parties (Fletcher et. al., 2005).
Paul Smith Ltd Suggested Entry Mode to China
It is suggested that Paul Smith should consider the following mix of entry modes. First of all, it should utilize direct exporting as the entry mode to China and once the brand has capture certain volume, then it should consider the opportunity to form strategic alliance with local partners to expedite the expansion process. The most important issue to tackle when considering entrance into China is the brand exclusivity and quality of the product offered. Having both issue sorted out, China form a huge market potential for Paul Smith to tap into.
Conclusion
Paul Smith Ltd international presence and global brand name as luxury brand is well known. Having its presence in most continents and very successful operations in Japan proves that Paul Smith Ltd has managed its business well internationally.
In its expansion plan, Paul Smith should enter China as shown by PESTEL framework analysis as there is a huge market opportunity for Paul Smith to tap. Given the current economic growth rate and rising upper middle class in the society; Paul Smith has every opportunity to seize the fashion conscious group in China through direct export, licensing and strategic alliances with local partners.
References
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