the practices of international market entrance for chinese companies where and how to grow?

The Practices of International Market

Entrance for Chinese Companies

WHERE and HOW to Grow?

Growth is top of mind for business executives. Strong, value creating revenue

growth lies within reach of corporations that pursue best practice in innovation, strategy,

marketing, operations and organizations.

For companies aspiring to grow, where to compete is just as important as how. To choose the right battlegrounds, they

must match their distinctive capabilities with sectors where

profitability growth is likely to occur.

Internationalization

Major Motivations to Internationalization

Proactive

Motivation

Reactive

Motivation

Profit advantage

Unique products

Technology advantage

Exclusive information

Managerial commitment

Tax benefit

Economies scale

Competitive pressure

Overproduction

Declining domestic sales

Excess capacity

Saturated domestic market

Proximity to customers and ports

The Core Competencies • Denning’s OLI theory stated in 1988

Ownership advantages – it consist of intangible assets such as ‘know-how’.

Location advantages - it could be profitable for the firms to continue these assets with factor endowment ( labor force, energy, materials, transport, and communication channels) in foreign market.

Internationalization advantages – it must more profitable for the firms to use its advantages rather than selling them, or the right to use them to a foreign firm.

• Other Advantages

EXPORTING

INTERNATIONAL CONTRACTING

INVESTMENT

Joint VentureGreenfieldM&A

LicensingFranchisingContract manufacturing Management contractTurnkey projects

Indirect exportDirect export

Internet Entry

Choosing a Mode of Entry

B2BB2C

With the channels of International

Express

Mode of Entry in international Business

Information Systems

Company Infrastructure Logistics

Human Resource

Profi

t

R&D ProductionMarketingand Sales

Customer Service

The Value Chain by Professor Michael Porter

Pro

fits


Indirect export modes

Manufacturer uses independent export organizations located in its own country ( third country)

There are five main entry modes of indirect exporting.

Export buying agent – A representative of foreign buyers who is located in the exporter’s home country. The agent offers services to the foreign buyers: such as identifying potential sellers and negotiating prices.

Export management company/export house – are specialist companies set up to act as the ‘export department ‘ for a range of companies.


Direct export modes

Manufacturers sells directly to an importer, agent or distributor located in the foreign target market.

Distributor (Importer) – independent company that stocks the manufacturer’s products. It will have substantial freedom to choose own customers and price. It profits from the difference between its selling price and its buying price from the manufacturer.

Agent – Independent company that sells on to customers on behalf of the manufacture( exporter). Usually it will not see or stock the product. It profits from a commission (typically 5-10%) paid by the manufacturer on a pre-agreed basis.

CES is the world‘s largest consumer electronics exhibition, the mainstream of Chinese color TV enterprises every year at this international fair. In the year 2005, the achievements of Chinese TV Legion is far beyond people’s expectations.The Xiaxin Electronic exhibited a 30 variety of digital high-definition plasma TVs and high-definition LCD TV, the only orders signed at the meeting had more than 100,000 units.

Case Study ： How to sale the Color TV Sets in USA market？

The same excited is Hisense Group, with the agent of the eight regions, including North America, signed a $ 200 million flat-panel TV orders. In fact, in order to bypass the high tax levy of anti-dumping restrictions in CRT television which United States involved, the Chinese color TV providers exhibiting almost invariably played "high-end brand, large-scale introduction of LCD and plasma flat-panel TVs”."In addition, in order to meet the emerging trend by United States family to information technology, many functions are added, such as access to the Internet, TV shopping, home security control, remote video telephony and other functions." A participants of Chinese business representatives said.By the end of 2011, the LCD TV's overseas sales by TCL which is the top 4 biggest color TV producer in China reached 3.73 million units.

Piggyback – choosing a back to ride on. It is about the rider ‘s use of the carrier’s international distribution organizations.The Strategy of Internationalization of Logitech - with the technology and the product sets of Performance Mouse MX and Anywhere Mouse MX, riding on IBM and Compaq, the revenue of 2011 was $2.32 billion.

http://www.62368.com/picture_13136.html

http://www.hfsmkj.com/Class.asp

http://www.xindone.com/go/temp/ibmdanlao.htm

Export Modes

R&D

R&D

R&D

R&D

R&D

Production

Production

Production

Production

Production

Marketing

Marketing

A B

Export buying agent

C

Indirect export

Direct export

Cooperative export

R&D Production

Note: A1, A2, A3, A are n=manufactures of products /services B: is an independent intermediary/(agent) C: is the customer

A1

A2

A3

A

Marketing

Agent, distributor

Export marketing group (with a local agent of B

C

CB

B

A Rider B

B’s international sales organization

PiggybackC

Home country or third Country

Sales and service

Sales and service

Sales and service

Sales and service

Foreign Target Market

Border


Intermediate Entry modes

Contract manufacturing – is outsourced to an external partner, specialized in production and production technology.

Licensing – the licensor gives a right to the licensee against payment ,e.g. a right to manufacture a certain product based on a patent against some agreed royalty.

Franchising – the franchisor gives a right to the franchisee against payment, e.g. a right to use a total business concept/ system. Including use of trade marks (brands), against some agreed royalty.

There are two major types of franchising:

1, Product and trade name franchising. It is very similar to the trade mark licensing

Mode of Entry in international Business2, Business format ‘package ‘franchising.

International business format franchising is a market entry mode that involves a relationship between the entrant ( the franchisor ) and a host country entity.

The package can contain the following items:

Trade marks/trade names, Copyright, designs, patents, trade secrets;

Business know how; geographic exclusivity; design of the store; market research for the are, location selection, and management system

Start with a response to a perceived local business opportunity, the franchisor will more rely on the knowledge and the flexible response to the local market.

Franchisor will try to search a long term cooperation rather than a conflict. How to develop a monitorial system, a training procedure and adjustment mechanism is very important.

In the early days of the Walt Disney Company, a man to find Walt, said: "I am a furniture maker, I'll give you $ 300, you make me the image of Mickey Mouse printed on my desk, you can?”. This was the first trademark user fees received by the Walt Disney.


Since then, the Disney company created by a large number of well-known animated characters such as Mickey Mouse, Donald Duck, Snow White Princess, etc., are widely granted a license, printed in a variety of goods such as clothing, toys, purses, by the world consumption of especially children’s love. Today, the Walt Disney Company has more than 4,000 trademark licensing in the world. its products, including from the most ordinary ball-point pen to a watches, value of $ 20,000. Use permit trade patterns, the business conduct of the Walt Disney Company was a great success.

http://www.dan-dare.org/freefun/games/cartoonsmoviestv/Goofy/Goofy.htm

R&D

R&D

R&D

R&D

R&D

Production

Production

Production

Production

Marketing

Marketing

A

B

C

R&D Production

Note: A is the manufacture, B: is the partner and C: is the customer

A Upstream specialist

A

B

A Franchisor

Marketing

C

B Downstream specialist

B Franchisee

A Licensor B Licensee

CSales and service

Sales and service

Sales and service

Sales and service

Sales and service

Marketing

Sales and service

R&D Marketing

Sales and service

Production

C Y Coalition

X CoalitionC

Marketing

Licensing

Contract Manufacturing

Marketing

Production Franchising

Border

R&D Marketing

Sales and service

Production

A+B (e.g. a joint venture)

A+B (e.g. a joint venture)

Foreign target market Home country or third Country

Intermediate Modes


Formal successful experience in

Malaysia 20 years ago

Franchising Practice of UK Universities in Chinese Market

The motivations of UK universities to recruit International students worldwide since 1980s.

Former Premier Margaret Thatcher Called on Privatization and Cut the budget to UK Universities. The tuitions to foreign students is 4 times high.

The Advantages of Higher Education System: perfect quality control; plenty of education resources; good reputations;

WT

O co

mm

itted ed

ucatio

n

can b

e a service ind

ustry

UK universities exported higher education products since 1980s in Malaysia; then China since middle of 1990s.

There were 100,000 Chinese students in UK by 2009 who bring 3 Billions Pounds to UK economy. The plan is 120,000 students this year as expected by E&S Ministry of UK

Mode of Entry in international BusinessFranchising Practice of UK Universities in Chinese Market

The Franchising Strategies of UK Universities – delivering the higher education program as a package.

Foundation Course Delivering Language Entrance

Requirement

Joint Venture Business Model

QAA System Monitoring

The localization of teaching & Staffing


Hierarchical Modes

The firm owns and controls the foreign entry mode /organization.

The degree of control that head office can exert on the subsidiary will depend on how many and which value chain functions can be transferred to the market.

Domestic based sales representatives – it resides in the home county of the manufacturer and travel abroad to perform the sales function.

Foreign branch – An extension of and a legal part of the manufacturer( often called a sales office), taxation of profits take place in the manufacturer’s country.

Subsidiary – A local company owned and operated by a foreign company under the laws and taxation of the host country


R&D

R&D

R&D

R&D

R&D

Production

Production

Production

Production

Marketing

Marketing C

Note: C: is the customer

C

CSales and service

Sales and service

Sales and service

Sales and service

Marketing

Sales and service

R&D Marketing

Sales and service

Production

C Transnational organization(Globally integrated)

Region centre (two variants

C

Marketing

Resident sales representatives/ sales subsidiary/ sales branch

Domestic-based sales representatives/ manufacture’s ownSales force

Marketing

Production

Sales and production subsidiary

Border

R&D Marketing

Sales and service

Production

Foreign target market Home country or third Country

Direct to customer

Corporate identity (image), personnel

Common R&D, finance Hierarchical modes

The Research Theory in Mode of Entry

Ronald Coase Professor of University of Chicago

he received the 1991 Nobel Laureate in Economics (“for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.”)

Professor Coase offer this theory in 1937. he argued that ‘a firm will tend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of an exchange on the open market’.

Transaction cost emerge when market fail to operate under the requirement of perfect competition (‘friction free’). In the real world there is always some kind of ‘friction’ between buyer and seller (can often be explained by opportunistic behavior), resulting in transaction cost.

The transaction cost analysis (TCA) framework argues that cost minimization explains structural decisions. Firms internalize, that is integrate vertically to reduce transaction cost.

The Transaction Cost Analysis (TCA) Model

Seller: Producer

Buyer: Export Intermediary

End - customer

’ Friction between seller and buyer Transaction cost

Ex ante cost – search costs - contracting costs

Ex post cost – monitoring costs - enforcement costs

If ‘transaction costs’ are higher than ‘control cost’ through an international ‘hierarchical’ system, then

End - customer

Seller: Producer Internal firm:

foreign subsidiary

Country B

Country A Country BForward integration


Country A

Transaction Cost Analysis Model


Ex ante Cost:

•Search cost: gathering information to identify evaluate potential export intermediaries.

•Contracting cost: refer to the cost associated with negotiating and writing an agreement between seller and buyer.

Ex post Cost:

• Monitoring costs: to ensure that both S and B fulfill the pre determined set of obligations.

• Enforcement cost: to associated with the sanctions of a trading partner who does not following the agreement.

Hierarchies:

•Externalization – Doing business through an external partner ( importer, agent, distributor)

•Internalization - Doing business through an external partner ( own subsidiaries)


The Uppsala Model

The basic information: it developed by Johanson &Wiedershiem-Paul in 1975 at Uppsala University.

Complemented by Johanson & Vahlne in 1977.

Empirical bases:

Four Swedish Companies: Volvo, Sandvik, Atlas Copco, and Facit

The model was made in accordance with the entry form and the choice of the market of these Swedish firms.

The main description:

The Uppsala model is a theory that explains how firms gradually intensify their activities in foreign markets.


The key features of the model:1. Firms first gain experience from the domestic market before they

move to foreign markets;

2. Firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries;

3. Firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes (sales subsidiaries etc.) both at the company and target country level.

Theoretical Contribution:-Establishment Chain (International Penetration)-Psychic Distance (International Expansion-Culturally and

Geographically)--Dynamic Model (Knowledge Development and increasing Foreign

Market Commitment )


Stage 3

Establishment Chain (Four-Stage Model)

-The firm tends to gradually increase its involvement in a specific foreign market

-A sequential and successive process is followed from No regular Export, to Export via Agents, to Establishment of Overseas Subsidiaries, to Overseas Production.

-The stages both represent the increasing resources commitment and accumulated market experience.

Stage 1 Stage 2 Stage 4

No Regular Export

Export via Agents

Overseas Subsidiary

Overseas Production



Market A

Market B

Market C

Market D

Market E

Psychic Distance International Market Expansion

Small

Great

Increasing Internationalization

International Market Penetration

High Market CommitmentsLow

Export Export via Agents Overseas Subsidiary Overseas Production

Increasin

g Geograp

hic M

arket

The Uppsala Model

Source: Linkopings University



Market Knowledge

Market Commitment

Commitment Decision

-General Knowledge

-Marketing methods

-Common characteristics of customers

-Business Culture

-Climate, customer firms personal

-Amount of resources

-Size of investment (marketing, organization)

-Degree of commitment

-Alternative use for the committed resources and transferring them into the alternative one

-Perceived opportunities and problems in a specific market

-The economic effect

Uncertainty effect

The Uppsala Model

Source: Johanson & Vahlne (1977)

Mode of Entry in international BusinessUppsala Model: A Ranked according to psychic distance from Sweden

Profile of establishments, Sanvik Countries

Year

● - Sales Agency ○ - sales subsidiary

×- manufacturing subsidiary

Mode of Entry in international BusinessUppsala Model: A Ranked According to Psychic Distance from Sweden

Profile of Establishments, Atlas Copco

CountriesYear

● - Sales agency ○ - Sales subsidiary

×- Manufacturing subsidiary


The Uppsala Model Criticism of the Uppsala Model

1. Establishment Chain

-The initial step does not necessarily begin with exporting

- Frog Leaping

-De-internationalization

2. Psychic Distance

-Firms more interested in entering markets with greatest opportunities.

-Greater psychic distance but high industry similarities

-Following-clients-business

-Globalization shorten the psychic distance

3. Market Penetration Depth

-Localization

-Market commitment beyond overseas production

Source: Bell& Yong, in Hooley, Loveridge&Wilson(1998),Grady&Lane(1996)

The way of HUAWEI go to

InternationalizationThe way of HUAWEI go to


1

24

3

3

2

The main products are programmed telephone exchanger and telecommunication software and service design


5

6

The Strategy of International Entrance by CNOOC

The Construction for new ports are on going by CHCEC worked for CNOOC (China National Offshore Oil Corporation ) to build bases for aviation fuel storage facilities,liquefield petroleum gas storages...

Hambantota port

Coco island

Gwadar Port

Pearl Necklace Strategy to India

Foreign Direct Investment

• Now many firms prefer to enter international market through ownership and control of assets in host countries. Other firms may first gain knowledge of and expertise in operation in the host country, and then expand in the market through ownership of production or distribution facilities.

• FDI affords the firm increased control over its international business operations, as well as increased profit potential.

• FDI exposes the firm to greater economic and political risks and operating complexity ,as well as the potential erosion of the value of its foreign investment if exchange rates change adversely.


Marketing factors

!. Size of Market

2. Market growth

3. Desire to maintain share of market and to follow competition

4.Desire to advance exports of parent company

5. Need to maintain close customer contact and following them

Cost factors

1. Desire to near labor and lower labor cost

2. Availability to raw materials/capital/technology

3. Lower transport cost

Barriers to trade

1. Government-erected barriers to trade

2. Preference of local customers for local products

Investment Climate

1.Political stability / Tax structure/ Currency exchange regulations

2. Limitations on ownership

Major Determinants of Foreign Direct Investment

(FDI)


The firm and Its Competitive Advantages

Change the Advantages Exploit Existing Competitive Advantages Abroad

Production at Home Exporting Production Abroad

Licensing Management Contract Control Assets Abroad

Joint Venture Wholly Owned Affiliate

Greenfield Investment M&A Foreign Enterprises

1 step

2 step

3 step

4 step

5 step

Source: Adapted from Gunter Dufey &R. Mirus, University of Michigan 1985

The DFI Decision Sequence


In November 2003, TCL, the top 6th Chinese Electrical Appliances Producer costs € 220 million merged the television manufacturing business with the French consumer electronics giant Thomson, thus forming the world's largest color TV enterprises of TTE Europe, with estimated annual sales of $ 3.5 billion, TV shipments to more than 18 million units. TCL accounted for 67% of the shares of the combined company.

Before the joint venture, Thomson loss of € 100 million, For answering the arguments, Mr. Li Dongsheng, TCL chairman explained: if it is profitable, it will have no the TCL anything, but this loss gave an opportunity to TCL for the European market entrance. The Chinese market has long been open, how to get the advantage of competition? The attack is the best defense – if the others use global resources to fight you, it is difficult to defense with regional resources only.

http://tech.sina.com.cn/it/2004-07-29/1136394988.shtml

For acquisition of Thomson, TCL Group continually losses for two years in 2005, 2006. In April 2007, TTE Europe filed for bankruptcy liquidation. On March 10, 2011, the Commercial Court of Nantes, France, made the first order of court decision, the TCL Group, TCL Multimedia and its four wholly-owned subsidiary should pay € 23.1 million in compensation to the statutory liquidator of TTE European (about RMB 211 million).The announcement of TCL Multimedia and TCL Group Annual Report, the Commercial Court of Nantes, France, will make the judgment of the second writ in that year , which claims the amount of up to 34 million euros.Li Dongsheng said: Chinese enterprises have to go out whenever sooner or later, and go early is better to go late. This process is bound to be difficult. For TCL acquired Thomson, Alcatel, but we can not stop to internationalization, each way has its risks, the business war means that the risk of intense.

Methods for FDI

1

Greenfield strategy: building new facilities ;the word green-field arises from the image of starting a virgin green site and then building on it

3

Joint Venture: creating when two or more firms agree to work together and create a jointly owned separate firm to promote their mutual interests

2

Acquisition strategy: buying existing assets in a foreign country; the purchaser quickly obtains control over the acquired firms’ factories, employees, technology, brand names and distribution networks


The Greenfield Strategy

Advantages :• The firm can select the site that best meets its needs and

construct modern, up-to-date facilities.

• The firm can start with a clean slate.• The firm can acclimate itself to the new national business

culture at its own pace, rather than having the instant responsibility of managing a newly acquired, ongoing business.


The Greenfield Strategy

Disadvantages :• Successful implementation takes time and patience.

• Land in the desired location may be unavailable or very expensive.

• The firm may be more strongly perceived as a foreign enterprise.


The Acquisition Strategy

Advantages :• It is quick to execute.

• In many cases firms make acquisitions to preempt (move faster and early than) their competitors.

• Maybe it is less risky than Greenfield.



Disadvantages :• The acquiring firm assumes all the liabilities—financial,

managerial, and otherwise—of the acquired firm.

• The acquiring firm usually must also spend substantial sums up front.



Why do acquisitions fail?• The acquiring firms often overpay for the assets of the

acquired firm.

• A clash between the cultures of the acquiring and acquired firm.

• Attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast.

• Inadequate pre-acquisition screening.


As the big giant of the world's retail industry, Wal-Mart's annual sales are four times the world's second largest retailer Carrefour. Different with Carrefour to merge Costco and opening his new branches of Costco in Japan grand and lively, After four years of study, Wal-Mart decided into Japan through a partner. After the search, the target is Japan's fourth largest retail - Seiyu Ltd.

Enter the Japanese market through cooperation with Seiyu in 2002, Wal-Mart made a low profile, regardless of name or store, do not have a local Wal-Mart's logo. In December 2003, Wal-Mart held the shares of Seiyu has reached 38% (2002 entry only held 6%). In November 4, 2005, holding of shares in Seiyu to 56.56%. Wal-Mart in 2007 spent $ 873 million to acquire of the remaining shares of Seiyu.


China Capital Steel Corp. acquired a state owned Iron ore company – Hierro Company in 1992. It was a good deal. The company covered 582 k m2 area with estimated 1.6 billions tons iron ore reserve.

Chinese acquirer was suffered the loss for 15 years due to the strikes

Which was organized by worker’s union and different cultures.

The company started to make money in 2007, $170 million. The reason is not only by the ore price increasing but the managers understood how to run an oversea company appropriately.

Joint Venture

Advantages :• May facilitate entry into a foreign market.

• Allow firms to share the fixed costs (and associated risks) of developing new product or processes.

• A way to bring together complementary skills and assets that neither company could easily develop on its own.

• It can make sense to form an alliance that will help the firm establish technological standards for the industry than will benefit the firm.


Joint Venture

• But alliances have risks, and one key to making a strategic alliance work is to select the right ally.

• The characteristics for a good ally 1.help the firm achieve its strategic goals

2. share the firm’s vision for the purpose of the alliance

3.unlikely to try to opportunistically exploit the alliance for

its own ends


Joint Venture How to select a good partner• Collect as much pertinent, publicly available information on

potential allies as possible.• Gather data from informed third parties, including firms that have

had alliances with the potential partners, investment bankers who have had dealings with them, and former employees.

• Get to know the potential partner as well as possible before committing to an alliance. This process should include face-to-face meetings between senior managers to ensure that the chemistry is right.


Haier set up a joint venture with Jordan made his product into the U.S. market

Haier negotiated with the MEC of Jordan in December 2001. Haier invested $ 5 million to set up a joint venture ‘Haier Middle East Trading Company’ with MEC. the two sides began to the construction of the Haier products manufacturing plant in 2002.The mature sales network of Jordan MEC helps Haier to quickly open up its business in the Middle East market. At the same time, Haier Jordanian exports their products to the U.S. market enjoys the zero-tariff preferential policies. Haier products are exported to the United States finally.

Springboard

http://www.sis.pku.edu.cn/pub/wanglian/zhd/map/map_me.htm

The international Entrance by E-Commerce B2B or B2C marketing initially focused on domestic sales, but unexpectedly, the foreign customer orders coming and resulting in the concept of Internet marketing (IIM)For instance: Dell AmazonShipments through international freight services company or express such UPS,DHL,TNT,FEDEX,EMS,NHK.

Xsdot is a web development company that occupies itself with the development of internet, intranet, extranet, e-commerce and custom web based applications.

Exporting

Contractual Agreements

International Investment

Degree ofRisk & ManagementControl for the Profit

High

Low

Internet

The Comparison of the Four Different Modes of international

Entrance


Mode Primary Advantage Primary Disadvantage

Exporting Relative low financial exposure Vulnerability to tariffs and NTBs

Permit gradual market entry Logistical complexities

Acquire knowledge about local market Potential conflicts with distributors

Avoid restrictions on foreign investment

Licensing Low financial risk Limited market opportunity/profits

Low-cost way to assess market potential Dependence on licensee

Avoid tariffs NTBs restrictions on foreign investment

Potential conflicts with licensee

Licensee provides knowledge of local market Possibility of creating future competitors

Franchising Low financial risk Limited market opportunity/profits

Maintain more control than with licensing Dependence on franchisee

Franchisee provides knowledge of local market

May be creating future competitors

Low-cost way to assess market potential Potential conflicts with franchisee

Avoid tariffs, NTBs, restrictions on foreign investment

Advantages and Disadvantages of Different Modes of Entry

Mode of Entry in international BusinessAdvantages and Disadvantages of Different Modes of Entry

Mode Primary Advantage Primary Disadvantage

Contract Manufacturing

Low financial risk Reduced control (may affect quality, delivery schedules, etc.)

Minimize resources devoted to manufacturing

Reduce learning potential

Focus firm’s resources on other elements of the value chain

Potential public relationship problems-may need more

monitor working conditions, etc.

Management contract

Focus firm’s resources on its area of expertise

Potential return limited by contract conflicts with licensee

Minimal financial exposure May unintentionally transfer proprietary knowledge and

techniques to contractee

Turnkey project Focus firm’s resources on its area of expertise

Financial risk (cost over runs, etc.)

Avoid all long-term operational risk Construction risks (delays, problems with supplies, etc.)

Foreign Direct investment

High profit potential Maintain control over operations

High financial and managerial investments

Acquire knowledge of local market Higher exposure to political risk

Avoid tariffs, NTBs Vulnerability to restrictions on foreign investment

Greater managerial complexity

the practices of international market entrance for chinese companies where and how to grow?

Documents

internationalization

profits slide

export department

foreign market

agent independent company

foreign target market

professor michael porter

mode of entry b2b b2c