China: External Environment
Executive Summary
This report presents an analysis of the external
environment of the Chinese market. It presents information on the political
environment, legal environment, economic environment, sociocultural
environment, and technological environment. It uses the findings to formulate
recommendations to Australian Laboratory Services Pty Ltd (ALS) on whether it
should continue with its expansion plans into the Chinese market. Analysis of
the external environment shows that the company should continue with its
expansion efforts. However, the company must change its leadership style to
conform to the expectation of Chinese employees.
Table of Contents
The growth of a company may necessitate it to expand
its activities to overseas locations. This helps in sustaining the growth of
the company. However, venturing into new markets presents the company with
various challenges. The company must undertake a critical analysis of the
market to determine its viability. This is the major issue facing Australian
Laboratory Services Pty Ltd (ALS). This report would present of the viability
of the company’s efforts to set up a steel manufacturing plant in China.
This report would analyse the external environment. It
would focus on the political environment, legal environment, economic
environment, sociocultural environment, and technological environment. The
findings of the report would enable the company determine the viability of
setting up its steel manufacturing plant in China.
The report would analyse China’s external environment
in relation to ALS. The report would determine the opportunities and threats of
the Chinese market. The SWOT analysis would help in determining the feasibility
of the company’s efforts to set up a steel manufacturing plant in China.
The report would present information on the political
environment, legal environment, economic environment, sociocultural
environment, and technological environment. An analysis of the above factors
would help in the formulation of recommendations to the company.
China is relatively stable compared to other emerging
markets. This is despite the fact that the country has a one party system.
However, there is very little transparency in the country. Widespread civil
unrest in the short term is unlikely, as there are no signs of division in the
ruling Communist Party. Companies that do business in the country rarely
experience problems unless they get into a dispute with a Chinese partner on a
politically sensitive issue.[1]
2.2 Government relations
Government has deep-seated resentment with Western
powers. Sovereignty of Taiwan is one of the major issues that strains the
relationship with Western powers. This may present challenges to foreign
companies that intend to invest in the country. Foreign companies should form
collaborative relationships with the government to ensure that they stay
informed on the government regulations that may affect their operations.[2]
2.3 Analysis
China has a stable government. It would provide an
opportunity for the company, as lack of social unrest would ensure that the
operations Australian Laboratory Services Pty Ltd (ALS) continue without any
distractions. However, it is vital for the company to ensure that its
operations do not violate the policies of the government, as it may face dire
consequences.
3.1 Business
laws
State Administration of Industry and Commerce is the
agency that regulates the commercial activities of companies operating in
China. All entities must register with SAIC in order to have commercial
operations in the country. In addition, they must submit annual or tri-annual
registration documents to SAIC offices near the entity’s location.[3]
Some of the functions of SAIC are similar to those of The Australian National
Contact Point (NCP). The State Administration of Taxation (SAT) collects taxes
and implements tax laws.
3.2 Labour
laws
China does not have a minimum wage for the entire
country. Employers should ensure that their employers work for a maximum for 49
hours per week. In addition, companies should not hire employees who are less
than 18 years old. China’s labour laws require employers to ensure that
employees work in a safe and hygienic environment. They should provide
maternity leave and treatment for injuries incurred during work.[4]
3.3 Analysis
The labour laws present ALS with an opportunity. SAIC
helps in implementing various laws that facilitate foreign direct investments.
This ensures that the activities of foreign companies continue seamlessly.
Local tax bureaus ensure make it easy for foreign companies to access
government services. In addition, they ensure that companies comply with
existing tax regulations.
4.1 Currency
exchange rate
The Chinese government manages the exchange rate to
favours its exports. China uses a ‘managed float’ system that pegs the value of
the Yuan against a basket of major currencies in the world, which include the
dollar. This has made the Yuan exhibit a high level of stability during both
crisis and non-crisis economic periods. Therefore, investing in the country
would protect a foreign country from volatilities in exchange rate.[5]
4.2 Economic
trends/forecasts
At the end of 2013, China had foreign reserves of US$3,821
billion. The foreign reserves was equal to 19.2 months of the country’s
external payments. In 2012 and 2013, the GDP growth of the country was 7.7%.
This was lower than 8.9%, which is the five-year average of GDP growth. This
indicated a smooth adjustment of GDP growth after a period of high GDP growth.[6]
4.3 Analysis
A stable currency and positive economic outlook would
present the company with an opportunity. A stable currency would prevent losses
due to fluctuations in the value of the currency. On the other, a positive
economic outlook would help in increasing the market for the company’s
products.
5.1 Hofstede’s
Cultural Dimensions
Hofstede’s Cultural
Dimensions
|
Home Country
|
Host Country
|
Managerial implications
|
Collectivism Vs
Individualism
|
90
|
91
|
The company should use
groups to conduct various activities.
|
Power Distance
|
36
|
80
|
The management should
ensure that it rarely uses democratic style of management
|
Uncertainty avoidance
|
51
|
40
|
The management should
formulate strategies on employees may tackle some issues instead of making
employees be at liberty to formulate methods of how to tackle certain issues
|
Time orientation
|
31
|
118
|
The management should
focus on long term instead of short term goals of employees
|
Femininity vs Masculinity
|
61
|
66
|
The management should
offer rewards to motivate employees
|
5.2 Analysis
There are several cultural differences between China
and Australia. This would present a threat to the company. The power distance
is one of the dimensions that may have a significant impact on the management
of Chinese workers. The company should ensure that it rarely uses democratic
style of management, as employees may associate it with weakness of the
company’s leadership.
6.1 Technological
infrastructure
China has highly sophisticated infrastructure and
technology by investing heavily in R&D. In 1998, investments in R&D
accounted for 0.7% of the GDP. However, by 2005, investment in R&D
accounted for 1.4% of the GDP. The country intends the investments GDP to
account for 2.5% of the GDP by 2025.[7]
Reverse engineering of foreign technology has also helped in improving the
level of technology in the country.[8]
China has the largest information and communication
industry in the world. There are more than 1.3 billion phone subscribers. In addition,
the country has more than 500 million ‘netizens’. China Mobile, China Telecom
and China Unicom are some of the largest telecommunications companies in the
China. The companies provide a highly reliable communication system.[9]
The sophistication of technological infrastructure and
high degree of sophistication of the communication would present the company
with an opportunity. They would facilitate the operations of the company and
ensure they run seamlessly. This would help in improving the competitiveness of
the company.
Strengths
|
ALS has operations in
various parts of the world. Therefore, it has experience on how to manage
international operations.
|
Weaknesses
|
ALS does not have a steel
manufacturing plant in any part of the world. Therefore, it may not know how
to manage the operations of a steel industry successfully.
|
Opportunities
|
Economic environment
·
Stable
exchange rate would reduce losses due to exchange rate fluctuations
Technological environment
·
China has
highly advanced communication networks
·
Highly
sophisticated infrastructure would increase the efficiency of the company’s
operations
Legal environment
·
China has
favourable that help in attracting foreign investments
|
Threats
|
Political environment
·
The government
is intolerant to companies that violate its policies
Sociocultural environment
·
There is a
large cultural difference between China and Australia, ALS’s domestic country
|
ALS should go ahead with its expansion efforts. The
company stands to gain from the expansion. The strengths of the company’s
expansion efforts outweigh the weaknesses. The company should set up the
Chinese plant as soon as possible. However, it must first ensure that it
obtains the necessary clearance from various departments in China.
·
The
company should first obtain information on government policies that would
affect its operation before venturing into the Chinese market.
·
The
company should ensure that it does not violate government policies.
·
The
company should use democratic style of leadership rarely
·
The
management should focus on the long term goals of employees instead of short
term goals
Anon. “RPT-Fitch
Affirms China at 'A+'; Outlook Stable” Reuters,
April 4, 2014, accessed on April 5, 2014 from: http://www.reuters.com/article/2014/04/04/fitch-affirms-china-at-a-outlook-stable-idUSFit69605220140404
Cheung, Yin-Wong & de Haan, Jakob. The Evolving Role of China in the Global
Economy. Boston, MA: MIT Press, 2013.
Collins, Stuart. “Political stability in China comes
with little transparency”, Business
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Dwivedi, Yogesh.
Adoption, Usage, and Global Impact of Broadband Technologies: Diffusion,
Practice, and Policy. New York: Idea Group Inc., 2011
Hong, Yu. Labor,
Class Formation, and China's Informationized Policy of Economic Development,
Lanham, MD: Lexington Books, 2011.
PWC. Doing Business and Investing in China. Beijing:
PWC, 2013
Sengupta, Jati. Understanding
Economic Growth: Modern Theory and Experience. London: Springer, 2011.
[1]
Stuart Collins, “political
stability in China comes with little transparency”, Business Insurance, April 5, 2014, para 2-4. Accessed on April 2014
from
http://www.businessinsurance.com/article/99999999/NEWS040103/120309887?tags=%7C59%7C332%7C338%7C76%7C73%7C313%7C80%7C342
[2] PWC, Doing business and investing in china (Beijing, PWC, 2013), p. 124.
[3] PWC. Doing business in China, p.
129.
[4] Yu Hong, Labor, Class Formation, and
China's Informationized Policy of Economic Development (Lanham, MD:
Lexington Books, 2011), p. 231.
[5] Yin-Wong Cheung & Jakob de
Haan, The Evolving Role of China in the
Global Economy (Boston, MA: MIT Press, 2013) p. 68.
[6] Anon., “RPT-Fitch Affirms China
at 'A+'; Outlook Stable”, Reuters, April
4, 2014, para 1-3, accessed on April 5, 2014 from: http://www.reuters.com/article/2014/04/04/fitch-affirms-china-at-a-outlook-stable-idUSFit69605220140404
[7] Jati Sengupta, Understanding Economic Growth: Modern Theory
and Experience, (London: Springer, 2011), p. 60.
[8] Carl Dahlman. Industrial development in the 21st
century. (New York: United Nations, 2007), p. 45.
[9] Yogesh Dwivedi, Adoption, Usage, and Global Impact of
Broadband Technologies: Diffusion, Practice, and Policy (New York: Idea
Group Inc., 2011), p. 52.
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