Analyzing Opportunities And Challenges Of Entering China Market For A Singapore-based Steel Company

Suppose that you are a business strategist in a Singapore-based firm that makes and/or sells consumer or industrial products . The firm is interested to enter the China market within the next two years and you are tasked with mapping out the opportunities and challenges of doing business in China.

Identify the product that you will be making or selling in China. State and discuss six  relevant and important factors that you would consider prior to entering China’s market. These factors should cover broad economic, political and socio-cultural concerns.

a. Assess the nature and trend of China’s logistics industry.

b. For the product that you have identified in Q1, formulate a viable supply chain strategy for China’s market. You should take into account the following factors:

• Cost considerations (e.g. labor, materials and taxes)

• The firm’s suppliers and their corresponding locations

• Quality assurance from suppliers

• The firm’s inventory strategies

• Logistics considerations (e.g. transportation services)

In 2012, e-commerce shoppers in China spent over RMB 1 trillion online, presenting a highly lucrative market for businesses to tap on. With 700 million netizens, China’s digital market is the largest in the world and is continuing a highly positive trend.

Outline and examine the major trends of China’s e-commerce market. You may wish to consider the following points (include statistics and graphs if possible):

• China’s overall e-tailing market, broadband accounts and smartphone adoption

• Major companies in the market

• Where the market is headed in the near future (i.e. next 1-3 years)

• Development opportunities for your firm in Q1

As discussed in China’s 13^th Five-Year Plan, one of the key areas that the country is focusing on is inclusive growth. Explain what is ‘inclusive growth’ and analyse how e-commerce and the digital economy at large can be used to enhance inclusivity in China.

Factors to Consider Before Entering China's Market

The product that the Singapore-based firm intends to sell in China is steel. Before entering into the China’s market, the firm needs to analyse six relevant and essential factors based on the country’s socio-economical and political aspects and for this the report has analysed political, economical, social, technological, legal and environmental issues or in short PESTLE analysis (Song, Sun & Jin, 2017).

The Chinese government has the power to promote the rules and regulations solely. According to the constitution, the People’s Republic of China is referred as a socialist state falls under the dictatorship of people’s democratic led by the working class. The Chinese government is consisted with the people’s congresses and political party systems, which makes an agreement with the political consultation and multi-party cooperation of the Communist Party of China (CPC) (Haveman, Jia, Shi & Wang, 2017). These systems have confirmed the power of CPC across the country. According to the political consultation, all parties, representatives and mass organisations under the leadership of CPC take part to the country’s consultations and some important issues related to economical, political, social and cultural affairs before taking any decisions and discussion major issues to implement the decisions. China experiences some political risks regarding expropriation, confiscation, contract repudiation and currency inconvertibility. Moreover, a conflict between central government and the local and provincial governments regarding the applicable law and its non-observance and observance can be seen over the country. In addition to this, it is essential to discuss about the political stability of China for foreign companies. The activity of foreign business along with foreign investment and tourism in this country has decreased drastically over the year. 

Since 1949, China has followed the central economic planning based on the Soviet-style while market reforms have been come into existence in 1978 when the People’s Republic of China has opened up its economy in international market (Jiang, Dong & Du, 2018). The economic condition of this country has disrupted many times, for instance, Chinese Civil War and the World War II during 1940s were adversely affected the economic condition of this country.

However, China liberalised its economic condition through adopting market reform strategies since 1978 when the president of this country visited to Singapore. China’s economic condition affected adversely after the global financial crisis, occurred in 2008 in the U.S.A.

Figure 1: Annual GDP growth rate of China

Source: (Tradingeconomics.com., 2018)

The above figure has represented the annual growth rate of China since 2008. From this diagram, it can be stated that the annual growth rate of this country has decreased drastically after 2008 while before this year, the average GDP growth rate of China was 10% per year (Tradingeconomics.com., 2018). After 2009, this republic country has recovered its economic condition though internal reforms of the country have again led the GDP growth rate of China to decrease further (Zhu, 2018). However, based on nominal GDP, the Chinese economy has become the second largest one after the U.S.A and consequently, it has captured the maximum market across the world due to its fastest-growing economy.

Assessing China's Logistics Industry and Formulating a Supply Chain Strategy

As of 2018, China is the largest populated country all over the world containing almost 1.42 billion populations, which is estimated as the 18.54% of world’s total population. However, this increasing population has created serious problems for the government of this country and for this; the CPC has implemented policy regarding birth restrictions. The chief goal of Chinese Government is to stabilize country’s population during first half of the 21^st century (Enderle, 2018). From this aspect, it can be said that the country is a labour-intensive one and this further can help any foreign companies to get sufficient amount of labourers.

Figure 2: Population growth rate of China

Source: (Data.worldbank.org., 2018)

According to above figure, population growth rate in China has increased drastically over the year since 2008.

Other important social factor is unemployment rate, which is reducing over the year and in 2017, this rate has reached at its lowest point, which is, 3.95% (Israr & Saleem, 2018). However, due to structural reform within the economy, unemployment rate has experienced some trouble and this in turn has increased the rate in this county at present. Hence, the Singapore Company can find charge lower wages for these unemployed labourers. In addition to this, Complex cultural system of China includes the hierarchical structure regarding social life, family importance, hard work for achievement and self-restraint regarding cultivation and morality. Hence, it is essential for this foreign company to understand about these cultural diversities of China.

Figure 3: Hofstede cultural dimension of China

Source: (Hofstede Insights., 2018)

The above figure has represented China’s Hofstede cultural factors indicating high power distance (80) to represent higher level of inequality of wealth and power within the country. The other significant factor of Chinese culture is Long-term Orientation (87) (Hofstede Insights., 2018). This factor represents time perspective and preservation attitude of the country.

China has robust opportunities to develop its technological fields related to biotechnology and computers to innovate. After 1970s, some large companies like Philips and General Electric entered into the country with their stipulated transfer of technology. At present, companies with different sizes have technological advantages in China (Wei, Xie & Zhang, 2017). However, foreign companies have found that technology theft by local people has become a serious but common issue in China. For this, it is essential for this Singapore Company to become aware regarding this issue before entering into the market.

The legal system of China represents the parliamentary supremacy, where institutions of executive and judiciary are secondary compare to the legislature along with a state of unified non-federal, whose powers of law making are restricted by the central state. Internal security, police and other social monitoring related functions provide public security and for this; a new council regarding national security has been formed in 2013 (Besley, 2015). Under the CPC leadership, courts and other institutions of legal operate their activities while the central, provincial or local governments approve their budgets and judges sections. Hence, it can be said that the legal system in China can be biased for local authorities and against the foreign companies.

Examining the Major Trends of China's E-commerce Market

The country has various taxes that foreign companies are required to pay. Hence, the Singapore Company needs to follow these tax laws along with tax treaty between these two countries. Some of these taxes are Enterprise Income Tax (25% for a residential company), Value-Added Tax (VAT) and consumption tax (Chen, 2018). The tax system of China falls under eight main categories. The employment law of China sets minim levels between the relationship of an employer and an employee, where both can negotiate their scope of jibs, salary and other job related minimum benefits. In addition to this, the country has Intellectual Property Law, Competition Law, Foreign Exchange Law along with Import and Export Law that are required to consider.

Due to rapid development in industrial sector, the environment of China has experienced negative externalities, for instance, decreasing natural resources and increasing pollution within the environment. In 2007, the country has been recognised as the largest carbon dioxide emitter along with other green house gases (GHG) across the world (Jiang, F., Zalan, Herman & Shen, 2018). According to the environment report of World Trade Organisation (WTO), most of the rivers in China are polluted by large extend and due to this maximum population may not receive clean water to drink. Hence, Chin has established its administrative committee for environmental protection.

a). China’s economic growth accompanies with the increasing demand for logistic industries though capabilities of this industry has remained at an initial level of development due to some unresolved challenges. For this, the government has taken initiatives to improve the efficiency and capacity of logistics for both local and foreign players (Arvis et al., 2018). Hence, it can be said that, logistic industry of China is going to experience robust and steady growth in coming years.

Figure 4: Total value of China’s logistic market during 2012-2016

Source: (Statista, T., 2018)

As per the above diagram, it can be said that total logistic value of China has become 229.7 trillion in 2016. At present, logistic industry in China can be divided into four chief categories, which are i) state-owned companies including China Post, Sinotrans Group and other subsidiaries; ii) Private domestic companies that operate through truck, express delivery and general logistic; iii) foreign companies, whose key target is international market; and iv) spin-offs.

The demand for this logistic industry in China is influenced by various factors like rapid expansion in domestic market, improved infrastructure in most of the developed cities and e-commerce sector of China.

Top metal manufacturing companies in China are ArcelorMittal, Nippon Steel & Sumitotmo Metal Corporation, Baosteel, Hebei Iron and Steel Group and Posco and so on. These companies can supply steel to this Singapore Company at comparatively lower prices.

The company can hire local labourers with comparatively lower wages, as the country has large workforce. However, it can be difficult to hire skilled labour with lower wages. Hence, in this situation, the company needs to hire skilled workers from overseas with higher wages.

The Singapore Company is a non-resident company of China for which it needs to pay enterprise income tax depended on the income earned from China. Moreover, the company needs to pay other taxes as well.

The steel company of Singapore chiefly supply its products to various car-manufacturing companies like Foton, Foday, Geely and Green field Motor (Chin, 2018). Those companies are situated in Zhejiang, Beijing, Guangdoong.

China follows its effective mechanisms related to quality control for any business that is intending to secure its supply chain (Hu & Zhang, 2017). The country has its offices and labs to check supply chain quality in Hong Kong, Sichuan, Guangdong, and Zhejiang for inspecting products, texting in labs and supplier audits. The company needs to follow ISO 9001-2008 certification for checking the product quality.

Analyzing How E-commerce and Digital Economy Can Enhance Inclusivity in China

The Supply Chain Inventory has various logistic forms, which are raw materials procurements, storage of raw materials and storage of semi-finished or finished products and transport of finished or semi-finished products.

Reorder level is  stated as the inventory level through which a company can place new order.

The specified Singapore Company is the retailer of steels. It sells 935 units to one of the car manufacturing company every day (Wen, Xu, Lee & Ren, 2017). The supplier of this company takes 7 days to deliver the order.

Hence, the manager of this Singapore Company should place the order before decline o inventories below 6545 units for avoiding stock-out.

The company is operating intra-state business in China. However, to transport steel, the company can follow any of the transport methods, which are, air, water or road (Mei, & Wei, 2017, July). Through air, the company can transport light products within short period while to transfer heavy products, the company needs to use railways and inland waterways.

As of now, e-commerce market in china has developed significantly and has become the largest one across the world. In 2017, this market has crossed $ 1.1 trillion and consequently has contributed 23.1% of entire retail market in China (Giuffrida, Mangiaracina, Perego & Tumino, 2017). It is predicted that by 2020 this e-commerce market can surpass the U.K, the U.S.A, Germany and Japan. This e-commerce market includes people, who are connected through internet via smartphones and computers. At present, around 38.4% of total population of China is using internet connection. In this field of e-commerce market, many foreign companies like Amazon, Alibaba, B2W and Jingdong and others have operated their business successfully. On the contrary, some other companies like e-Bay, Wal-Mart and Best Buy have failed to sustain within the market. Increasing economic growth of China along with its large market share across the world can develop the future prospects of these e-commerce sites, significantly. As a result, the Singapore company can also develop its economic condition with the help of this digital market, as it can develop the logistic services for this company. The company can conduct with other automobile companies or hardware companies, where steel is used as raw materials through online. This further can develop customer base and sells of the company.

Inclusive growth implies economic growth, which generates employment opportunities for reducing poverty within the country through accessing basic services related to education and health for poor. According to the 13^th Five-Year Plan of China, inclusive growth implies increasing supply of public goods and services for les developed areas and poor rural areas (Ma et al., 2018). In addition to this, through this growth, the country focuses on two-child policy to control population. In addition to this, this plan focuses on policy improvement regarding employment support and provides various vocational training for increasing skills of labour. In addition to this, the plan tries to expand its middle-income people and increase income for lower income group people to reduce income inequality within economy (Wang et al., 2018). To focus on inclusive growth, the government of this republic country also focuses on development of public health system by reforming medical facilities. Hence, from these objectives, it can be stated that the chief goal of China’s 13^th Five-Year Plan is to focus on inclusive growth of the country.

E-commerce and the digital economy of China can improve the inclusive growth of the country. According to a report of Accenture, the number of people using internet in China was around 650 million among which most of the people were using internet through smart phone. This trend has helped the e-commerce and digital economy of this country to develop further and this in turn has developed the business sector of China to develop further. Moreover, the logistic services has developed significantly, through developing these e-commerce and digital economy. This in turn has facilitated public sectors and other private sectors to deliver medicines, provide education and supply raw materials in rural areas for developing small firms over there. Online marketing strategy has helped large number of rural Chinese people to purchase products across the world or across the country. In addition to this, this service also facilitates small and medium size companies to reach in any part of the country or outside the country for selling their products without making any branch or without incurring extra costs for advertising. Thus, by covering a wide range of market and increasing customer base, any company can expand its business and this further can increase employment opportunities in those areas. As a result, through earning more income or getting jobs, poor people in these remote areas can increase their standard of living and this further fulfil the target of Five-Year Plan regarding increasing the number of medium income group people and developing economic conditions of lower-income group people. In short, through e-commerce facilities and digitisation, the country can develop its economic activities across the nation through reaching any remote more easily and quickly. As a result, the target of 13^th  Five-Year plan can easily develop its inclusive growth.

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