Effective Marketing To Mainland China – Marketing Research Paper
In order to effectively do business in other countries and societies, businesses must first do much research in determining the best approach to the partnership. Business is hard enough to concrete in a similar environment like the United States; but adding the pressures of
different languages and morals can really put a strain on business relationships and be devastating to the bottom line. Even bigger differences like monetary values, geographical and economical laws can play havoc to a business trying to establish over seas partnerships unless all factors are accounted for.
MemberSoft is the third largest producer of operating systems in the world, third only to Microsoft and UNIX. MemberSoft sold 12 million copies of Baileys06, our flagship operating system, and generated 4 million dollars in profit last year alone. The advantage to MemberSoft’s products ranges in value, depending upon what a particular client needs is. We focus on encryption and security in our packages. With much debate on the security breeches of both Windows and Linux, we took security to the extreme and use this as a huge bargaining tool to move consumers to our product. Another advantage to Baileys06 is its ease of expansion and customization. This chameleon approach to software design allows users to build upon and change many functions of their system and gives the consumer many controls they would not have in other OS environments. We feel that this functionality will really give us the advantage, especially in oversees markets.
We at MemberSoft are in the preliminary stages of marketing Baileys06 to a new market; China. Baileys06 is our newest operating system ran solely on PC formatted computers. We have had much success in marketing and selling Baileys06 to the American public and due to saturation in the market, we feel that China would be a good place to continue. Due to the vast differences between our market here at home and China’s, we are going to start with an in depth analysis of global, regional and country trends in economy, politics and many other factors that can effect our success in the Eastern market. We will also discuss the needs and wants of the Chinese people and plan how Baileys06 can meet those particular issues.
We picked China for our first venture for a few reasons. First, Microsoft, obviously our largest competitor, has a bad reputation in China. The company’s reputation in the West as arrogant and aggressive, along with cultural and business blunders and difficulty adjusting to China’s unique political environment, have caused friction for Microsoft in what is becoming one of the world’s most important markets, according to industry observers. (cnn.com) We are taking the down fall of Microsoft’s reputation in China as a catalyst to booming sales in the East. The challenge will be to not fall into the same traps that our bigger, older brother did. To guard against that, we will start our in depth analysis China’s unique economy and culture.
China stretches some 5,000 kilometers across the East Asian landmass in an erratically changing configuration of broad plains, expansive deserts, and lofty mountain ranges, including vast areas of inhospitable terrain. The eastern half of the country, its seacoast fringed with offshore islands, is a region of fertile lowlands, foothills and mountains, desert, steppes, and subtropical areas. The western half of China is a region of sunken basins, rolling plateaus, and towering massifs, including a portion of the highest tableland on earth. The vastness of the country and the barrenness of the western hinterland have important implications for defense strategy. In spite of many good harbors along the coastline, the nation has traditionally oriented itself not toward the sea but inland, developing as an imperial power whose center lay in the middle and lower reaches of the Huang He (Yellow River) on the northern plains.
The Chinese leadership began moving the economy from a sluggish, inefficient, Soviet-style centrally planned economy to a more market-oriented system. Whereas the system operates within a political framework of strict Communist control, the economic influence of non-state organizations and individual citizens has been steadily increasing. The authorities switched to a system of household and village responsibility in agriculture in place of the old collectivization increased the authority of local officials and plant managers in industry, permitted a wide variety of small-scale enterprises in services and light manufacturing, and opened the economy to increased foreign trade and investment.
China thus has periodically backtracked, retightening central controls at intervals. The government has struggled to sustain adequate jobs growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; reduce corruption and other economic crimes; and keep afloat the large state-owned enterprises, many of which had been shielded from competition by subsidies and had been losing the ability to pay full wages and pensions. From 80 to 120 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time, low-paying jobs. Popular resistance, changes in central policy, and loss of authority by rural cadres have weakened China’s population control program, which is essential to maintaining long-term growth in living standards.
Another long-term threat to growth is the deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table especially in the north. China continues to lose arable land because of erosion and economic development. Beijing says it will intensify efforts to stimulate growth through spending on infrastructure – such as water supply and power grids – and poverty relief and through rural tax reform. Accession to the World Trade Organization helps strengthen its ability to maintain strong growth rates but at the same time puts additional pressure on the hybrid system of strong political controls and growing market influences. China has benefited from a huge expansion in computer Internet use. Foreign investment remains a strong element in China’s remarkable economic growth. Growing shortages of electric power and raw materials will hold back the expansion of industrial output.
Because of limited interaction among regions, the great variety of geographic zones in China, and the broad spectrum of technologies in use, areas differed widely in economic activities, organizational forms, and prosperity. Within any given city, enterprises ranged from tiny, collectively owned handicraft units, barely earning subsistence level incomes for their members, to modern state-owned factories, whose workers received steady wages plus free medical care, bonuses, and an assortment of other benefits. The agricultural sector was diverse, accommodating well-equipped, “specialized households” that supplied scarce products and services to local markets; wealthy suburban villages specializing in the production of vegetables, pork, poultry, and eggs to sell in free markets in the nearby cities; fishing villages on the seacoast; herding groups on the grasslands of Nei Monggol Autonomous Region (Inner Mongolia); and poor, struggling grain-producing villages in the arid mountains of Shaanxi and Gansu provinces. The economy had progressed in major ways since 1949, but after four decades experts in China and abroad agreed that it had a great distance yet to go.
The first few years of the reform program were designated the “period of readjustment,” during which key imbalances in the economy were to be corrected and a foundation was to be laid for a well-planned modernization drive. The major goals of the readjustment process were to expand exports rapidly; overcome key deficiencies in transportation, communications, coal, iron, steel, building materials, and electric power; and redress the imbalance between light and heavy industry by increasing the growth rate of light industry and reducing investment in heavy industry. The government also actively encouraged the establishment of collectively owned and operated industrial and service enterprises as a means of soaking up some of the unemployment among young people and at the same time helping to increase supplies of light industrial products. Individual enterprise–true capitalism–also was allowed, after having virtually disappeared during the Cultural Revolution, and independent cobblers, tailors, tinkers, and vendors once again became common sights in the cities. Foreign-trade procedures were greatly eased, allowing individual enterprises and administrative departments outside the Ministry of Foreign Trade (which became the Ministry of Foreign Economic Relations and Trade in 1984) to engage in direct negotiations with foreign firms. A wide range of cooperation, trading, and credit arrangements with foreign firms were legalized so that China could enter the mainstream of international trade.
Although the reform program achieved impressive successes, it also gave rise to several serious problems. One problem was the challenge to party authority presented by the principles of free market activity and professional managerial autonomy. Another difficulty was a wave of crime, corruption, and–in the minds of many older people–moral deterioration caused by the looser economic and political climate. The most fundamental tensions were those created by the widening income disparities between the people who were “getting rich” and those who were not and by the pervasive threat of inflation. These concerns played a role in the political struggle that culminated in party general secretary Hu Yaobang’s forced resignation in 1987. Following Hu’s resignation, the leadership engaged in an intense debate over the future course of the reforms and how to balance the need for efficiency and market incentives with the need for government guidance and control. The commitment to further reform was affirmed, but its pace, and the emphasis to be placed on macroeconomic and microeconomic levers, remained objects of caution.
The banking system was centralized early on under the Ministry of Finance, which exercised firm control over all financial services, credit, and the money supply. During the 1980s the banking system was expanded and diversified to meet the needs of the reform program, and the scale of banking activity rose sharply. New budgetary procedures required state enterprises to remit to the state only a tax on income and to seek investment funds in the form of bank loans. Between 1979 and 1985, the volume of deposits nearly tripled and the value of bank loans rose by 260 percent. By 1987 the banking system included the People’s Bank of China, Agricultural Bank, Bank of China (which handled foreign exchange matters), China Investment Bank, China Industrial and Commercial Bank, People’s Construction Bank, Communications Bank, People’s Insurance Company of China, rural credit cooperatives, and urban credit cooperatives.
The People’s Bank of China was the central bank and the foundation of the banking system. Although the bank overlapped in function with the Ministry of Finance and lost many of its responsibilities during the Cultural Revolution, in the 1970s it was restored to its leading position. As the central bank, the People’s Bank of China had sole responsibility for issuing currency and controlling the money supply. It also served as the government treasury, the main source of credit for economic units, the clearing center for financial transactions, the holder of enterprise deposits, the national savings bank, and a ubiquitous monitor of economic activities.
China’s economic miracle over the past two decades has produced an environmental disaster with skyrocketing rates of air and water pollution, severe land degradation, and increasing resource scarcity. This environmental crisis is engendering a range of other social, political, and economic challenges within China. China’s environmental enforcement remains unequal to the challenge. There are significant opportunities for the United States to assist China’s environmental protection effort in ways that serve core U.S. political and economic priorities.
China’s pollution and environmental degradation are also transforming the social, political, and economic landscape of China by incurring costs to Chinese economic productivity, engendering waves of internal migration, contributing to wide scale public health problems, and leading to social unrest. In terms of air quality, China’s overwhelming reliance on coal for almost three-quarters of its energy needs has made its air quality among the worst in the world. Almost two-thirds of Chinese cities tested failed to achieve standards set by the World Health Organization for acceptable levels of total suspended particulates, which are the primary culprit in respiratory and pulmonary diseases. Acid rain, resulting from sulfur dioxide emissions from coal burning, affects over one-fourth of China’s land, including one-third of China’s agricultural land, damaging crops and fisheries throughout affected provinces. China’s dramatic growth in automobile use poses the greatest future threat to China’s air quality. China has millions of cars, trucks, and buses; they suggest that China will have 110 million cars; critically, national standards for carbon monoxide and nitrogen oxide are well below those in the United States. Foreseeing the challenge, the Chinese government is putting into place fuel efficiency standards that exceed those of the United States, and working to experiment with higher standards.
In China, health care delivery follows a three-tiered structure set up in the 1950s for rural and urban areas. In 1990, China set baseline criteria for primary health care in rural areas which is largely funded by a reestablished rural cooperative medical care financing system. Financing reform efforts in urban areas are using a model through which contributions are collected from salaries and from local governments and other public organizations. The overall incidence of infectious diseases is more than 500/100,000 people, but associated mortality has declined. Diseases covered by the expanded Programs of Immunology have been controlled, but China is at high risk for viral hepatitis (epidemics of hepatitis A infections occurred in 1988), and incidence of tuberculosis has increased.
In addition, the HIV/AIDS epidemic is spreading rapidly with an estimated 50,000-100,000 infected. Parasitic diseases are also widespread, and causes of death seen in developed countries (hypertension, stroke, coronary health disease, cancer, and diabetes) are increasing. With 510 million people living in iodine-deficient areas, iodine deficiency diseases have disabled an estimated 8 million people. China has promised to eradicate iodine-deficiency by the year 2000. The disabling Kaschin-Beck disease is also endemic in China. Occupational diseases threaten nearly 20 million Chinese people, and the prevalence of smoking and alcohol abuse is increasing, especially among young people. By the year 2000, 10% of the population will be older than 60, and 30% of this group will have health problems requiring care. The health care system is, thus, undergoing rapid change to meet its new challenges. China’s gradual transition to a market economy, which has been proceeding for two decades, has put China among the World’s fastest growing economies. While economic growth has increased Incomes and improved health indicators, as well as reduced overall poverty levels, growth has not been totally benign.
Unregulated economic development has also contributed to the devastation of China’s forests. China’s forest resources rank among the lowest in the world. This deforestation has contributed to biodiversity loss, soil erosion, and much of the horrific flooding that China experiences on an annual basis. As China has become a major source of furniture and other wood products in the international market, this too has driven an increasingly profitable but environmentally problematic illegal logging trade.
China also supports strong anti-terrorism measures due to concerns about its own vulnerability to terrorism in its vast northwestern territories. As China faces a rising tide of terrorism and separatist movements within its own borders, the government has adopted specific approaches in dealing with the issue. The first has to do with prevention. This involves domestic legislation and sweeping crackdowns on terrorist activities by law enforcement agencies. Another approach is to isolate and demonize separatist groups. The government has depicted them as evil forces and defended its sometimes heavy-handed approach to separatist activities as necessary to protect the social and economic stability of minority regions. Beijing has combined these repressive tactics with efforts to co-opt leaders of minority groups. Internationally, China has sought closer cooperation with the governments of the Central Asian republics. Anti-terrorism has become a major focus of the Shanghai Cooperation Organization that includes China, Russia, Kazakhstan, Kyrgyz, Tajikistan, and Uzbekistan. The six member states have already announced the establishment of an anti-terrorism center.
In the past, China revealed as little as possible about the sensitive issue of separatist violence in the huge and remote western region of Xingjian. Apart from anything else, it was highly embarrassed by the claims of local Muslim Uighurs that they were being oppressed and overwhelmed by outsiders in their own land. “Beijing was initially very shy about the whole problem,” said MJ Gohel, a terrorism specialist at the Asia Pacific Foundation, an independent intelligence think tank based in London. China has waged a continuing battle against signs of rebellion against its rule, though human rights groups say many of those it has arrested may have done “little more than practice their religion or defend their culture”. Since the 11 September 2001 attacks on the United States, China has not only intensified its crackdown in Xingjian, but it has also felt bold enough to seek outside help. It now describes its once secret and sensitive private problem as an integral part of the war on global terrorism.
China’s emergence as a global economic and trade power has created economic opportunities for China’s trading partners, but has presented several challenges as well. On the one hand, China’s economic growth has made it an increasingly important trading partner for many nations. On the other hand, China’s trade barriers, failure to adopt most multilateral rules on international trade, and the relative absence of the rule of law for business activities have often proved to be major barriers for doing business in China and have been the cause of growing tensions with various trading partners, especially the United States.
Currently, China is the largest economic power that is not a member of the World Trade Organization (WTO), the international body that sets rules for most international trade. China has sought WTO membership, but has consistently argued that it should be given fairly lenient terms for joining the WTO. The United States and certain other WTO members contend that China is a large economic and trading power and, hence, must make major reforms to its trade regime before joining the WTO. Chinese officials contend that China is a developing country and should be allowed to enter the WTO under conditions which would allow it to adopt reforms over time. They contend that U.S. demands for trade liberalization are too severe because they would cause widespread bankruptcies of many state-owned firms, leading to widespread layoffs and social unrest.
The growth of China’s economy and the pace of reforms have been of great concern to Congress. Some Members view the sluggish growth in U.S. exports (and the rising U.S-China trade imbalance) in recent years as an indicator that Chinese markets are relatively closed to most U.S. goods and services; they argue that the United States should support China’s membership in the WTO only if it agrees to significantly open up its markets to U.S. goods and services. Congressional support or lack thereof, for China’s WTO membership will likely determine whether it will eventually vote to extend permanent most-favored-nation (MFN) treatment to China.
Despite any differences in politics and economy, we feel the global market has never been more inviting then it is right now. With vast improvements in transportation and shipping; coupled with the advance of communication tools such as the internet and global cell phones the time is right for global business. We can also save money and easily and cheaply set up cd-rom coping establishments in China to take advantage of cheap labor and decreased shipping charges. Money can break down walls and change the way countries work from the inside. China, in the past so anti foreigner, much like Russia was during the cold war, is learning from history and have started opening up it’s boarder.
As stated above, China has almost paranoia of other cultures. We will capitalize on this scare by highlighting the security of our product. The Chinese people demand top notch security and that is what we plan on marketing to them. The Chinese people also have specific ways of doing everything. The ability of our OS to be molded and customized will be yet another selling point to our friends in the East. The Chinese can in effect make their own version of our OS that suits all their needs. To further ensure of our success in the East, we will strongly partner with the Chinese government and will include them in business decisions and any potentially important planning and organizing.
The life cycle theory applied to China’s booming market says that foreign firms can now set their strategies for the growth stage. As investors in the China market we plan to succeed and focused primarily on start-up approaches, cultural issues, Chinese management styles, and the time needed to achieve success. China’s market has undergone many changes since the late Deng Xiao-ping initiated his open door policy nearly 20 years ago. They have been particularly evident in the past few years as the average, payback time for foreign firms is now 4.6 years, down from 7.4. The government has tightened bank lending in an effort to slow a growth rate that is too steep. State enterprises are now undergoing financial pressures, a phenomenon unheard of until recently. Workers are beginning to accept responsibility as individuals, much as they would in a true free-market society. As the economy develops, the market follows suit. The principal changes can be summarized in terms of the structural changes in China’s market, the country’s improved managerial knowledge, its new generation of managers, and its progression in the market life cycle.
We noticed as foreign companies proliferated, competition between them and Chinese firms became fierce; in sectors where foreign firms compete, China’s market is no longer dominated either by foreign or Chinese firms. However, sales of foreign consumer goods are confined to China’s more affluent population–those who can afford to pay the premium prices. Management has been one of the most serious problems in China because of the generation, now aged 40 to 50 that grew up during the Cultural Revolution. They are seen as having an “iron rice bowl” mentality and, without adequate training in their earlier years, have no respect for authority. They have occupied the most important positions in China’s state-owned enterprises because of the power they achieved during the revolution. Foreign firms are reluctant to hire or deal with them. But they are gradually being replaced by a younger generation of energetic, hard-working, trainable Chinese who, despite the political training they had to undergo, were given more opportunities to study in school. They take pride in working for foreign firms and in adapting to new challenges. They will make doing business in China much easier.
When foreign investors first evaluated the potential of the Chinese market, they were concerned about the availability of indigenous laborers and first-line supervisors. Though both are still important, the need for indigenous middle managers and technical personnel, especially in accounting and finance, is now more critical, as foreign investors strive to develop the market they have chosen to enter, enlarge their operations, and establish regional headquarters. No longer burdened with opening the market, they can now look into the details of running operations in the Western way. And as foreign operations mature in China, the potential of the market looks more promising and deserving of further investment.
Without question, foreign firms must depend heavily on expatriate managers and staff for their China-based operations because they are importing into China their foreign technology, their foreign management styles, and their foreign economic and financial philosophy. But choosing an expatriate who is unprepared for what lies ahead can be disastrous both to the person chosen and to the firm. Expatriates represent the largest single group of failures in China. They must accommodate the internal pressures from the company for profit as well as the external pressures caused by China’s complex and competitive environment. As one interviewee put it, “Every day is a battle. Succeeding in China takes lots of hard work.” Moreover, many Chinese, rightly or wrongly, have a negative attitude toward foreign managers.
Expatriates often must make bold decisions while remaining patient, persevering, self-confident, and sensitive to cultural differences. The culture to which they are likely accustomed is often based on individualism and confrontation, as seen through Chinese eyes. Such a culture is at odds with the structured hierarchy of a Confucian-based society, in which those on the lower rungs of the ladder defer unquestionably to those on the higher. It differs in its primary ethic because, despite occasional lip service to the contrary, it is primarily result-oriented rather than harmony-oriented. In the Confucian manner, results are achieved by indirection–an art fraught with ritual both in business and in private, and which takes years to learn. Expatriates are thrust into an elusive world of seeming contradictions where connections (guan xi), which they do not yet have, take precedence over merit.
The so-called “Overseas Chinese” are often excellent expatriate choices because they are able to combine Western training with local understanding and sensitivity. Another valuable group consists of Western-trained Chinese. Although many do not wish to return to China, some are willing to do so. The interviewees stressed the well-known observation that, as a foreign operation matures, it relies less on expatriates because such reliance is less viable and economical.
Training young Chinese managers as an alternative to using expatriates is an option. Young, bright, career-minded, eager-to-learn Chinese managers now represent an important alternative to expatriates, who enter the Chinese market with cultural and work-related idiosyncrasies in a foreign and highly competitive environment. Although the cost of training local managers is high, it is often cheaper in the long run. It is also a growing trend as local sourcing replaces offshore sourcing. But in a Confucian-oriented society, the firm must play a paternal role and provide caring guidance and motivation. Young, potential Chinese managers are somewhat like those who matured in Southeast Asia in the 1960s and 1970s. They are dedicated and eager to improve their standard of living, but are fond of job-hopping to better their careers. They also raise cultural issues, as one of the interviewees mentioned, particularly when foreign concepts, such as “management”.
Both interviewees were acutely aware that this issue has acquired high visibility in recent times and is a serious problem when doing business in China. Aside from the unauthorized and unpaid-for reproduction and sale of intellectual property, especially compact discs and computer software, by some Chinese firms (over which the U.S. has recently threatened sanctions,), there is the “voluntary” transfer of technology by foreign companies when Chinese firms make it a condition of doing business. The problem is exacerbated by the preference of foreign companies for the sharing aspects of joint ventures, rather than the “go-it-alone” risks of branches and subsidiaries in an environment such as China’s. There is also the feeling that not sharing technology is a losing game, because the Chinese, like anyone else, can acquire much of it indirectly without the assent of its owner, or by reverse engineering, even though that process is time-consuming and expensive.
Of course, what is at stake is the recovery of research and development costs or an appropriate reward for the time, effort, and originality the creators of the technology have expended. Understandably, they wish to be rewarded monetarily if their creations are exploited on the market. But neither interviewee shared the belief that technological know-how should be withheld from a firm’s Chinese partners. Sharing it has too many benefits for both parties, including increased market share, increased confidence among the Chinese partners in their Western counterparts, and the incentive of both parties to develop new technology to succeed what has been disclosed. Of course, as the interviewees observed, the Chinese are not unique in wanting to feel that they are being dealt with openly and fairly, with their interests duly considered.
As part of our research in doing business in China we interviewed various business personnel. The type of technology the Chinese covet most is “high-tech.” They are also interested in other types of technology, particularly at the early value-added stage. Moreover, because of economies of scale, in some cases the Chinese are unable or uninterested in using their acquired technology anyway because the market is not big enough to justify large-scale production. In other instances, foreign technology is actually protected by the Chinese government, such as that pertaining to national defense.
Enhancing the visibility of Western product quality. In many areas, a viable market for foreign products already exists in China. The problem is how to open it when consumers are satisfied with only rudimentary levels of quality and are unwilling to spend more money for higher caliber products. In the opinion of the interviewees, the key to increasing China’s demand for higher quality goods lies in education, patience, and persistence. As the country evolves, more people will rise above the level of bare existence, and the desire for better quality will be a by-product of that process.
Sales and distribution, making consumer products available in China is a major problem, one that is both managerial and infrastructural. The absence of a free market in the past resulted in scarcities. State-controlled retail outlets, manufacturers, and suppliers were often sold out before demand was satisfied. Moreover, centralized government control, rather than actual need, determined, for example, how many trains would run per day and their points of origin and destination. The construction and location of highways were similarly controlled. Without an infrastructure that is supportive of business; foreign firms have tried to be adaptive by using other means such as delivery vans. Unfortunately, solutions of that kind are not very efficient.
Moreover, in the past, foreign firms have actually had to export many of their Chinese manufactured goods, either because the government required it as a condition of the joint venture or because their particular consumer markets lay elsewhere. Hence, because there was no great need for sophisticated sales and distribution systems, they were not developed. Although the competitive features of the open door policy have improved matters somewhat, there is still a need for greatly improved sales and distribution networks. Looking to China’s growing consumer market and the greater freedom foreign firms can be expected to have in penetrating it, our interviewees felt that foreign firms should recognize this need early and initiate strategies to satisfy it
China is converting to local sourcing. Our interviewees emphasized the high cost of offshore sourcing on the one hand, and the need for quality on the other. The solution, as they saw it, was for foreign firms to bring their overseas suppliers to China and develop them into local suppliers, thereby minimizing the cost of transportation and production for downstream products. They felt that a joint venture was the best vehicle to use. Actually, the move toward local sourcing has already begun and is another indication that China’s market is moving from the introductory stage to the growth stage.
China is trying to capture regional markets by moving industrial manufacturing sites to the interior as soon as possible. China’s coastal regions have been the primary sites for the location of industrial product manufacturing facilities. But market penetration by foreign firms is now moving into a second stage, motivated by the plentiful supply of cheaper labor in the interior regions and the support given by the central government to projects that improve the economies there. By nature, of course, the manufacture of industrial products is regional, and the first firm there usually secures the market. Competition for these regions is now in full swing.
In response to China’s hunger for advanced overseas technologies, many multinationals have re-deployed their global strategy and have made China one of their priority locations for R &D centers. Multinationals such as Microsoft, IBM, Motorola, Nokia and Toyota have all established R&D centers in China. With the expansion of the China market, many multinationals have kept increasing investment in their China R&D centers. Statistics show that the investment of companies like General Motors, Philips, Motorola and Siemens to their Chinese R&D’s has all exceeded 10 million U.S. dollars.
These foreign R&D’s also employ a large proportion of Chinese talent. The ministry said high-school graduates and students, who have returned from overseas, have been the main targets for recruitment. The R&D’s also have close ties with Chinese universities and scientific research institutions. As part of our company’s ongoing effort to embrace the growing pool of technical talents in China to enhance local R&D capabilities and to deliver time-to-market, customized platforms and solutions for markets across Asia Pacific and the world.
We recognize the city’s growing importance as a regional business and technology center and China’s leading role in the development and adoption of advanced computing and communication technologies. We believe that China has one of the world’s most compelling combinations of R&D talents and market potential. As a leading technology market with a growing number of highly trained researchers and technologists, China is creating the kind of dynamic environment that is an impetus to great R&D. We are committed to working with the local industry to help bring Chinese innovation into the world.
China is evolving from a manufacturing-based economy to a broader, diverse economy and includes innovation through world-class education, and research and development efforts. Asia-Pacific R&D Ltd. is a full-scale facility with advanced product development to deliver innovative products designed for China and the world. We plan to recruit and attract top local and global talents and will continue the collaborative efforts with universities and government to support R&D programs and cultivate future technology talents in China. With continued strong growth expected across the region, Intel is planning for Asia-Pacific R&D Ltd. to employ more than 1,000 employees by the end of 2006. The staff will include software and hardware engineers along with employees who deliver and support products, and manage business functions such as marketing, planning, management and business support services.
As an international Chinese human rights non-governmental organization (NGO), HRIC has been actively engaged in individual case advocacy, education, and research for almost seventeen years. Over the past three years, HRIC has also accumulated experience in successfully challenging China’s state-of-the-art censorship and surveillance system through our E-Activism pilot project. We welcome this opportunity to share our insights and recommendations. NGOs, governments, and the business community share stated norms and values of transparency, openness, and fairness. In some ways, human rights NGOs and IT companies are in the same business, the information business, the business of generating, promoting, and disseminating information-because we share the belief that knowledge is power. The Chinese propaganda, social and police apparatus understands this very well.
The presence of US-based IT companies operating in China presents new and complex human rights, business, and corporate social responsibility challenges, including those recently demonstrated by various companies’ complicity in undermining freedom of expression, access to uncensored information, and the privacy rights of Chinese citizens. Today, even the Chinese government is citing the practices of these major companies as justification for their own censorship and information control. In accordance with the Public Pledge of Self-Regulation and Professional Ethics for China’s Internet Industry, companies agree to remove any information considered harmful, or which may disrupt social stability from Websites that they host. These sites include blogs, such as that of Beyond not being complicit in contributing to and legitimating Chinese government censorship, the business community and the industry has the same opportunity to exercise leadership in promoting greater openness, and human rights protections in China through their business practices, their lobbying, and support for legislative reforms.
Chinese domestic law must also conform to international law, specifically to China’s international obligations, including its human rights obligations. In fact Chinese domestic law includes provisions for protections of freedom of expression, press, privacy, and right to criticize the government. The PRC Constitution even includes a much publicized human rights amendment. Article 33 of the PRC Constitution states that the state respects and promotes human rights, while Article 35 guarantees citizens freedom of speech, the press, association and assembly. When assessing compliance with Chinese Law, corporate counsel should undertake a more nuance and comprehensive legal analysis that identifies specific laws, provisions, tensions or conflicts between different laws, and how to address these conflicts or tensions.
We feel that the issue is not whether US companies do business in China, but how they operate and what are the relevant guidelines. No one sector has the silver bullet, but the first step is to acknowledge the trade-offs honestly rather than offer self-serving justifications. Engagement and presence in the market alone will not inevitably lead to any particular result except for market access for the companies. Corporate engagement and presence in China will contribute to greater reform and openness only if it is responsible and coherent. Vague, abstract, inaccurate reference to Chinese law and compliance with domestic law is an indefensible justification for undermining human rights. The obligations of companies need to be viewed in light of a coherent framework of the legal and ethical obligations of IT companies that includes the laws of the home country, the host foreign country, and the larger framework of international human rights responsibilities of transnational companies.
The partnership efforts of business and government throughout the long process of negotiations around China’s World Trade Organization accession are a useful example and precedent of what can be done. IT Industry groups should adopt industry wide standards for doing business in countries with repressive regimes. However, unlike the general aspiration Code of Ethics promulgated by individual companies, industry wide standards are only effective if they are specific, include effective monitoring and reporting provisions, and are operational throughout the company. HRIC has also outlined a beginning framework best practices for IT companies doing business in China.
There has been a lot of information on the table as to why we picked China. I would like to summarize briefly why we made China our next marketing ground for Baileys 06. First, the versatility of our package in terms of being stream lined to many different needs and even computers. As stated above, depending on what region or even town you might be in, will be seen a large fluctuation in economic, technological and social differences. Baileys 06 is a perfect match for the differences each town sees; this is where Linux and Windows fall down. The security aspect of Bailey 06 is yet another good reason why the Chinese people will be interested in our package. The Chinese people have many concerns with our competitor’s backdoors and virus potential; there is no fear of hacking or viruses with our product.
Cheap labor costs and a large body of skilled and unskilled workers is another reason why China is ripe for the marketing of Baileys 06. By actually producing our OS in China, it will strengthen the relationship we have with the Chinese government and can we say, hit them from the inside. We will use their own people to market, train and sell the software, which will greatly strengthen our bond with the consumer. It is this type of out-of-the-box thinking and marketing that will set us up for victory in our new market.
On a much wider scale, the Chinese government is quickly opening its arms to outside merchandise. The Chinese people are widely curious about Western products and have the money and resources to purchase them. China is a growing country in terms of economy, technology and socially; making it a prime target for not just MemberSoft, but many western companies like Wal-Mart, Motorola, Microsoft, and many more. The key is to get in quick, capitalize on Microsoft’s bad reputation and become the Operating System of choice for China. That is the most important reason why to hit China first.
Now, the reasons for going to China are many, but there are not without its challenges as well. Shipping and transporting the software packages will continue to be a challenge in China. Governmental interjection, although becoming less strict, is still a thorn in the side of anyone wanting to do business in China. I love the expression “we are standing on the shoulders of giants”. Our research tells us that another challenge for us is to how other western businesses are doing in the East. 70% of current western businesses are either just breaking even or barely making a profit in China. (Bannerjea)
Yet another challenge can be with Chinese Operating Systems already in place. Why should I switch from my OS I know and trust, to Baileys06 that I do not know? This will be one of the biggest challenges we will face. China’s different views on intellectual property are another challenge we will face. We are currently working on an on line version of our OS that will only be available on the internet from a “dummy” terminal. Many companies have worked on this technology and many believe it is the way of the future for all software sales worldwide. This will be a copy proof way of administering our software with no fear of copyright infringement and unauthorized usage of Baileys06.
In terms of SWOTT, we just discussed our strengths and weaknesses. For the opportunities; we need to capitalize on the cheap work force in China. Once we indoctrinate a large work force in China, we can use these individuals in two ways. First, as stated above, they can be used to infiltrate the Chinese themselves. Secondly, we can utilize these same individuals to work on other projects and global ventures. They can document what worked and what did not, can write manuals as to organization and goals and manage new groups of teams from other markets and countries.
Threats will always come from competitors. In the ever fluid market of computer software, the next big and better product is right around the corner. The Chinese government will continue to be a threat to any western businesses. With strict policy and the constant intrusions and paranoia, it will be a challenging relationship to say the least. The last “T”, the trends we hope will over compensate in threats. The trend in China is growing economy and technology, backed with an interest in Western goods and services. More and more consumers and businesses are turning to computers for time management and organization. As more computers are phased in, there will be a larger need for Baileys06.
The possibility of success of this venture is extremely feasible. With little start up fee, respectively, we should see a large margin of profits and a whole new world of consumer opportunity. As stated in above paragraphs, China is ripe for the picking in terms of prospering from our software package. The time is also right economically and politically as well for our software revolution. Global trends have also dictated that the time is right as well. Global trends correspond to the increase in globalization. Even in China, who lately have been opening its doors to the west and western products and ideas. Technological trends in terms of security and functionality are also right. As stated above, the Chinese put much importance in both security and customizing options; both of which are the cornerstone of Baileys06.
Let us discuss now the exit strategy just in case we are unsuccessful in our venture in the east. The first thing we need to discuss is what we have invested in China once we are up and running. We will be leasing our building and warehouse space, so no loss there. We will have at best 10 Mediatechnics Fusion 652 cd copiers which will cost approximately $2,400 a piece. (mediatechnics) These 10 units will be responsible for duplicating all of the software disks needed for all of China. This will be the bulk of products actually owned in China. Other supplies such as blank cds and packaging will be purchased over seas and on a as needed basis. Unloading these Fusion 652 cd copiers will be quite easy on the open market. We can expect at least $1,200 a piece for each of these used machines. When Cortez got to the new world, he burned his ships so his men would work twice as fast; as you can see, unlike Cortez’s men, we would have an extremely easy time packing up, selling our cd-machines and heading back home.
In the government-oriented governance pattern, as the representative of principal shareholders, the government plays its role more in external governance. Such a role is not reflected via the market mechanism, but finds expression in the authority to appoint operators and managers, the authority to examine and approve major decisions made by MemberSoft, and the authority to exercise external supervision and constraint over the operational activities of operators and managers (for example, appoint the chief financial supervisor, and carry out regular and irregular auditing, etc.). A survey conducted in 2000 by the Chinese Entrepreneurs’ Survey System shows that since China initiated the reform and opening-up drive in 1979, government appointment has always been the principal form for choosing and promoting operators of state-owned enterprises, accounting for about 76 to 80 percent. This is true of the state-owned enterprises that have carried out reform in introducing the corporate system. A survey of the 30 enterprises trying out the corporate system conducted by the State Economic Restructuring Office indicates that the general managers appointed with the board of directors playing a vital role account for 30 percent, and those appointed with the government or the competent departments playing a leading role, 70 percent (Zou Dong-tao, 1998). A recent survey conducted by the Chinese Entrepreneurs’ Survey System also demonstrates that as far as state-owned and collective-owned enterprises are concerned, the departments that can supervise and restrict the behavior of enterprises’ operators most effectively are the higher-level government departments and the financial and auditing departments.
Corresponding to direct external regulation over MemberSoft exercised by the government, mergers, acquisitions, takeover and other components of the market mechanism play a much less supervisory and restrictive role in the government-oriented governance pattern. Study with substantial evidence has demonstrated that the state-owned listed enterprises with absolute controlling shares held by the state show less market behaviors including mergers and acquisitions. Even when control authority is transferred, the transfer is primarily via the contractual transfer and allocation of state-owned stocks, not the purchasing form on the secondary market. According to research conducted by Sun Yong-xiang and Huang Zu-hui (1999) on the equity structures of the listed companies in 1991 thru 1998, the more centralized the equity, the less the number of mergers and acquisitions effected.
A Chinese official from the Ministry of Information Industry (MII) was quoted saying “in 2004, China would likely turn out 48 million computers, a rise of 29 percent over last year. The figure is expected to reach 90 million in 2008. “If the official is right, then China is going to be world’s largest IT market in 5 years. Our target will be 10% of the computer base for the first year, 15% for the second year and 20% for the third year. Based on the above forecast and our sale goals we calculate our sales for the next three years to be as follow:
2006 2007 2008
Annual sales forecast for Baileys06 as a percent of existing computers 10% 15% 20%
Computer units sale 60 million 75 million 93 million
Target unit sales 6 million 11 million 18 million
Our Capital Budgeting Analysis indicates a great return on investment for the next 3 years. This fact should assist us in securing financial backing from local investors. Although it is feasible for us to secure all our investment needs from our local investors, we are planning on offering Chinese investors the opportunity to invest up to 20% of the total investment value. This move is aimed at improving our business outlook in china. Have Chinese investment in our operation will strengthen the national trust in our brand and thus improve the rate of adoption for our products. Also, with piracy being a major issue in china, having local interest in our company and our product will help us fight the piracy battle more effectively.
Giving the growing Chinese economy and the improving trade relations between the US and china we do not anticipate drastic changes in the currency. We are going to contract major banking institutions to manage our hedging and international exchange operation. We will also retain global financial consultants to advice us on such critical operations.
Output Screen (This screen is locked intentionally because it contains the formulas for the Input Screen.) variables Year 0 Year 1 Year 2 Year 3
1. Demand 6,000,000 11,000,000 18,000,000
2. Price per unit YUN 500 YUN 515 YUN 530
3. Total revenue =(1)x(2) YUN 20,000,000 YUN 5,665,000,000 YUN 9,540,000,000
4. Variable cost per unit (VC) YUN 25 YUN 25 YUN 25
5. Total VC = (1) x (4) YUN 1,000,000 YUN 275,000,000 YUN 450,000,000
6. Annual lease expense YUN 2,000,000 YUN 2,000,000 YUN 2,000,000
7. Other fixed annual expenses YUN 2,800,000 YUN 2,800,000 YUN 2,800,000
8. Noncash expense (depreciation) YUN 5,000,000 YUN 5,000,000 YUN 5,000,000
9. Total expenses=5+6+7+8 YUN 10,800,000 YUN 284,800,000 YUN 459,800,000
10. EBT of subsidiary= (3)-(9) YUN 9,200,000 YUN 5,380,200,000 YUN 9,080,200,000
11. Host government tax 30% YUN 2,760,000 YUN 1,614,060,000 YUN 2,724,060,000
12. EAT of subsidiary= (10)-(11) YUN 6,440,000 YUN 3,766,140,000 YUN 6,356,140,000
13. Net cash flow to subsidiary YUN 11,440,000 YUN 3,771,140,000 YUN 6,361,140,000
14. S$ remitted by subsidiary 100% YUN 11,440,000 YUN 3,771,140,000 YUN 6,361,140,000
15. Tax withholding on remitted funds 10% YUN 1,144,000 YUN 377,114,000 YUN 636,114,000
16. S$ remitted after withholding YUN 10,296,000 YUN 3,394,026,000 YUN 5,725,026,000
17. Salvage value YUN 0 YUN 0 YUN 52,000,000
18. Exchange rate $0.12 $0.54 $0.56
19. Cash flow to parent ($25,000,000) $1,235,520 $1,832,774,040 $3,235,134,560
20. PV of parent cash flow 20% $1,029,600 $1,272,759,750 $1,872,184,352
21. Initial investment by parent ($25,000,000) $0 $0 $0
22. Cumulative NPV: (Existing rate #1, “Most-Likely”) ($23,970,400) $1,248,789,350 $3,120,973,702
22a. Cumulative NPV: (Est. rate#2, “Best-Case”) ($23,284,000) $448,108,500 $1,116,745,769
22b. Cumulative NPV: (Est. rate#3, “Worst-Case”) ($22,426,000) $684,662,750 $1,678,590,875
Branine, M. (1996), ‘Observations on training and management development in the People’s Republic of China’ Personnel Review, Vol.25, No.1, 1996, pp.25-39
Roy F. Grow, “Reconsidering The China Market: Guidelines For Success,” Euro-Asia Business Review, 6, 4 (1987), pp. 9-14.