Foster’s Group and Chinese Business Environment

Background information

Foster’s Group is a private limited multinational company that operates within the Australian beverage industry. The firm engages in the production, marketing and distribution of alcoholic beverage products. Since its inception, the firm is committed to maximizing its profitability by marketing its premium branded products within the global market. The firm has integrated the concept of market expansion as one of its best management practices to achieve its growth objectives. Currently, Foster’s Brewing Group has ventured in 130 countries around the world.

In its quest to attain its wealth and profit maximization objective, Foster’s Group has identified Asia Pacific region and specifically China as one of the potential markets for entry. According to Accenture (2009), the Asian Pacific region presents the high market potential for firms in the alcoholic beverages industry. The region shares 25% of the total global market. Additionally, 33.3% of all alcoholic beverages produced globally are consumed in the region. Consequently, firms in the industry cannot ignore the presented market potential. Lynn, Wang and Mehlum (2011) assert that ‘China is expected to be among the world’s largest economies by the year 2050′ (p.1).

There are diverse international expansion strategies that Foster’s Group can adopt. Some of these strategies include exporting, forging international joint ventures and partnerships and foreign direct investment. Niemana and Pretorius (2004) assert that it is essential for organizations to incorporate effective growth strategies to develop sufficient competitiveness. Despite the management team’s dedication in stimulating Foster’s Group organizational growth, it is paramount to appreciate the fact that there are some risks associated with entering new markets. According to Luo (1999), understanding the risk involved in international expansion is critical in that it provides organizations’ management team with an idea on the risk management techniques to incorporate.

Aim and scope of the report

The report entails a broad risk analysis conducted by Foster’s Group Business Development Executive. The analysis is aimed at providing the board of directors with a comprehensive understanding of the economic risks, cultural risks, legal risks and the ethical risks associated with China. An analysis of the investment environment and the level of country stability are also conducted.

Risk analysis

Political risk

Analyzing a country’s risk is an essential element that the firm’s management teams should undertake in their quest to venture into the international market. Some risks can be evaluated through various financial mechanisms such as hedging and insurance. According to Hitt, Ireland and Hoskisson (2009), international diversification is associated with several risks. Political and economic risks constitute the largest category of risks experienced by firms in the global market. In its pursuit for profit and wealth maximization objective, Foster’s should evaluate the political risk associated with China. One of the significant political elements that the firm should determine includes the level of stability concerning the national government. China has a relatively low level of political risk compared to other emerging economies (Hoenig, 2013).

One of the factors that have led to a decline in the country’s level of political risk relates to the prevailing political stability in the country (Conklin 2002). During the 20th century, China had adopted a communist system of government. The land was ruled through a centralized imperial monarchy system. During this period, the country’s political system could be described as being authoritarian. However, China is increasingly adopting a democratic system of governance. Even though the country’s political environment is dominated mainly by the Communist Party of China, other smaller parties are emerging. This indicates that the country is increasingly moving towards political liberalization. The Chinese government has adopted a policy that provides the ruling political party [CPC] with the power to restrain any protests and organization that might consider being of a threat to the country’s political stability. The media has also played a significant role in highlighting corruption and government inefficiencies.

Despite this, the Chinese government is characterized by a relatively low level of transparency. According to Collins (2013), transparency is one of the central elements that organizations management teams should evaluate when evaluating the foreign country to venture into. Lack of transparency is a significant hindrance to foreign investors. Collins (2013) asserts that transparency in China is a significant issue, and perhaps the single issue that foreign investors in China have to deal with. The regulatory environment in China is not transparent. This is evidenced by the fact that the regulations instituted by the government on specific sectors can change quickly.

Additionally, the Chinese government has not been consistent in applying rules and regulations. The country is yet to adopt a fully democratic system of governance. However, most Chinese appreciate the level of social stability that the government has managed to maintain.

The political stability in China has significantly contributed to economic growth in various sectors. Accordingly, the country has continued to experience positive economic growth. Collins (2013) asserts that China has a relatively high level of political stability and a predictable business environment. Additionally, most of the companies that have ventured into the Chinese market have not experienced severe problems in their operation.

Despite the prevailing political stability, China has experienced instances of social unrests. The social upheavals experienced in China over the past few years were as a result of the 2007//2008 global economic recession. The recession has led to an increment income disparity amongst citizens. Additionally, the social unrests are also as a result of environmental, land and labour disputes (Knowles, Diamantis & El-Mourhabi 2004). Despite this, the government has been very successful in resolving such social unrests. The communist party also remains united, which further enhances the country’s political stability. The state also experiences relatively low cases of crime and insecurity, which means that investors’ property is safeguarded.

Legal challenges

One of the significant challenges that the government faces relates to the enforcement of intellectual property rights. China has not developed an effective legal system. This has led to the creation of numerous loopholes in its legal system. This is evidenced by the prevalence of copycat culture amongst Chinese society (Jayaraman 2009). The copycat culture has emanated from the fact that Chinese society is mainly Confucian, which advocates individual sharing. As a result of this tradition, counterfeit culture has significantly increased over the years. Counterfeit products are sold openly across the Chinese markets. Currently, China is ranked as the biggest producer of fake products. One of the factors that have led to the prevalence of counterfeit products in the country is that its laws are vague, which means that they can be interpreted in various ways. The Chinese government has not been consistent in imposing laws. Jayaraman (2009) emphasize that laws on trade taxation, labour and intellectual property rights are often changed, which complicates their interpretation and hence enforcement. Lack of consistency in the country’s legal system leaves room for manipulation. This presents a significant challenge for foreign investors intending to venture into the market.

Despite the crackdowns that were undertaken by the Chinese government to wipe out illegal business activities, counterfeiting and piracy have continued to be a significant challenge. Consequently, industrial espionage in China remains to be amongst the top risks that foreign investors have to take into account. In summary, Collins (2013) emphasizes that ‘China is not a political risk hotspot. It is characterized by little political violence, business interruption, riots and strikes’ (para. 17). Consequently, Foster’s Group should consider venturing into the Chinese alcoholic beverages industry.

Economic risk

Countries experience varied levels of economic risks. Some of the elements used to evaluate a country’s level of financial risk include financial volatility, exchange rate and international competitiveness. Foreign exchange rate movement is one of the factors that investors intending to venture into the global market should consider. Change in the foreign exchange rate is affected by numerous factors; one of them being the country’s economic growth (Collins 2013).

Over the past three decades, China has continued to experience a relatively high rate of economic growth. One of the factors that have stimulated the country’s economic growth relates to the transformation from a planned economic system to a market-oriented economic system. Despite a significant proportion of the country’s political framework being under the control of the communist government, individual citizens and non-state organizations are increasingly gaining economic influence (Graf & Saguy 1999).

China’s entry into the World Trade Organization has significantly contributed to its economic growth. Its entrance has also provided both foreign and domestic investors to maximize their profitability. This has emanated from the fact that the country has eliminated trade barriers between member countries through trade liberalization. Consequently, firms in the country have an opportunity to market their products into the international market. Despite the high rate of economic growth being experienced in China, Lelyveld (2011) asserts that there are signs of the country undergoing economic slowdown. One of the factors associated with the slowdown is the government policies being experienced. However, the projection has not yet materialized. This is evidenced by the high rating that various rating agencies such as S&P, Moody’s and Fitch have assigned China. S&P rated China AA-, Moody’s Aa3, and Fitch A+. The rating undertaken by these agencies shows that China’s economic risk is relatively low. The Chinese government has projected a 7% annual rate of economic growth over the next few years until 2015. The government intends to achieve this by stimulating the country’s level of economic productivity (Reuters, 2013).

Despite the projected rate of economic growth and the relatively low rate of economic risk, there is a high probability of the country’s economic risk increasing. The increment will arise from changes in the country’s macroeconomic factors such as monetary policy, trade policy, and fiscal policy. According to Jarayaman (2009), China’s economy is much dependent on exports from the manufacturing sector. To protect is export earnings, the Chinese government has pegged the Yuan currency against the dollar. Moreover, the Yuan is undervalued to promote exports. Adoption of the fixed exchange rate regime is a significant challenge for foreign investors. This arises from the fact that an increment in Yuan’s value can adversely affect the profitability of foreign investors.

Cultural risk

China has a rich cultural history that has been developed over the years. According to Jayaraman (2009), the Chinese culture being experienced today is as a result of the historical transformation. China has a unique culture that is different from most economies. When deciding to venture into the Chinese market, firms need to develop a comprehensive understanding of Chinese culture. This arises from the fact that Chinese culture is strongly reflected in the business environment. For example, organizational Chief Executive Officers in western countries are perceived as consensus builders while they are perceived as decision-makers and implementers in China. The Chinese business culture is evidenced by the adoption of the strict hierarchy system (Jayaraman 2009).

In the course of deciding to venture into China, it is fundamental for Forster’s Group to take into account the face culture. Jayaraman (2009) asserts that face culture is an essential component that firms have to take into account to succeed in China. According to Harvard Business Review (2006), embarrassing the Chinese or losing one’s composure during business negotiation can adversely affect the outcome. Consequently, it is fundamental for Foster’s Group to ensure that it is culturally sensitive upon venturing the Chinese market. Additionally, the firm will be required to ensure that its workforce in the Chinese market has good character. This arises from the fact that Chinese prefer purchasing from businesses that portray integrity and strong moral values. According to Jayaraman (2009), showing anger and hostility is unacceptable in China. On the contrary, Chinese seek trust, stability and harmony in their purchasing process. According to Jarvis (2003), culture is expected to continue playing a significant role in the Chinese business environment. Consequently, it is essential for firms intending to venture the market to develop a comprehensive understanding of the business culture to succeed. Jarvis (2003) asserts that understanding the prevailing culture enables foreign investors to ‘navigate the unique cultural obstacles that are endemic to Chinese ways of business’ (p. 49).

Challenging market behaviour

The Chinese market is different in several ways compared to most economies. This presents a significant challenge for the firm’s intention to markets products in the country. According to Jayaraman (2009), most western companies that have tried to market their products in China have failed miserably. Most Chinese prefer consuming products that are associated with their country. Consequently, foreign firms are forced to advertise, brand and market their products by the Chinese culture to gain sufficient market acceptance. Most western companies such as eBay and Google that have ventured the Chinese market have failed to attain their desired level of market leadership. One of the factors that contributed to Google’s and eBay’s failure to acquire the desired level of market share is their inability to understand the localization factor. On the other hand, local financial firms have been very successful as a result of being adequately localized. Foster’s Group needs to incorporate the concept of localization in order to successfully penetrate the Chinese market.

In addition to above-market behaviour, most companies venturing the Chinese market to introduce old products. Such decisions are informed by the belief that China is an emerging economy and hence it is underdeveloped. However, this is not the case. China is one of the emerging economies that have undergone significant growth over the past few decades. Therefore, firms intending to venture the Chinese market should analyze their products in order to determine their market acceptability.

By venturing into the Chinese market, there is a high probability of Foster’s Group experiencing intense competition. According to Jarayaman (2009), China is ranked amongst the most competitive markets. Firms operating in various economic sectors in China incorporate different strategies to compete with multinational companies that have entered the market. One of the competitive strategies that local firms adopt to relate to pricing.

Conclusion

From the above analysis, it is evident that Foster’s Group is committed to maximizing its profitability by venturing into new markets. However, Foster’s Group needs to ensure that it conducts a comprehensive analysis of the target country before venturing. One of the factors that the firm should take into account in its growth pursuit is a risk. This arises from the fact that growth is associated with a certain degree of risk. Different countries are characterized by various degrees of risks. Some of the risks that firms’ management teams should include political risks, economic risks, cultural risks, financial risks, and prevailing market behaviour.

The analysis shows that China has a relatively low level of political risk. This has emanated from the adoption of a communist system of government that is committed to creating a high level of cohesion within the society. A few incidents of social unrests evidence the country’s political stability. Despite this, one of the major factors that may limit investors from venturing into the Chinese market is the low level of transparency within the government.

Over the past three decades, the country has experienced an increment in the rate of economic growth. This has partly arisen from its recent ascension to the World Trade Organization. Additionally, the country has increasingly been committed to transforming its economy from a planned system to a market-oriented economy. Therefore, foreign investors’ venturing the Chinese market will experience equal market opportunities. The country’s inconsistency about various macro-economic policies is likely to hinder foreign investors. This shows that the country is expected to experience a high rate of economic risk.

Despite the country’s commitment to integrating a market economy system, China has not incorporated an effective legal system to promote the same. The numerous loopholes in the country’s legal system may limit its attractiveness to foreign investors. For example, lack of a competent legal system has led to an increment in the rate of counterfeiting which a major deterrent to foreign investors. Moreover, the country is also characterized by a challenging business environment and market behaviour as a result of the prevailing culture.

Recommendations

In its quest to venture the Chinese alcoholic beverage market, is essential for Foster’s Group management team to consider the following.

  1. The country’s economic growth coupled with the fact that the Chinese market accounts for the most significant proportion of alcoholic beverages consumed globally are an indicator that there is a high probability of firm succeeding upon venturing the market.
  2. China has a relatively stable political environment. Consequently, venturing the market would provide a unique opportunity for Foster’s Group to achieve its profit maximization objective. This will be enhanced by the fact that the firm will access directly access the Chinese market, which has a large number of potential customers.
  3. To successfully market its products within the Chinese market, Foster’s Group should consider incorporating the concept of localization.

Reference List

Accenture: High performance in the Asia Pacific alcoholic beverages industry 2009, Web.

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Harvard Business Review 2006, Harvard business review on doing business in China, Harvard Business School Press, Boston.

Graf, E & Saguy, I1999, Food product development: from concept to the market place, Aspen Publishers, Gaithersburg.

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Hoenig, J 2013, Managing business risks, China Business Council, Shanghai.

Jarvis, D 2003, International business risk: a handbook for the Asian Pacific region, Cambridge University Press, Cambridge.

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Lelyveld, M 2011, China’s economic risk rise, Web.

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Luo, Y 1999, Entry and cooperative strategies in international business expansion, Quorum, Westport.

Niemana, G& Pretorius, M 2004, Managing growth: a guide for entrepreneurs, Juta Academic, Cape Town.

Reuters: Fact box-key political risks to watch in China 2013, Web.