Barriers to Entry and Various Risks That Must Be Considered by Foreign Retail Companies Seeking to Conduct Business in China

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Barriers to entry and various risks that must be considered by foreign retail companies seeking to conduct business in China

By Aizhan Yermekbayeva

"Let China sleep, for when she awakes, she will shake the world"

(Napoleon Bonaparte)

Most politicians, businessmen and academics would agree with the quote above. It is becoming more and more evident that “China is now slowly waking up”. And a market of over 1.5 bn potential consumers is perceived by most multinational enterprises (MNCs) as an opportunity hard to miss. Businessmen and even renowned academics make various recommendations on approaching Chinese market.

This article will provide a critical analysis on how to develop businesses in China successfully and sustain stable profitability. The main focus will be drawn on entering and operating business in the retail industry as the industry is attracting the growing number of foreign investors despite the fact of having unresolved issues with the supply chain management, “bureaucratic red tape” and most importantly - fierce competition.

China could be divided into two main parts when it involves setting up a business: Hong Kong and mainland China. Hong Kong, which was a British colony until it was reunited with mainland China in 1997, is considered to be one of the most liberal markets with low level of governmental interference. However this article’s primary focus is on the mainland China, given its current political and economic importance.

Merely thirty years after the reforms initiated by Deng Xiaoping in the late 1970s, China has become the world’s fastest growing economy. Some predicted that by 2015 China will surpass Japan and will become the world’s second largest economy (Hall, 2009). But it happened five years earlier. It has been expected that by 2010 its retail industry will be worthy of $596 bn. China’s vast natural resources and cheap labour are substantially appealing to foreign investors. “No future is brighter than China”, states Coca-Cola’s chairman and CEO Muhtar Kent (Einhorn, 2009).

As thought provoking as it may be Lehman Brothers in China still went bankrupt in 2009 and Marks & Spencer, despite having more than sufficient financial resources, failed to succeed. According to a statement made by the executive chairman of M&S Sir Stuart Rose, “basic shop keeping mistakes” (wrong clothing sizes) and issues in the supply chain were the main reasons why their market entry strategy did not succeed in China. However, there are still barriers to entry and various risks that must be considered by companies seeking to conduct business in China.

The government in mainland China regulates the market, sets the controlling legislation and rules for foreign direct investments (FDIs) and competition . After China’s admittance to the WTO most of the regulatory barriers to Chinese market have been eliminated. China’s current economic environment offers a great opportunity for businesses.

Although China has been undergoing fast economic reforms these are not necessarily followed in tandem by political reforms. As such, most MNCs mistake is that they approach China in the same manner and with the same strategy as they would any other country. Conversely those businesses that have succeeded in China have used a strategy of “understanding local ways”.

It is vital not to underestimate the power of guanxi. Therefore foreign managers are strongly advised to understand this cultural phenomenon before attempting to start a business in China. Guanxi is “a complicated system of favour banking” which is practiced within a certain group. The importance of guanxi is often emphasised by a Chinese saying that without guanxi a person gets “half the result with twice the effort”. However, the main risk of guanxi is that it requires a high level of trust between parties involved in favour exchange – where someone’s word is his bond as opposed to an actual...
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