Social-economic, Political and Financial Conditions of India and China - Case Study Example

? Investment report of Introduction The wine industry is facing a rising aggregate demand at the global level. This phenomenon is encouraging wine producers around the world to put more focus on their expansion targets and grab the opportunities for expansion. In some countries of the world, consumption of wine holds a traditional value and is considered as a part of the country’s culture (Hoggart, 2012). Besides, the practice of wine consumption is gradually becoming a fashion trend among the youth, particularly, the population of the urban centres. This trend is majorly visible in China. In India, although there are strong government regulations against the practice of consuming wine, the young generation of the country are increasingly showing greater interest towards wine drinking. This paper presents a comparative study of the social-economic, political and financial conditions of two countries, India and China. Based on the information revealed, a particular country is chosen in which an Australian wine producing firm might invest for making international expansion. 2. Market Research Market size and potential growth Country China India Potential demand Drinking wine is one of the oldest traditions in China. This tradition can be dated as long as 5000 years back in the history of the country to. Brewing was a dominant industry in China. Wine made from food grains (such as rice) and grapes are the most favourite drinks for the people of China. This shows that the potential demand for wine in the country is quite high. Recent studies reveal that wine consumption by the population of China is showing an increasing trend over the period of last ten years. According to various researchers, consumption of wine by the Chinese would almost become double of the current figure (UPENN, 2012). Pattern of changes in the society as well as the economy has been the major thrust behind the changing trends in wine consumption in China. The market for wine in India is changing. The rise of the retail industry and the growing middle class in India acts as a catalyst to the growth of wine industry in the country. According to recent research, wine consumption in India reflects tremendous growth since the beginning of the 21st century. Wine market in India has increased by almost 30 percent between 2003 and 2010. As a result of globalization, India has been exposed to western culture. The middle class in the country is fast accepting and adapting to the western fashion. Although India does not have a heritage of drinking wine, practice of wine consumption is increasing, particularly, in social occasions. In the past, only the males in elite class used to patronize wine drinking culture. However, presently, the high income middle class is gradually becoming a loyal customer base for wine sellers. Costs Cost of the product is determined by the cost of the raw material used in the production of the good and cost of other inputs. Grapes are one of the major ingredients used in wine production. China has grape vines covering 1.25 million acres. Half of the produce is dedicated for the production of wine (G. G. Brostrom and J. Brostrom, 2008). Since there is adequate availability of grapes in China and cheap labour is also available, costs of producing wine in China is not very high. In India, the government protects the domestic wine industry against competition from foreign producers. Although cheap labour is available in abundance, other ingredients, such as grapes, are costly. This makes cost of producing quality wine quite high in India. Sellers often discriminate among the target customers with regard to pricing policies. While prices of certain products are lowered to attract more customers, while prices of premium brands are kept high. The premium products are generally consumed by the rich customers, who have a taste for wine developed through consuming wine over a long period of time. Degree of competitiveness China is emerging as a super market for global wine industry. Different companies from France, Australia, Italy and other major wine producers are focusing on the Chinese market. Therefore, there is tough competition among the players in Chinese wine market. Italian wine producers are facing strong competition in the Chinese market. This is because several other suppliers are already occupying significant shares of the total market. Wine producers from France occupy 48 percent of the market share and dominate the market (Customs, 2010). Australian producers hold the second position in China with 21 percent market share. Italy is also one of the exporters of quality wine to China. Various other producers from different countries also supply wine to the Chinese market (DPI, 2010). India is a developing country and wine market in the country is also developing. Since the country is open to the waves of globalization, a number of foreign producers occupy large shares of the Indian market. Some of the largest exporters of wine to India are from France, Australia, Italy and Chile (Sommelier India, 2007). This shows that, at present, the wine market in India is highly competitive with a number of dominant export partners supplying quality wine to Indian market (Hoggart, 2012). 3. Country Risk Characteristics 3.1 India 3.1.1 Government policies and incentives. Since 2001, the Indian government has followed a policy of free imports to India since the year 2001. This has led to fall in prices of imported wine in the country. Fall in price has hampered revenue generation for the sellers of foreign wine. The government has recently showed inclination towards providing preferential treatment to the domestic wine industry. It is heading towards bringing uniformity in taxes and providing infrastructural facilities to domestic wine producers. This is made to promote domestic wine industry, so that steep competition from Australia and France might be countered (Sommelier India, 2007). 3.1.2 Financial and Economic Growth. The Indian wine industry shows a mixed scenario. On one hand, due to strong devaluation of the Indian rupee, cost of importing wine would rise. This would affect the maximum retail price of wine, which is expected to reflect a 15 to 20 percent rise (Indian wine academy, 2013). This is not good news for importers as the entire burden of cost might not be shifted to consumers through price increase. Devaluation of rupee would hamper the suppliers of imported wine in India since they would face a net rise in cost. Importers are worse off in this situation. On the other hand, the government is promoting the domestic wine producers and supporting them financially as well as by developing infrastructural facilities. This might lead to export of wine from India. Therefore, domestic producers are better off. 3.1.3 Technology, infrastructure and logistics. India is developing rapidly and is adopting the intricate technological advancements that are occurring globally. Major infrastructural developments, such as power generating projects water supply projects, are taking place in the country that would facilitate the production and distribution systems. Logistics is one important aspect of developing a successful distribution chain in the country. The country is well connected by road and railways. 3.1.4 Availability of labour. There is abundant supply of low skilled labour in India. Due to its abundance, labour is cheap. There is also sufficient supply of skilled workers. Hence this presents a favourable environment for inviting foreign producers to set up manufacturing units in India. 3.2 China 3.2.1 Government policies and incentives. The government of China has recently taken the initiative to promote the wine industry in the country. China is now a part of the World Trade Organisation (WTO) and the import tariff rate for wine has been lowered from 65% to 14% (excluding consumption tax and VAT) (DPI, 2010). This leads to increase in imports of wine by China. 3.2.2 Financial and Economic Growth. China, as a consumer of wine, is developing rapidly. Emergence of the middle class in China is one of the most significant indicators of development of the Chinese economy as a supermarket (Collins, 2013). The GDP of China has shown a high growth rate of 7.8 percent in 2012 (Yao & Wang, 2013). Per capita income has also increased simultaneously (Riley, 2012). Demand for expensive wine has increased considerably, particularly from the affluent consumers (Standard, 2013). However, research shows that these customers, although are making large amounts of consumptions, they are increasingly showing price consciousness (Decanter, 2013). 3.2.3 Technology, infrastructure and logistics. With advancements in the world economy, various development projects have been undertaken in China over the last few decades. Major infrastructural spending has allowed the country to take a leap forward towards a higher level of growth than its neighbour India. The urban centres in China are well connected with the suburban areas and the rural areas that have an agricultural base. There is good communication and transportation facility within the country and also with the other trade partners via roadways, railways and airways. Companies enjoy good transportation facilities that strengthen their distribution networks. 3.2.4 Availability of labour. China is the largest country in the world in terms of population and accounts for approximately 19.29 percent of the total population of the world (World population review, 2013). This indicates that there is cheap availability of labour in China. Both skilled and unskilled labour is present in the country. India ranks second, after China, in terms of population. China is still a developing country and the total population is greater than India. Therefore, there are scopes to find cheaper labour in China than in India. Besides, since China has a long tradition of brewing wine, which is expected to cast a positive influence among the skills and aesthetic taste of the labour that work in the breweries. China is one of the rapidly emerging economies and nation is adopting the advanced technological knowhow for the different production processes in the country. Therefore, skilled labour is also available in adequate amounts in China. 4: Type of FDI to further minimise risks International expansion can be made in various ways. FDI is one of the most commonly adopted methods used by multinational corporations. The Australian firm might increase its distribution network to international destinations by making joint venture with the State-owned enterprises (SOEs) enterprises in the country. It is safest to set up a joint venture with these enterprises in the new market (Li, Liu & Wang, 2012). Such joint ventures minimises the risk of entering into a new market and also allows the firm to utilise the market knowledge of the organization existing in the country (Daft, Kendrick & Vershinina, 2010). 5: Conclusion China is one of the most rapidly growing markets in the world. China is gradually being considered as an important market that makes notably high demand for wine in the global market. Quality wine is considered as a luxury product (Okonkwo, 2007). China has been found to put up high levels of demand for luxury goods in the international market even in the post-financial crisis period, when the world was swooning under recession (China Briefing Media, 2006). Research reveals that the growing middle class in China is the backbone of such high level of demand for high priced goods, such as imported wine (Li, 2011). This reflects that the Chinese market offers promising growth opportunities. As the Chinese government is liberalising the Chinese economy, more and more companies from other parts of the world are taking advantage of this high market growth in China (NZTE, 2013). However, although India is another emerging economy with a strongly developing market, the social and political conditions of the Indian market do not present a suitable growth opportunity to a wine producing firm. The wine market in India is not as mature as China and consumption of wine in the country is restricted under government regulation and social stigmas (ICAP, 2013). Besides, the government of India is playing protectionist policies to allow expansion of domestic wine industry in the country. 6: Recommendations The discussion presented above shows the political, economic and social contexts of the two countries, India and China, in which an Australian wine producing company would have to operate if the company seeks to establish a distribution network in either of the countries. Taken into consideration that the entrepreneur is risk averse and aims at increasing the total sales volume of the company, it is advisable that the distribution network should be established initially in China. This would allow the firm to supply its products to the middle class population of China that are have a demand for quality wine and also are backed by sufficient purchasing power. As a result of liberalization and state capitalism in China, the Chinese population is acquiring a taste for the western culture and wine is an integral part of this culture (Assenmacher, 2011). References Assenmacher, K. (2011). Chinese economy: Threats foreign companies face when investing in China and what Chinese authorities are doing to combat them and sustainability of the current rapid growth in the Chinese economy. Munich: GRIN Verlag. Brostrom, G. G. & Brostrom, J. (2008). The business of wine: An encyclopedia. Connecticut: ABC-CLIO. China Briefing Media. (2006). China briefing’s business guide to Beijing and North-East China. Hong Kong: China Briefing Media. Collins, S. (2013). Political stability in china comes with little transparency. Retrieved from http://www.businessinsurance.com/article/99999999/NEWS040103/120309887 . Customs. (2010). China customs bureau. Retrieved from http://english.customs.gov.cn/default.aspx . Daft, R. L., Kendrick, M. & Vershinina, N. (2010). 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