The opportunities and challenges that a Chinese firm faces while entering into Saudi Arabian market - Essay Example

?International Business Executive Summary International business can be referred as processing of transactions in the countries abroad in order to satisfy individuals and organizations of home country. The main objective of the paper is to identify the opportunities and challenges that a Chinese firm which is into retail sector may face while entering into Saudi Arabian market. It has been observed that retail industry in Saudi Arabia is one of the leading industries. China, on the other hand, possesses several challenges such as high congestion in the cities because of rising number of set ups of multi-national corporations and industries, giving rise to competition. Such challenges may force a company to internationalize. Though there are numerous challenges that Chinese company wanting to enter into Saudi Arabia might face, it can be stated that the benefits are multifarious. Recommendations on using RFID technology, employing skilled labor and adhering to the changing taste of consumers of Saudi Arabia has been offered for the retail company to succeed and maintain competitive advantage. Table of Contents Executive Summary 2 Introduction 4 Entry Modes 5 Advice on General Business Context 8 PESTEL Analysis of China 8 PESTEL of Saudi Arabia 9 Industry Specific Characteristics (Porter’s Diamond Model) 11 Factor Conditions 11 Demand Conditions 13 Supporting Industries 13 Firm’s Strategy, Structure and Rivalry 15 Institutional and Culture Differences 15 Opportunities and Challenges In Host Country As Well As Foreign Country 16 Recommendations and Conclusion 18 Findings From Various Models 18 References 20 Appendix 27 Appendix A (Conducting Business in Saudi Arabia) 27 Appendix B (Comparison of China and Saudi Arabia Cultural Dimension) 28 Introduction In the recent times, it has been observed that increasing number of firms are going global which includes sectors like manufacturing, service, art, music and film among others. International business leads to enhanced flow of capital, services as well as ideas across the world. Consumers are offered with new choices and the companies are facilitated to innovate various new products as well as services. It has also been observed that international business assists in offering challenging employment opportunities to the people. Those transactions that are carried out in or with countries abroad in order to content the goals of the individuals, companies as well as organizations are referred to as international businesses. There are numerous types of international businesses such as export-import trade, foreign direct investment, licensing, and franchising and management contracts. It has been observed that since the past thirty years of operation, the volume of international trade has augmented from $200 billion to more than $7.5 trillion. In comparison to the global exports, there is rise in the sales of the foreign affiliates by a significant amount. The best thing that can be identified in the context of international business is that it has been successful in creating a network related to global connections that is capable of binding two countries, institutions as well as individuals because of trade, financial markets, technology as well as living standards. In the context of this study, the Chinese firm which is into retail sector wants to enter into Gulf Cooperation Council based country i.e., Saudi Arabia is considered. The Chinese firm will hire a consultant in order to gain advice on making such a move. The consultant will try to identify and offer advices on the challenges as well as opportunities when undertaking such a move into gulf countries. The project will begin with industry-specific characteristics. In order to do so, diamond model will be used. The project will also try to identify the general business contexts both national (China) as well as international (Saudi-Arabia). This will be conducted with the help of the PESTEL analysis. The next logical step followed after having identified the business context is to identify the most suitable entry mode into the Saudi Arabia market. The project will also offer advice on dealing with the institutional as well as cultural differences as well as ways of dealing with the opportunities and challenges that takes place between the host and home countries. Finally, after having identified the context and the methods of dealing with the cultural differences, it becomes significant to determine if the investment proposal must go ahead or not. The research for this paper has been conducted by taking secondary research analysis into consideration. Entry Modes It would not be wrong to say that it is because of the globalization related activities, the firms are compelled to expand their operations beyond the home country. Internationalization of a particular firm is not only focused upon the information of which markets can be served. But it also concentrates towards how to enter into those countries. There are innumerable theories as well as researches that have demonstrated great benefits of choosing the right market entry mode since it helps in determining how successful the company will be in international markets. This implies that if the firm makes a wrong choice in the means of entry, then in such circumstances it becomes difficult for the companies to revise the strategy. There are different foreign entry strategies which the firms planning to internationalize tend to choose. They are exporting, international licensing, international franchising, management contract, turnkey operation, equity alliance, joint venture, consortiums, contract manufacturing and full ownership and wholly owned subsidiaries (Le & Rothlauf, 2008). It can be stated that one of the easier and less risky methods of entering into global market is via exporting. Exporting can be conducted either directly or indirectly. Licensing is another method of entering into the foreign market. It demonstrates a deeper level of dedication to internationalization. Along with it, there are high risks in comparison to the export operations. In some of the fields, franchising has proved to be an efficient method for the companies to globalize and expand their business in the global markets. In franchising, the owner of the business, or most popularly known as franchisor, permits the other company or the franchisee to duplicate the business as per the same concept, quality standards, image or model. Management contracts are generally a context where one particular company possessing experience in one particular business areas allows its personnel to conduct general or specialized management roles for other company (Le & Rothlauf, 2008). In case of turnkey contracts, a contract is made between two companies where one company makes a deal with another to develop and deliver a readymade industrial plant. It can be mentioned that equity alliances is almost similar to the concept of minority equity ownership. Equity alliances are generally cooperative settings where one of the coordinating companies is eligible for taking ownership in other partner company. Consortiums are contractual joint ventures and in this case, more than two companies are involved. Contract manufacturing is also noted as one of the most vital international market entrance approaches used by most of the firms. Via contract manufacturing, the company wanting to get into the foreign market can make a contract with the domestic firm in order to produce the product that has been set to be sold locally. Wholly owned subsidiary are also the foreign entry strategies that are widely used by the modern day business organization. However, for the Chinese firm wanting to enter the Saudi Arabian market, joint venture seems to be the viable entry mode strategy. Joint venture can be identified as an enduring involvement of two or more than two companies where the parties makes their contribution with assets, has participation in the equity and the risks are also shared. In some cases, the assumption which is made by the firm in case of joint contract is that both the parties will collectively operate an undertaking until the business is viable. The various reasons for the creation of a joint venture by the companies also need to be studied. One of the reasons is that in some of the sectors, the regulation of the particular country may not permit full ownership of the operation by the foreign nationals (Wu & Zhao, 2007). In some cases, the foreign investors may prefer reducing capital outlays or risks related to entry into foreign markets by making use of the assets of the local partners. Along with these reasons, the local partner may prefer taking benefit of the relation with the foreign partner so that it can avail the technology, product development, international brands as well as managerial techniques. In case of joint venture the complementary assets which are possessed by separate firms can be combined. The assets can be either tangible assets such as machinery or equipments or it may as well as intangible assets such as production or marketing skills, market specific information and technological know-how. It is to be mentioned that for a joint venture to operate successfully it becomes imperative for the Chinese firm to consider certain steps. One of the most significant first steps is that the firm managers must review the business of the firm as well as corporate strategies so that it can regulate collaboration with the objectives of the joint venture. In the second step, it becomes crucial to evaluate the suitability of the possible joint venture partners for fit with the strategy of the firm as well as compatibility during the life of the joint venture. In order to succeed in the joint venture, it is to be remembered that the partners must try to lessen the probable risk factors comprising poor communication, cultural clashes, imbalanced resources and distinct objectives (HM Treasury, 2010). It is to be remembered that the joint venture must be formed in circumstances when there is mutual agreement among the parties and they agree to the fact that this entry mode offers the best scope of optimizing opportunities. Joint ventures are generally flexible and they can facilitate the retail firm to have greater access to the customers. The joint venture partners may want to share the distribution networks. The relation of the suppliers may be strengthening if one partner was the vendor of the other. The partners of the joint venture might take benefits of increased capacity in terms of production along with economies of scale as well as scope. The staffs might as well be shared by both the firms thus benefiting from complementary and specialized staffs (Christian Albrechts Universitat, 2012). Advice on General Business Context PESTEL Analysis of China The point which is worthy of mentioning is the fact that the population of China is nearly 23% of the total population of the world. There are greater opportunities for business in bigger cities where the income of the consumers are quite high. The people prefer trying the product before they make any purchase. It has been noted that the attitude of the people of China is almost similar to the people of United States in terms of work ethics as well as purchasing patterns. There is growth in the market of China. The retail sales are also rising. The political system of China is quite rigid and it controls the unions. Both the regulatory as well as legal systems might be inconsistent. The intellectual property might be at risk in China and most of the businesses are generally based upon the relationships. The use of computer is quite low in China. However, there is rise in the access and use of the internet. China has implemented mandated emission reduction that assist in the smooth operation of the trade in this country (Philpot, 2008). PESTEL of Saudi Arabia The political constancy in Saudi Arabia is medium and the degree of government promotion of information technology (IT) is quite high in the country with an average growth rate of 15 per cent per annum (Georgia State University, 2012). The Gross Domestic Product (GDP) of Saudi Arabia in 2010 in terms of US$ has been 434.67 billions (Current Affairs Business News, 2012). Along with it, the Gross National Income (GNI) for the year 2009 in terms US$ has been 22,750 Millions (The World Bank Group, 2012). In the year 2010, the inflation rate or the consumer price % had been 5.3% (Arab News, 2010). The penetration rate of internet in Saudi Arabia in the year 2010 had been 41 % (World Trade Organisation, 2012). Saudi Arabia is considered as the largest Gulf country. Along with it, Saudi Arabia is renowned as the biggest economy in both Middle East regions as well as in the North Africa region. It can be stated that there is possibility of high growth in the retail space (Ame Info, 2011). The nation possesses young demographics and the arrival rate of the tourists is quite high. The role of the women in the social context is also found to be altering. Research indicates the fact that Saudi Arabia which is considered to be the large as well open economy in the region is one of the most productive markets for the retail industry (Prlog, 2009). Rise in the rate of population, high brand awareness and free flow of information among young demographics where approximately 45 percent of the populace is aged in between 20 years – 44 years along with greater degree of disposable income with the public can be considered as the key drivers for the retail industry in Saudi Arabia (Alpen Capital, 2011). The point worthy of stating is that retail industry is the fourth biggest industry after oil, banking and telecom industry in the country in terms of total numbers of retail establishments as well as employees. The total revenues earned by the country from the retail sector in the year 2008 have been US$55 billion. The major competitors are expected to be small retail stores. Big retailers which comprises of national as well as international players are also trying their best to perform well in the fragmented retail industry. In the year 2011, the total retail sales had been US$ 69 billion (Oxford Business Group, 2012). The major retailers in Saudi Arabia are Carrefour, Tesco, Benetton, Gucci, Emporio Armani, Swatch, KFC, Mc Donald’s, Subway, and Harvey Nichols among others. The economy of Saudi Arabia is generally recognized as liberal economic strategies (Alpen Capital, 2011). It is also assumed to have free market policies that help in encouraging foreign investments. The state is generally not found to be interfering with the inflows as well as outflows of capital. The businesses are incentivized by offering favorable tax exempts, exemption of custom duties on exports, subsidies as well as provision of land at relatively low price. It has been observed that the retail sector is one of the few sectors in the Saudi Arabia where 100 percent foreign ownership is not granted. The population of the country is 27.45 million and the percentage of urban population is estimated to be 82%. The rate of literacy is moderate and is 78.8 percent as on the year 2010. The country makes use of aggressive environmental policies in order to protect carbon-dioxide emission from taking place (Alpen Capital, 2011). The table (Appendix A) helps to comprehend the ease of doing the business through certain parameters in Saudi Arabia. Industry Specific Characteristics (Porter’s Diamond Model) Factor Conditions There is requirement of human resources, knowledge resources, capital resources, physical resources as well as infrastructure. Skilled labor is one of the main components of productivity growth. It is quite significant for any nation to have skilled labor so that the operation of the business can run smoothly. It has been found that there is shortage of skilled labor in Saudi Arabia. However, the capability of the Saudi Arabian firms to attract and retain a knowledgeable as well as qualified workforce is one of the key success factors for Chinese firm wanting to enter into Saudi market (Market Research, 2011). The challenge related to human resource is mushroomed by means of workplace segregation, the gap among the skills in logical as well as foreign employees, difficult labor regulations as well as unique permit system for the foreign labors (Irmgard Coninx Research Grant, 2012). Therefore, it can be revealed that such restrictions in the human resources can pose quite a few challenges for the firm in Saudi Arabia. It has been found that the raw materials are available at lower rates which key drivers for success of Chinese firm in Saudi Arabia (Kuah & Day, 2005). Apart from cheap rate materials in the country it has also been found that the region tends to offer high class infrastructure as well as energy that can be easily supplied at low rates in comparison to other countries of the world (GBN, 2011). Since the Saudi Arabian hypermarket is quite huge and therefore large number of transactions takes place daily. In light of this fact some of the companies in Saudi Arabia are adopting RFID technology. However, in the context of the retail industry of the region, it has been noted that the main determinants of RFID adoption intention has been social issues, competitive forces as well as technology competence. Top management support is of great significance in this context (Alqahtani & Wamb, 2012). It has further been identified that the retail industry firms are not capable of importing goods into the country and thus distribute them effectively to various stores which poses to be a serious challenge for the new firms longing to enter into the country. Although there has been enhancement in the supply chain infrastructure, the country remains less advanced in comparison to few other nations. Demand Conditions There is high demand of retail stores in the Saudi Arabia. Although the retail industry faces tremendous challenges such as oversupply that has an impact upon the market in terms of minimization of rentals in the short term. However the outlook for the long terms generally remains favorable as well as robust because of the imminent recovery of tourism as well as hospitality sector. It had been anticipated that the retail market will develop at a CAGR of nearly 9.5 percent in the period of 2010-2012. The consumer habits in terms of products have been altering in the Middle East and there is rise in the online shopping habits. Therefore, it becomes significant for the retailers to mould themselves with the changing tastes and preferences (Construct Arabia, 2011). Supporting Industries It can be analyzed that if there is boom in one particular industry it might assist in the development of other industry as well by offering its valuable inputs in terms of resources so that the other industries can prosper. Tourism industry especially religious tourism can tremendously have an impact upon the retail industry of Saudi Arabia. It has been recognized that the country is capable of attracting pilgrims of nearly 1.8 billion Muslims every year because of the holy mosques situated over there. The statistics reveals the fact that more than 2.5 million pilgrims tends to visit the country when there is Hajj festival celebration and during Umrha pilgrimage there are nearly over seven million pilgrims throughout the year. It has been reported by the Saudi Tourism Information and Research Center that the country had been capable of earning an amount of nearly (SR25.9) billion because of the inbound tourism in the country. In order to increase the earning rates the government of the country is preparing the cities with good hotels, apartments as well as retail outlets along with shopping arcades. The country gains tremendous advantages because of the retail spending for the millions of pilgrims visiting the country each year (Sacha Orloff Group, 2012). Firm’s Strategy, Structure and Rivalry It is quite significant for the retail firm to prepare its strategy in a manner so that it can attain competitive advantage. There are many competitors in the retail industry in Saudi Arabia such as Tesco, Carrefour, Benetton, Gucci, Emporio Armani, Swatch, KFC, Mc Donald’s, Subway, and Harvey Nichols. In order to beat the competition the firm has to possess highly skilled labor and must also focus upon innovation. It needs to make use of the RFID which will help the firm to attain high competitive advantage. The organization needs to take into consideration flat organizational structure so that the decision making process in the organization becomes smoother and easier. Furthermore, such organizational structure will permit employees’ involvement by means of ‘decentralized decision making procedure’. Institutional and Culture Differences It is worthy of noticing that Saudi Arabian populace places more emphasis upon the preservation of its cultural heritage which is assisted by numerous institutions in the country. It is significant to identify the culture of both the countries i.e., Saudi Arabia and China. This can be done with the help of Geert Hofstede cultural dimension. It has been observed that China obtains 80 and ranks to be the highest in terms of power distance index. Therefore, this implies that China is a nation where inequalities are generally embraced by the people. China is generally a chief collectivist culture and thus ranks 20. People here tend to act in interest of the group. The commitment of the employees towards the organization is quite low. China obtains 66 and thus is one of the countries with masculine society. In order to succeed, the people of China might sacrifice their family as well as leisure priorities for work. In terms of uncertainty avoidance, the country scores 30 and has a low score in this index. The people of China are quite comfortable with uncertainty. Since the language of the country is not easily understandable, therefore Western countries face problem. China scores 118 in terms of long term orientation and thus is high in this index (Geert Hofstede, 2012). On the other hand, the score of Saudi Arabia in power distance is 95 is higher than China. This implies that people want hierarchy order. The country scores 25 and is a collectivist society and again this is higher in comparison to China. Saudi Arabia is a masculine society and thus scores 60 which is less in comparison to China. The main emphasis that Saudi Arabian firm places is upon equity and competition. Saudi Arabia does not prefer to take any kinds of risks and prefers avoiding uncertainty. It obtains rank of 80 in this index. Appendix B offers chart of Geert Hofstede on both the countries (Geert Hofstede, 2012). Opportunities and Challenges In Host Country As Well As Foreign Country One of the opportunities for the Chinese firm planning to enter into the Saudi Arabian market is that Saudi Arabia is anticipated to grow at a CAGR of nearly 9.4 percent and thus expand its share in the retail sales of GCC from nearly 42 percent in the year 2010 to 44 percent till the 2015. One of the significant threats that Saudi Arabian firm may face is that the country has strict rules and regulations related to obtaining credit cards which has a tremendous impact upon the consumer spending as well as consumer confidence. The main intent of Chinese firm into Saudi Arabian market is that since China is an emerging market, there are rising number of multinational companies trying to enter into the country and make their active presence, thereby increasing the level of intense competition. By the year 2010, it was noted that there were more than 300,000 foreign companies in the country. In such circumstances it becomes difficult for the companies to compete with the foreign firms. Therefore, it becomes viable for the companies operating in China to internationalize. It offers them with the opportunity to prosper. Moving the firm into countries such as Saudi Arabia can be quite beneficial for a Chinese firm because retail industry in Saudi Arabia is one of the leading and emerging sectors with huge scope of growth in the coming years. Recommendations and Conclusion In order to recommend, it is quite significant to list all the findings that have been obtained from the analysis of various models. All the opportunities as well as challenges needs to be listed and thus the suggestions need to be presented accordingly. Findings From Various Models It has been noticed from the analysis of the models that the political system of China is quite rigid and the nation’s regulatory as well as legal systems are also inconsistent. Along with this, the country faces significant challenges related to intellectual property. China ranks high in terms of power distance and thus they embrace inequality. In Saudi Arabia, it is observed that the penetration rate of internet is quite high and it is considered as one of the big economies in the Middle East as well as in the region of North Africa. Saudi Arabia has high percentage of young population. Furthermore, the country possesses consumers mostly falling in the young age group who have high consciousness regarding the brand. The rate of arrival of tourists in the country is quite high. Religious tourism also has a major impact upon the retail industry of Saudi Arabia. Availability of the raw materials at relatively inexpensive rates in comparison to other countries can be one of the opportunities for the new firm. However, there are innumerable retail firms in the country which can pose a threat to the Chinese company entering into Saudi Arabia. Furthermore, the country may as well face challenges related to human resources. It has further been found that Saudi Arabia does not prefer taking any risk. This is one of the significant threats for any firm planning to enter into the country. It can be recommended that because of major loopholes in China’s regulatory as well as legal systems along with high congestion in the cities, it would be viable for China based company to expand its operation into Saudi Arabia. It becomes crucial for the firms to select modes of entry into the foreign markets. One of the best solutions of entering into the Saudi Arabian market by the Chinese organisation is by the means of joint venture. There are many advantages of entering into Saudi Arabian market by means of joint venture. The relation with the vendors may be strengthened and the technology with the partnering firm can be shared (Informa, 2011). It has been identified below from Appendix A that it is quite easy to conduct business in Saudi Arabia and the country ranks number 1 in terms of registering the property. However, it can be recommended that the novel firm must make use of the new technologies such as RFID so that the overall processing of the transactions becomes smoother. When hiring the employees, it must pay utmost care and thus skilled employees must be hired. The products must be competitive enough so that it can maintain competitive advantage. References Ame Info, 2011. Opportunities Abound In Saudi Arabia's Fast Growing Retail Market, Says Jones Lang Lasalle. News. [Online] Available at: http://www.ameinfo.com/283682.html [Accessed March 30, 2012]. Alpen Capital, 2011. GCC Retail Industry. 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[Online] Available at: http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDoQFjAD&url=http%3A%2F%2Fwww.wto.org%2Fenglish%2Ftratop_e%2Ftpr_e%2Fg256_e.doc&ei=PpR6T5jECojqrAeBqdCMAg&usg=AFQjCNEiiDrW3QXLU3--I4Mm-nk0guCSaQ [Accessed March 30, 2012]. Wu, D. & Zhao, F., 2007. “Entry Modes for International Markets: Case Study of Huawei, a Chinese Technology Enterprise”. International Review of Business Research Papers. Vol: 3, Iss: 1, pp: 183-196. Appendix Appendix A (Conducting Business in Saudi Arabia) Parameters With Respect To Ease of Doing Business Saudi Arabia Rank Overall ease of doing business 11 Starting of business 10 Dealing with construction permit 4 Getting electricity 18 Registering property 1 Credit 48 Paying taxes 10 Source: (Informa, 2011) Appendix B (Comparison of China and Saudi Arabia Cultural Dimension) Source: (Geert Hofstede, 2012) Read More