US airways's new Market - China - Term Paper Example

?US Airways in China Table of Contents Introduction 5 Social 6 Major Historical Developments 6 Population and Its Composition 6 Level of education 7 Mobility 7 Transportation 7 Communications  8 Energy 8 General Cultural Pattern 9 Purchasing Influences 9 Political 10 Major Political Trends 10 Government Structure, Organization & Operation 10 Principal Government Activities 10 Annual National Government Budget 11 Policies towards labor, agriculture, foreign policies 11 Economic 11 Labor Force & Wage Rates 13 Incomes & Standard of Living 13 Competition 14 Legal 15 Principal Laws Affecting Business 15 Geographical Summary 16 SWOT Analysis 16 Strength 16 Weakness 17 Opportunity 17 Threats 17 Marketing Plan 18 Summary of findings and Recommendations 18 Works Cited 20 Name of the Student Name of the Professor Name of the Course Date US Airways in China Introduction Considering the urge of the western countries to establish a strong foothold on the Asian continent in order to expand their aviation industry, US airways invading China seems to be a plausible option. The US Airways is one of the key players in the aviation industry in the US. It is a subsidiary of the US Airways Group with its headquarters in Temple, Arizona. The airline company operates both domestically and internationally. Being one of the biggest names, it would obviously want to explore the Asian markets. However, the major determining factor in this regard would be the pricing of fuel in the coming fiscal year, the economic scenario and the state of the aviation fleet. Interestingly, the company had already received permission from the sovereign authority to fly from Philadelphia to China back in 2008. However, due to the global economic slowdown, the project got delayed. This paper aims to understand the impact of the business environment of China on the expansion of US Airways and the possible marketing strategies to be adopted. Social Major Historical Developments Under the leadership of MAO Zedong, China had developed as a socialist state. However since 1978, under the leadership of DENG Xiaoping and with a favorable attitude towards globalization, a pro-market economic structure had materialized with a positive outcome through an increased GDP (“East & Southeast Asia: China”). Population and Its Composition The composition of the population using the various aspects is shown in the following charts according to age groups: Figure 1: Population of China Source: (“East & Southeast Asia: China”) The majority of the population is Buddhist with Christians and Muslims forming the minority. Chinese population is equally distributed between the urban and rural areas such that only 50% of the population lives in the urban areas with the rate of urbanization hovering around a mere 2% (“East & Southeast Asia: China”). Occupationally, majority of the population are engaged in the agricultural sector (around 50%), even though agriculture makes a relatively lesser contribution in GDP, while the shares in the industry and services sector stand around 22% and 28% respectively (Yoo 187). Level of education Figure 2: Education level in China Source: (“East & Southeast Asia: China”) Mobility In the wake of the pro-market reforms and globalization, China’s occupational mobility is undergoing paradigm shifts (“Occupational Mobility and Migration in China”). This is causing a rapid change in the age-old social division, according to occupational nature. Due to the increasing unemployment and large lay-offs by government and private enterprises, the masses are increasingly migrating to the urban areas in search of employment. Both the mobility between jobs and places has increased on this account. This will be an added advantage for US Airways. Transportation The traditional form of transportation in China revolves around the railways. However, roadways, airports and waterways also comprise the other forms of transportation. The total area covered by the roads is 4,106,387 km with a paved length of 3,453,890 km and unpaved length of 652,497 km. The total number of airports in the country is 507. The length covered by the railways is 86,000 km. There are around seven major seaports in the country. The navigable length of river stands around 1, 10,000km (“East & Southeast Asia: China.”). Communications  All the different forms of broadcasting media like, radio, television and newspaper, are popular in China. Radio continues to be an important form of communication in rural China (“Communication approaches mass media”). However, as the percentage of Chinese speaking population of China is not significant, US Airways would have to conceptualize their advertisements in vernacular languages in order to popularize themselves. With the growing popularity of the internet, advertisements through web are also plausible. Energy Figure 3: Annual per capita energy consumption Source: (“Annual per Capita Energy Consumption of Household”) The annual per capita energy consumption of China has been shown in the above graph for the period between 1984 and 2010. General Cultural Pattern In order to establish themselves in China, the US Airways must consider that the Chinese culture is an extremely important aspect in their purchasing decisions. It would be wrong for the American firm to assume a large size of market and a substantial disposable income while exploring the Chinese market. Purchasing Influences An American company penetrating in China must take into consideration the Chinese perception, which is largely shaped by the perceptions of their opinion leaders, in shaping the country’s overall purchasing and other influences. Influencing these key opinion leaders seems to be of paramount importance for determining the overall mass. Purchasing Motives Understanding the aviation needs of the flyers would be a key factor in determining the range of services. The dominant requirements of the flyers must be taken into account while compartmentalizing the prices for various categories. Political Major Political Trends It has been observed that China is opening up its economy, following the trends of globalization. The basic outcome of this policy would help in removing the bureaucratic controls over the businesses. This majorly serves to be an important factor in steering foreign houses to set up businesses in China now. Government Structure, Organization & Operation China’s governmental structure is a pyramidal one (“Political Environment”). The president ranks first in the hierarchy. The chief function of the president is to steer the course of the country and acts as the visionary. Below the presidential tower is the State Council. This is the group held responsible for framing the policies. The cities come under the control of Shi, the provinces under the Sheng, the countries under Xian, townships under Zhen and the lowest in the tier are the villages which are controlled by the Cun. Prevailing Political Philosophy As the bureaucratic controls are now being relaxed, the government is unlikely to interfere in the businesses of private enterprises. The prevailing economic scenario presents a positive environment for the new entrants. Except the codified laws governing the foreign business, exercise of other unnecessary controls over the marketing campaign is not likely. Principal Government Activities The factors affecting business decisions will directly depend upon whom the entrant is confronting in its entry level. This also largely depends on the type of sector and the level of commitment. The environmental concerns, however, remain a sensitive issue which the US Airways need to concentrate on. A liberalized pro-market approach would help to create a favorable environment for the aviation giant in China Annual National Government Budget The latest annual national budget of China is revised in a manner which favors the aviation industry. The allocation for the civil aviation fund is expected to rise, following the announcement made by the Ministry of Finance. This can turn out to be a positive influence on the US Airways. Policies towards labor, agriculture, foreign policies China’s pro-market policies are a welcome change after decades of state control. Recently, China has even dropped its one-child policy and the labor reforms are also undergoing rapid changes. China has also been successful enough in boosting its agricultural production through its liberalized regime and also, in reducing poverty drastically. However, income disparity remains high. The fact that China has been adopting a market led growth policy signifies that the bureaucratic controls are less likely to be exercised on US Airways. Economic Gross National Product (Total) The estimated revenue is 1.857 trillion and the expenditure is 1.992 trillion. Figure 3: GDP Source: (National Bureau of statistics) The composition of GDP is shown below: Figure 4: Composition of GDP Source: (“East & Southeast Asia: China”) The share of agriculture in GDP is around 15.2%. Progressive industrialization in China has raised the share of industrial and service sector to 51.2% and 33.6% respectively (Hon-Joon 187). At present, the banking system in China is also welcoming changes that were unthinkable even in the last decade. The banking industry is opening itself up to participation from the private sectors, thereby increasing the overall competitiveness in the financial industry. This will be of particular advantage to the foreign companies like, US Airways. If in the coming fiscal year, the terms of trade improve for the United States, then huge profits can be expected from this venture. The present Dollar Yuan exchange rate is 6.09 (“US DOLLAR-CHINA RENMINBI Exchange Rate”). Labor Force & Wage Rates There is no official standard to determine the wage rate in China. However, the local authority always makes sure that the rising inflation and other factors are considered while determining the minimum wage level. Incomes & Standard of Living The living standard in China ranks far below than that of America. The percentage of the affluent in China is insignificant compared to the large section of the middle-class, whose disposable income is restrained. A large section of the population is engaged in the services and the nature of these jobs requires mobility. So this sector can be primarily targeted for the purpose at hand. Also, employment in the high-end service sectors require frequent travels through airways. Competition China’s aviation industry is a well developed one and the present favorable government policies can offer huge momentum of growth for the sector. Recently, the three major Chinese players namely, Air China, China Eastern and China Southern, had experienced an unprecedented growth (“Chinese airlines focus on domestic growth while international expansion remains the poor cousin”). Therefore, stiff competition from these three giants is likely. The Chinese Government is spending millions of dollars to boost the aviation industry which includes construction of new airports and runways, increasing the airline fleet and also, dedicated and concerted efforts to improve the level of services (“A New Era in Aviation”). These measures have yielded positive results, thereby surging the number of people travelling by flights. A close analysis of this fact reveals a grim picture for the US Airways. The main reason behind this rise in number of people travelling by air owes to the fact that the distribution system is extremely well-organized, which has made the Chinese air travel affordable to the formidable size of the Chinese market and most importantly, they deliver this at a cost that is fractional compared to the distribution system worldwide. There will be fierce competition as the Chinese airlines are seeking domestic expansion. Overall, the environment for competition is well established and will prevent the American company to get victimized by domestic monopoly. Investments in aviation industry from the foreign companies will be ever increasing from now onwards. Legal The basic legal system has undergone a series of rapid changes as the country has relaxed the socialist system and has made way for market led growth policy. The legal system has undergone rapid transformations with the social and political changes. Principal Laws Affecting Business Business contracts in China are subject to various laws and regulations like, the foreign economic contract law, environmental protection law and joint venture law, to name a few. The written laws vary depending on the type of business venture. For example, if the business venture is a joint venture, the laws governing it will be different compared to an enterprise which is wholly foreign owned. For a foreign business with its resident offices in the country, the laws will be different and so on. There are also laws on the content of commercial advertisements and the use of trademarks by the company. The company must also be solely responsible for the quality of its products and any discount that it decides to advertise (Genzberger 236-237). Taxes The rules for business tax in China are based on a simple formula. The provisional regulations on business tax guide the taxes that are to be paid by the business entities. The flat rate of taxation approach is used for the purpose where the tax payable is the turnover of the company multiplied by the rate of tax appropriate (Lo and Tian 298-299). Antitrust legislation China has recently passed its Antitrust Legislation Act which had become effective on August 2008. This will be particularly helpful in promoting the business activities and encourage foreign investors to enter the country. This law is designed to put an end to all the monopolistic trade practices that impede the business. Certain exemptions are also granted for foreign enterprises fostering international economic developments. Labour laws China has no minimum legal wage. And there is also a large cheap supply of labor pool that can be tapped and this proves be a lucrative opportunity for foreign enterprises. Geographical Summary Given the rapidly growing economy of China and its growth experiences of the past, it seems like the perfect time for the US Airways to enter China, as its economy is opening up presently. Being one of the most powerful countries of the Asian subcontinent, its strategic geographical position is of utmost importance. SWOT Analysis Strength The rising revenues of the US Airways, as has been released in the company’s report, shows there has been growth in revenues. It is one of those airlines, which is able to provide reasonable airfares for the American population and gained its popularity overtime. The company mainly dominates the eastern coast and plans to extend westwards after its complete domination of the former. It has been observed that the company’s stock rose by 10% to $ 4.80 (Gilbertson, “US Airways sees 'weaknesses' turn to strengths now”). Weakness The company lacks a strong base of frequent fliers which proves to be non-profitable at the end. Also recently, there has been increasing reports of customer complaints, which is particularly dangerous for the company whose targeted customers include the middle-class segments. One of the major shortcomings of the airline is the hub kept for its break journeys, which are lesser in size compared to that of other airlines and this causes blockage in the smooth operations. Opportunity US Airways can definitely look forward to its merger with the American airlines. The merger can prove beneficial for both the companies and this can bring new product innovations, which can collectively cause threat to their rivals. With increasing competition from the internal competitors, it would be beneficial if the company develops policy for international expansion. The increasing levels of disposable income of the masses have increased the demand for air travel in the developing economies as it already holds huge potential. Threats The company faces a stiff threat from its chief competitors like, Southwest Airlines, Delta Airlines, Jet Blue and United Airlines. Apart from this, the extremely volatile fuel prices pose a great degree of threat to the company as with a slight increase in the fuel prices, cost would hugely increase and force the company to go bankrupt. Marketing Plan One of the chief methods of entry that can be adopted by US Airways is to enter via joint venture. Given the financially unstable position of the company in recent times, it will be particularly helpful as it can use the resources of the partner company. The sales potential would thereby increase as the issue of cultural divide between the countries can be addressed. Also, given the deeply competitive nature of the domestic aviation industry, US Airways can use the market domain knowledge of the niche market. The comprehensive marketing plan can be summarized below: The company can operate its cheap flying fleet in China as the demand for reasonably priced air fares in China mostly comes from the majority of its middle class population. The pricing of the products must be based on the economic class travels, as this comprises the major section. The key strategic geographic locations should be focused by the airline as the demand for domestic flight travels are fairly high, given that China is a large country. In order to focus on the promotional techniques, the airline must introduce loyalty cards and discounted ticket prices in its nascent stage to attract a loyal customer base. Summary of findings and Recommendations The opening of the Chinese economy is perhaps the most significant decision that will work in favor of the US Airways. The neo-market policies adopted by China and opening up of all its sectors including the aviation sector, will work in favor of the company. The vast size of the Chinese market is particularly lucrative for exploring the country as a market. One of the chief factors in doing so would be to shape the views of the opinion leaders for capturing the attention of the masses. One of the chief recommendations for the company would be to provide ample services for foreign travels at fair prices. This would definitely lure the Chinese tourists to travel out of the country, thereby tapping huge profits from it. Works Cited “A New Era in Aviation.” IATA. International Air Transport Association (IATA), 2013. Web. 21 Nov. 2013 “Annual per Capita Energy Consumption of Household.” quandl. National Bureau of Statistics China. n.d Web. 22 Nov. 2013 “Chinese airlines focus on domestic growth while international expansion remains the poor cousin.” CAPA . CAPA Centre for Aviation, 4 Nov. 2013. Web. 21 Nov.2013 “Communication approaches mass media.” Fao. n.p. Web. 22 Nov. 2013. “East & Southeast Asia: China.” CIA. CIA fact book, 2013. Web. 20 Nov. 2013. Genzberger ,Christine. China Business: The Portable Encyclopedia for Doing Business with China. California: World Trade Press, 1994. Print. Gilbertson, Dawn. “US Airways sees 'weaknesses' turn to strengths now.” The Arizona Republic. n.p. , 24 Apr. 2009. Web. 21 Nov. 2013. Hon-Joon , Yoo. “Occupational Structure in China and Its HRD Policy Implications: Compared with Korea .“ Sungkyun Journal of East Asian Studies 4.1( 2004): 184-200. Print. Lo, Vai lo and Xiaowen Tian . Law for Foreign Business and Investment in China. London: Routledge, 2009. Print. “Occupational Mobility and Migration in China.” FAFO. FAFO publications n.d. Web. 20 Nov. 2013. “Political Environment.” China-britain. Chinese marketing and communication, 2013. Web. 21 Nov. 2013. “US DOLLAR-CHINA RENMINBI Exchange Rate.” Bloomberg. BLOOMBERG L.P. 2013. Web. 22 Nov. 2013 Read More