I will be discussing the threats foreign companies are facing in China's business environment and detail the efforts made by the Chinese government to address the said issues.
Multinational corporations (MNCs), such as Wal-Mart, have identified that the most troublesome feature of China's business environment is the fragmentation of supply chain and local protectionism resulting to a lack of consistency of inter-provincial rules and regulation. Chinese provinces have, for centuries, enjoyed local autonomy and have made full use of it to protect local interests. Regional and local governments have the power to implement rules and regulation so long as it is line with the core mandates and laws of the central government and they can do this without notice. Foreign companies, most of which operate on the national level, finds this situation to be confusing and costly for business operations as they have to comply with each regulations set by each local entity. It also presents problems in supply chain efficiency as each province may require the inspection of the products being transported. For example, there is the possibility that nationally approved products are barred from local distribution due to differing health and sanitation requirements of different provinces. There also localities that require wholesale purchases of alcohol and tobacco products posing problems for retail-oriented stores. This state of affairs results in fewer choices or higher prices for consumers which can be detrimental to the MNC in light of the very cheap products produced by Chinese companies. Physical infrastructure also differs between provinces due to the gap in funds to implement projects posing difficulties for road transportation whether it may be private or commercial trucking resulting to a problematic interprovincial purchasing. (McGregor 2007, p. 45)
Technology and the Abundant Labour Force
China's population is one of the largest in the world implying the abundance of the labour supply. While it can be argued that this presents an opportunity for the companies due to the expected lower compensation packages, it presents tradeoffs in accuracy and quality. The cheapness of labour works for industries that employs manual labour but is a nightmare for those which involves automated processes. High-end technology and electronics manufacturing from Japan, Korea and the United States relocating to China require automated processes and invest in usually expensive technologies to meet quality and accuracy standards. They are now faced with the dilemma of resorting to manual labour and risk quality or invest in automation and incur large costs that cannot be easily regained in light of fierce competition. In sectors that make use of manual labour such as those in transportation, distribution and retail, the abundance of labour can be a threat because it decreases entry barriers and forces the company to lower their prices to be able to compete in the market. As a result, foreign companies and their local providers still opt either to process manually or to contract out to local, third-party logistics companies that use manual processes thereby sacrificing quality. (Yan, Rick and Lebeberthal, Kenneth 2006, p.11)
Foreign companies that need to have automation in their process could have some part of the process done manually but