Essay: 'The company and the internationalization of the business'

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Introduction
Wine producers are now competing in a global market. The growth of the Chinese economy over the past years has influenced companies to enter the Chinese market. At the same time, the production and promotion of Chinese wines is also growing.
Wine industry is developing rapidly in China. Some of the key factors of this market’s growth are: income growth, emerging middle class and also the increase of interest for the Western lifestyle and consumption habits.
Hong Kong and China are classified as potential markets for Romanian wine exports. Although Romania produces appreciated and good quality wines in the European Union, Romania’s exported wines in the Chinese market are not sufficiently marketed and are not being effectively promoted.
In order to successfully penetrate the Chinese market, Romanian wine-producing companies need to be able market/promote their products to the Chinese consumers in a way which will make Romanian wines well known while creating an image in the consumers’ minds that Romanian wines are of high quality.
Research aim and objectives
Throughout this study we aim to explore the opportunities and threats of the Chinese market, its trends, and also to discover some important characteristics in terms of consumer preferences, purchasing habits and culture. It is important for wine producers to study the history and wine industry of the Chinese market before taking the decision to expand to the Chinese market. The wine producers should study the culture and customs of this market, in particular to form an image in terms of market and consumer preferences. At the same time, by analyzing the market, the producer can take a decision regarding the foreign market entry mode, the risks they may encounter, and being able to form their strategies for the foreign market, in order to achieve its objectives.
In this thesis, we propose to bring important information of the wine market in China, while analyzing the potential of Romanian wine producers to enter the Chinese market and be successful. In the second phase, we aim to illustrate the internationalization of a Romanian wine producer-Murfatlar in the Chinese market while proposing strategies to succeed in the Chinese market.
Methodology
In order to pursue our objectives for this thesis, we used a qualitative form of research- Case study. Case study is a methodology which can use both qualitative and quantitative approach. The data collection for this research consists of primary qualitative data, such as personal observation, and secondary sources consists in academic journals, reports, articles, research, academic books etc. We used secondary data for in order to analyze the internal and external environment for the case-company.
The main goal of our research was to give recommendations for Romanian wine-producers to succeed on the long-term in the Chinese market. Also, we wanted to give a clear view of Chinese market and Chinese consumers. Thus, we proceeded by analyzing Romania’s export potential of wine, we analyzed the wine industry in China and the opportunities for Romanian wine producers. In the second part, we used as a case study the company Murfatlar. We presented the company’s history; we conducted a SWOT analysis for Murfatlar; we gave some insights of the Chinese market and Chinese business protocols, we conducted a PESTLE Analysis in order to define the macro-economic factors which influence wine business in China; we highlighted Chinese consumer’s behavior and habits; we analyzed the main competitors of Murfatlar in the Chinese market; we analyzed the main ways of entering Chinese market; and at the end of this case study we elaborated some recommendations for Murfatlar in order to gain success on the long-term in China.
Motivation
My interest in the wine sector comes from my time spent in Shanghai, to study Chinese. During my studies between 2012-2014, I had the opportunity get some insights of this culture, and also to see that most of Chinese knew about Romania. What made me sad, was that in this emerging market I could not find any Romanian product. From that moment I decided to investigate more thoroughly how Romanian companies could internationalize their business in China, which would be most suitable entry-mode for this market, what are the opportunities and barriers that Romanian companies could meet in the Chinese market and give recommendations and suggestions for SME’s to successful internationalize their businesses in China. However, to be successful in this market it is absolutely necessary study the cultural differences, business protocol, consumer behavior and habits, competitors, market trends, barriers and risks etc. As I was trying to find the most suitable Romanian product for the Chinese market, I discovered that Romania is the 10th European wine producing country. Moreover, at the wine expo in Shanghai, in 2011, a Romanian company won many medals and its wines were highly appreciated.
Structure of thesis
The thesis is organized in two chapters. It begins with the introduction, which includes the research background, the research aim and objectives, the motivation, and the structure of the thesis. The first chapter builds up the theoretical approach of the study. Throughout this chapter we will review relevant literature on firm internationalization, motives for internationalization, internationalization process of the company, some models of internationalization and also the barriers and risks of internationalization. The second chapter is to put into practice the theoretical knowledge covered in the first part of the thesis. This chapter has been divided into two major parts. In the first part we wanted to highlight the opportunities and perspectives for Romanian wine producers in the Chinese market. Also, we wanted to bring important information of the wine market in China, while analyzing the potential of Romanian wine producers to enter the Chinese market and be successful. In the second part of this chapter, we wanted to illustrate the internationalization of a Romanian wine producer-Murfatlar in the Chinese market while proposing strategies to succeed in the Chinese market. Given that the company already exports wine to China, we wanted to highlight a few aspects that the company should take into account for the long-term success in this market
Chapter 1
Internationalization of the company – A Theoretical approach
Internationalization and globalization among businesses has become increasingly popular over the past century and it’s no longer just the major firms who are doing so. Small multinational enterprises (SME’s) have also moved into the global markets due to the ease of accessing foreign counterparts through the increase in communicative technology. It has become apparent that no matter the businesses size, market or business sector Internationalization has become an important consideration for firms looking to cease the opportunities and benefits of going global. In this chapter we will focus on the concept of the Internationalization of business and the opportunities it presents.
1.1. International Business
Globalization is the modern term used to describe changes in society and world economy, resulting in highly increased international trade and cultural exchanges. The World Bank defined globalization as the liberty and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries . In the last twenty years, there have been major changes to the institutional framework governing international economic relations. Market integration is growing stronger, there has been a reduction of trade barriers between countries, relaxation of government policies has led to trade liberalization, more open international markets and broad strong trends of globalization, these and other developments, multiply the opportunities for internationalization of companies.
Some examples of the major changes occurring in the last 30 years of the international business environment include:
‘ Emerging markets have shown huge growth potential (eg. China, Eastern Europe, Indonesia, India);
‘ Fundamental changes in the economic systems of countries (the collapse of the former communist bloc in Eastern Europe, EU enlargement to the east);
‘ Growth of new trading blocs and major changes to existing ones;
‘ Reduction of barriers to international trade therefore increasing competition across national borders;
‘ Development of multinational and transnational organizations;
‘ Development of communicative technologies such as the Internet/Smart phones which have paved the way for a globalized economy.
It has become clear that globalization is deepening and expanding the interdependence between firms from different countries. Some of the major contributors to the rapid expansion of globalization over the past few years include the increases in communicative technology, the gains from trade realized by going global and the reduction of government’s barriers to trade and production. The increases of technology such as the Internet/smart phones have presented huge opportunities for businesses where they can access foreign counterparts halfway around the world at the touch of their fingertips.
Also the gains from trade opportunities by going global can be huge especially for SME’s who before globalization didn’t have access to such population dense countries such as China or India. It has also been evident in recent years the relaxation of governments to foreign trade has increased thus opening up new markets for firms across the world. Governments have reduced these barriers, primarily due to growing demand from consumers to have access to a greater variety of products at a discounted price.
At a macroeconomic level there are several factors that can be considered relevant for the current period:
‘ The liberalization of international trade: agreements between states and the removal of barriers to international trade has helped increase international trade and the importance of international business.
‘ Consumer needs: today’s consumer has become more demanding and wants to receive the best value and most innovative products and services, regardless of the country of origin of these products.
‘ Improved communication: development of technologies, such as the Internet have influenced consumer preferences and increased the ease for businesses to globalize.
‘ Strategic alliances and international supply chains: nowadays not only consumer preferences have changed, but also organizations. For example, even very large companies such as Apple, can no longer afford to develop new products alone which has increased the need to form strategic alliances with potential competitors in order to meet the ever increasing demand for new and innovative products. It is known that Apple has partnered with Sony, Motorola, Phillips, and AT&T in the past.
‘ Increasing global companies ‘ multinational, transnational and global brands: global companies adapt their products to meet not only local preferences but also international ones. This was seen with McDonalds when they adapted their menu for India where they were not allowed to serve beef due to the mass Hindu populations regarding cows as sacred animals, thus they have to server vegetarian burgers and famous burgers like the Maharaja Mac.
By overcoming the local, national and regional boundaries, as well as addressing the environment in a global manner, the company is integrating in the general trend of Internationalization.
Internationalization has been defined in the European Research Journal as the series of changes that firms involved in international business go through and can be presented as the business movements of a firm’s international operations .
Internationalization is defined as the process of increasing involvement in international operations that determine future developments and changes in the company on purpose, orientation and organizational principles. In other words, the internationalization is the body of methods, techniques and tools put at the service’s strategic approach of the enterprise to work abroad.
In the process of internationalization companies go through several stages which correspond to different forms of transactions. However, according to the resources and objectives of the company, she can engage more or less in international business. The companies that are engaging in more advanced forms of internationalization proceed through the following stages:
‘ Internationalization process of trading goods. This stage corresponds to the most basic forms of international transactions, and it refers to commercial transactions (export and import of goods);
‘ Internationalization of production. This can be achieved through various forms of alliances and international cooperation, focusing on the transfer of technology to produce the goods abroad (alliances and international cooperation, licensing, underproduction, joint ventures);
‘ Internationalization of the firm. In this case, the main way to achieve internationalization is through direct investment, this form is normally through foreign investment (FDI).
‘One model which highlights the complex nature of internationalization is the model proposed by Welch and Luostarinen(1988). This model focuses on the object of internationalization, target markets, entry modes, organizational structure and resources. These components could be completed with other such as motives, objectives, competitive advantages and degree of commitment.’
This model is illustrated in the Table 1.1.
Object of internationalization Provides the answer to the question: what?
The company can internationalize using goods, services, property rights, know-how.
Markets Provides the answer to the question: where?
The company must identify, analyze and prioritize the attractive markets. We also have to consider issues related to geographical distance, cultural, political and psychological between the national market and the company’s interest.
The methods used for internationalization Provides the answer to the question: How?
The methods to be considered are varied and offer varying degrees of involvement and diversification of the company. Among them: Exports and imports, associations, partnerships, cooperation and foreign direct investment.
Structure Provides the answer to the question: What type of structure?
This component implies the integration of the company in the international market
Finnancial resources Provides the answer to the question: what resources?
Refers to monetary dimension of internationalization. The financial resources may come from own and external sources.
Human resources Provides the answer to the question: What resources? Human resources are relevant in terms of the number, competence, international experience and training.
Table 1.1 Source: Victor, Danciu, Tranzac??ii comerciale interna??ionale. Concepte, mecanisme ??i practici moderne. Editura ASE, Bucure??ti 2012, p.12.
1.2. Motives for internationalization
When internationalization is initiated, it takes someone or something, inside or outside the company, to begin the process of achieving internationalization. These factors are called agents of change, such as:
‘ Internal agents can include: firm size, technological capability of the company, significant internal event, the age and knowledge which a company possesses, enlightened management etc.
‘ External agents can include: market demand, competitors, trade associations, economies of scale, competitive advantages and external experts, domestic distributors, banks, governmental activities, export intermediaries etc.
In general these internal/external agents are found in the fundamental reasons for why internationalization occurs and explain why firms engage in international markets and underlying management decisions.
Internal change agents
An internal agent of change to the firm is enlightened management. This agent is related to the international experience and the exposure of management. For example, when a current management of a firm understands the value of international markets and decides to discover the opportunities of foreign markets; managers who have lived abroad, who have international experience or who are interested in foreign cultures, are likely, to take the decision to go international.
A second example of internal change agents consists of new management or new employees. Often, new managers who were exposed to international experience or they had some export experience in the past, are likely to try to use their knowledge in the advantage of the company and take the decision to go international.
A significant internal event, like development of new product, can be another major change. For example, a manufacturer heard that his products that he was selling domestically were being resold in another country and it develops the interest of the company for international markets.
External change agents
A primary external change agent can be foreign demand. For example, due to the growth of corporate web-sites, the company receives unsolicited inquiries or orders from abroad. These orders from abroad are a major factor that can encourage firms to begin exporting.
Another major external change is the action of the competitors. For example, the company notices that other companies from the same industry are exporting goods. This information, can influence the company’s decision to go international.
Another example of external agent of change is domestic distributors. Often, such distributors being engaged in export activities, they are trying to encourage firms also to participate in the international market in order to increase their distribution volume.
Another major change agent can be the government. For example, the government is supporting and encouraging companies to engage in export activities by offering them tax refund.
A company decides to enter the international market if there is a motivation to do so. These motivations are categorized as proactive motivations and reactive motivations. Proactive motivations (or aggressive motivations) are when the company is trying to control the external environment and change it according to the interests manifested. Reactive motivations (or defensive motivations) represent responses to the pressures coming from the business environment. In other words, proactive firms go international because they want to, while reactive ones go international because they have to.
Some examples of proactive and reactive motivations are found in the Table 1.2.
Proactive motivations Reactive motivations
-Profit
– Access to resources
– Strategic Competitive Advantage
– Diversification of markets
– Diversification of products
– Exploitation of different growth rates
– The search for cheap resources in foreign markets;
– The search for new markets for its products;
– Tax benefits
– Reduce costs
– Technological advantage
– Managerial involvement
– Development of information and telecommunications network.
-Economies of scale – Competitive pressures
– Decrease in domestic sales
– Overproduction
– Proximity to customers.
– Predictable reactions of competition
– Proximity to customers and ports
– The market potential given the size of the population and purchasing power of consumers
– Excess capacity
– The domestic market has become saturated
Table: 1.2. Source: Popa, Ioan (1997), p. 80-83
Proactive motivations
The main motivation for a company to go international is the profit. For example, the management of the company can perceive international sales as a potential source of higher profit margins or more added-on profits.
The products or the technological advantage of the company can be considered another proactive stimulus. For example, the company may produce goods or services that are not widely available from international competitors.
Exclusive information about specific foreign markets can be considered as a proactive stimulus. For example, the company has a special knowledge about foreign customers or market situations. Such special knowledge may be based on a firm’s international research, special contacts, or simply being in the right place at the right time.
Tax benefits, can play a major motivating role for a company to go international. Many countries offer tax concessions to their firms in order to encourage export activities.
A final major proactive motivation is economies of scale. International activities may enable firms to increase its outputand reduce its production costs.
Reactive motivations
Firms act reactively especially in the face of changes and pressures in the business environment. A prime form of such motivation is the reaction of the company to the competitive pressures. For example, a firm may fear losing domestic market share to competing firms that have benefited from the export activities. Observing that domestic competitors are beginning to internationalize, the companies are starting to export its products on the foreign markets.
Another example of motivation can be the overproduction. Historically, during downturns in the domestic business cycle, foreign markets were considered a solution for the excess inventories. Also, the declining domestic sales that are in a declining stage of product life cycle have a similar motivating effect. The company can prolong the life of its products by expanding the market. This motivation is still particularly valid in less developed countries with respect to high-technology products that have become outdated by the latest innovations in developed markets.
Another reactive motivation is the proximity to customers and ports. ‘Physical and psychological closeness to the foreign markets can often play a major role in the international business activities. Geographic closeness to foreign markets may not translate into real or perceived closeness to the foreign customers because a foreign market that is geographically close may be psychologically distant.’ This type of motivation can also be named as physical and psychological distance. For example, a Moldavian firm established near the Romanian border may not even perceive their market activities in this neighbouring country as global marketing. Unlike US firms, most European firms automatically become international marketers simply because their neighbours are so close.
There are many stimuli and forces that may affect the internationalization process of the company. All these forces which influences or affects the internationalization process of the company can be divided into three categories:
‘ Forces within the company which drive it towards the international market (push forces). For example, need for expansion, saturation in domestic markets, economic difficulty in domestic markets, near the end of the product life cycle at home and excess capacity.
‘ Forces acting from the international environment (pull forces) – these forces attract the company to the international market through benefits and incentives they offer. For example, the attraction of overseas markets, the extent of the product life circle and exploit of a competitive advantage.
‘ Forces of mediation – they influence corporate decisions in favor of internationalization as a result of interaction between the forces that attract and the forces that are pushing the company.
1.3. The internationalization process of the company
When the company decides to go international, she must follow a strategic and operative process. Globalization offers multiple options on ways of entering a foreign market, which can be used simultaneously: export, import, cooperation, alliances, partnerships and foreign direct investment. Literature presents eight main steps that the company must go through when deciding to internationalize.
In the Scheme 1.3. are shown the stages of internationalization.
Scheme 1.3. Source: Danciu, Victor, op.cit. p.20
‘ Diagnostic analysis
The international business strategy is based on an analysis that takes into account the business environment (external diagnosis), and, the ability of the company to integrate into the international market (internal diagnosis).
The external diagnostic is analyzing the international business environment and the risks of the internationalization of the company, in other words, the Opportunities and Threats.
The components of the external diagnostic analysis refers to:
‘ the analysis of the demand (e.g. the nature and characteristics of the demand, market size, market potential and market volume) and supply (e.g. overall ratio between supply and demand in its sector, the covered area, the structure and nature of costs);
‘ the study of the competition (e.g. the intensity of competition, qualitative diagnosis of competitors, the concentration of the sector, dominant companies and barriers of entry);
‘ the economic conditions (e.g. the availability and the cost of raw materials, technology, human resources, capital, economic status.);
‘ the study of the Internationalization risks (e.g. political risk, economic risk, currency risk).
‘ the study of the socio-political environment (e.g. the nature of the political regime, the legal framework, social status).
‘ the study of the cultural environment (e.g. concepts, traditions, perceptions, communication).
The company should evaluate its own resources, competencies and its own restrictions towards internationalization through an internal diagnosis. This evaluation can include: the financial capacity of the business, must conduct a diagnosis with its offer of products, market share, volume of sales, number of customers, capacity of production and sales, research and development, personnel, organizational and cultural diagnosis. In other words, the company should analyze its own strengths and weaknesses. By performing this analysis, the company can decide whether has sufficient resources and if it has the required skills to go international.
These strengths, weaknesses, opportunities and threats, are the components of the SWOT analysis, whose results are prerequisites to elaborate the internationalization strategy, which determines the degree of involvement, the target markets, and the best ways to enter foreign markets.
‘ Setting the goals of internationalization.
This step consists in choosing the goals of the internationalization. The basic options are to choose between extensive growth, through market and product diversification, increase turnover from overseas etc, and intensive growth through profitability and profits; internal growth through capital accumulation and external growth after relocation as units of production, marketing, services, as a result of acquisitions or investments; autonomous development and partnerships.
The objectives of internationalization are quantitative and can relate to: expected growth rate, expected turnover, expected market-share, return on invested capital and expected level of profit, share turnover, expected profits from overseas, short-term/long-term orientation, concentration, diversification.
‘ Identifying the strategic alternatives.
This step is used for identifying the opportunities offered by markets and the objectives of the company. This step refers to a thorough analysis of localization in different geographic regions and markets and to establish the strategies of internationalization. Regarding the localization, the company must take into account criteria such as: nature of the work involved (international, multinational, global); economic considerations (market potential and its evolution); favorable conditions for doing business, access to resources; legal and administrative considerations; business risks: market risks, payment risks, currency risk, country rating, etc.
‘ Foreign market entry methods
Internationalization strategy lies in choosing a business-friendly method. The company can choose from various forms of trade (export, import, licensing, franchising) abroad implantations (joint ventures, subsidiaries, branches) or strategic alliances, partnerships and cooperation.
In this section we will explore in more detail the various strategies used by companies to expand their operations into foreign markets. The company usually is internationalizing its business gradually, in a way that minimizes risks, at least at the early stages of internationalization, and allows for deeper degrees of commitment as their learning and experience grow.
‘ Exporting
Exporting is the simpliest way for a company to internationalize its business. The export can be done directly, when the company develops its own relationship with customers in foreign markets, or it can be done indirectly, through international intermediaries like distributors, international agents, export management companies, trade houses, etc.
Direct exporting represents a deeper commitment and it allows the company for faster learning about how to do business abroad and it helps establish more productive relationships with customers which induces further internationalization and growth.
Indirect exporting, through intermediaries, becomes necessary when a company doesn’t have the sufficient experience of international business and is unable to find appropiate foreign customers, marketing channels.
‘ Licensing
Licensing is another method of entering into an overseas market for expansion. Licensing refers to the arrangement between an owner of a trademark, a design or patented technologies who gives permission and privileges for a business to legally use that intellectual property on agreed terms and conditions in return for fees and royalties. It is another form of exporting intangible assets whereby the intellectual property is granted to licensees so that they can produce a good that can be sold. Licensing gives companies opportunities to grow their brand internationally usually for inexperienced businesses during the early stages of the business life cycle. Licensing eliminates the needs for capital investment, allows quick entry, rapid returns and minimises the risks in overseas markets. Commonly, licensees are companies that are looking to boost their product innovation and increase brand awareness in that market through licensing.
‘ Franchising
Franchising can be defined as a system where an owner of a business (franchisor) provides independent people (the franchisee) with the rights to use the same business name/format and provide the same product services in exchange for royalties and fees. This form of exporting amongst franchisors undertakes a capital-intensive mode of investment, meaning that they invest through providing finance, information, and agreements to businesses. The main reason franchises invest overseas is typically for business expansion.
Business format franchising is the most common form of franchising that provides the franchisee with the use of trademarks, logos and a structured layout system for doing business. The franchisors provide support for the franchisee with site settings, layout and design, human resources and marketing attributes. In return, this agreement permits the franchisee pay an upfront fee and pay continuing royalties that help the franchisor provide research, development and support for the entire franchise system. Franchising increases rapid market expansion by using the intellectual property of the franchisor and the capital and network of owner operators.
‘ Subcontracting
Subcontracting refers to the process of entering a contractual agreement with an outside person or company, named subcontractor, to perform a certain amount of work. The main contractor is still in charge and has to ensure that the project is executed as specified in the contract. There are many companies that hire subcontractors in order to reduce costs, as the subcontractors can utilize specialized knowledge or resources to achieve cost advantages by producing in large numbers.
‘ Joint Ventures
A joint venture is the long-term participation of two or more companies in an enterprise in which each party contributes assets, has equity participation, and shares risk. Sometimes the joint-ventures don’t have a time limit and they remain established as long as they need this venture. However, the venture is its own entity, separate and apart from the participants’ other business interests.
‘ Wholly owned subsidiaries
In a wholly owned subsidiary, the parent company owns 100% of the shares of the subsidiary. Wholly owned subsidiaries in foreign countries can be established in two ways: through buying an existing company (acquisition strategy) or through building a unit from scratch. Greenfield investment is the establishment of a new wholly owned subsidiary, it is a complex and costly strategy but it provides the company the full control of the firm. This strategy has a high risk due to the costs of establishing a new business in a new country. Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative. Many multinational corporations apply acquisitions to achieve their greater market power, which require buying a competitor, a supplier, a distributor, or a business in highly related industry to allow exercise of a core competency and capture competitive advantage in the market.
‘ Strategic alliances
A strategic alliance is a type of cooperative agreements between different firms. Strategic alliances occurs when the two of more companies are joining together to pursue mutual benefits. The focus of the strategic alliances is often on creating new products or technologies, rather than distributing the existing ones. Another characteristic is that it often involves technology transfer.
‘ Evaluation of the partners and of the object of internationalization.
This step consists in identifying the potential partners followed by a detailed analysis in terms of their skills and advantages that a company can achieve by working with them. The object of the internationalization is chosen according to the skills and abilities of the company related to the potential and abilities of partners.
‘ The choice of partner and object of internationalization.
After evaluating the potential partners, the company may establish some links between the object of internationalization and potential partners. For example, some partners are suitable for export operations, others for strategic alliances, partnerships, and others for mergers and acquisitions.
‘ The negotiation of the contract.
This stage involves signing a specific contract for commercial arrangements, an arrangement which is reflected in equity stakes. In the strategic alliances case, it’s specified the obligations and rights of the parties.
‘ Control and analysis of internationalization results.
This stage refers to the permanent supervision of the way in evolving operation in relation to the objectives set. Control must be in the form of an audit, based on information obtained in real time, to track progress in achieving objectives and to timely notify any irregularities. This step is very important for the company to improve the international business.
1.4. Models of internationalization
In literature, there are presented several models of internationalization. In this part of the thesis we will present the Uppsala model, the product life cycle model, the transactional cost model, the eclectic model and the business network model.
‘The Uppsala model is a theory that explains how firms gradually intensify their activities in foreign markets. The key features of this theory is that firms first gain experience from the domestic market before they move to foreign markets; firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries; firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes (sales subsidiaries etc.) both at the company and target country level.’ We can say that through this model companies first start their expansion in a physic nearby market and after they gained knowledge of the market thereafter the companies are gradually expanding to the more distance market. The finding of this model showed that most often the companies entered a new market through export before any other entry-mode strategy.
‘The model of the product life cycle was introduced by Vernon in 1966 and the hypothesis of this model is that the successive modes of internationalization are closely related with the product life cycle. In the first stage the production facilities are in the advanced countries. As demand expands a certain degree of standardization usually takes place. ‘Economies of scale’, through mass production, become more important. Concern about production cost replaces concern about product adaptations. With standardized products the less developed countries may offer competitive advantages as production locations. For example, the movement of production locations for personal computers from advanced countries to less developed countries.’
‘The transaction cost model is assuming that the company internationalizes until the transaction cost inside balances the cost of the same transaction which is market-based. The transaction cost has as source the divergent interests and opportunistic behavior of the exporters. The decision about the internationalization alternative is taken following a pertinent analysis of the transaction costs. The main purpose of internalization using the cost transaction approach has to be the minimizing of the transaction costs as a whole.’
‘The eclectic model has been proposed by Dunning. According to Dunning the propensity of a company to engage itself in international production increases if it has ownership advantages, location advantages and internalization advantages. The eclectic model explains the emergence of the multinational companies by using the three already mentioned advantages.’
‘The model of business network emphasizes the value of commercial, personal and cognitve relationships between its members. This model assumes that the organizational network of the company is a major incentive for internationalization and the companies produce their resources by interacting with other partners. The companies of the network can be both individually independent and dependent on the resources controlled by other companies. The degree of dependence gradually increases and that means the resources of one company become more dependent on the ones of other companies for the benefit of all parties. The business networks work throughout exchange relationships and their needs and capacities are mediated by the interactions during those relationships. The position of a company inside a network is a key concept of the network model. This position defines the present control of the company and its access to the network resources.’
1.5.Barriers and risks of internationalization.
When it comes to internationalization there can be a wide variety of barriers and risks when venturing into foreign countries. These barriers/risks occur mainly during the start of the internationalization process however others can arise while a company is internationalizing.
Some barriers that can affect the internationalization initiation include: insufficient knowledge, insufficient finances, lack of foreign market connections, lack of productive capacity to dedicate to foreign markets, lack of foreign channels of distribution, cost escalation due to high export manufacturing, distribution and financing expenditures.
The main barriers encountered while beginning to internationalization is lack of information regarding potential foreign customers, competition and foreign business practice. Companies need to find adequate representation for overseas distribution and service. For example, lack of information regarding customers and foreign market can cause problems pertaining to meeting customer’s quality standards and establishing suitable design and image for the foreign market. During the process of internationalization, the company can encounter different barriers which can be divided into three groups: general market risks, commercial risks and political risks.
General market risks can include the following: competition in the foreign markets, market distance, language and cultural differences, differences in product usage in foreign markets, difficulties in finding the right partner, difficulties in finding the right distributor. For example, the company may have to change and adapt the product, price and promotional strategies due to cultural and language differences.
Commercial risks can include the following: exchange rate fluctuations when contracts are made in a foreign currency, failure of export customers to pay due to contract dispute, bankruptcy, refusal to accept the product or fraud; delays and/or damage in the export shipment and distribution process.
Political risks can include the following: foreign government restrictions, foreign exchange controls/ interference imposed by host government, high foreign tariffs on imported products, complexity of trade documents, civil strife, etc.
Chapter 2 Case study: The internationalization of Romanian wine producers in the Chinese market
Wine producers are now competing in a global market. The growth of the Chinese economy over the past years has influenced companies to enter the Chinese market. At the same time, the production and promotion of Chinese wines is also growing.
Throughout this study we aim to explore the opportunities and threats of the Chinese market, its trends, and also to discover some important characteristics in terms of consumer preferences, purchasing habits and culture.
It is important for wine producers to study the history and wine industry of the Chinese market before taking the decision to expand to the Chinese market. The wine producers should study the culture and customs of this market, in particular to form an image in terms of market and consumer preferences. At the same time, by analyzing the market, the producer can take a decision regarding the foreign market entry mode, the risks they may encounter, and being able to form their strategies for the foreign market, in order to achieve its objectives.
Thus, in this case study, we propose to bring important information of the wine market in China, while analyzing the potential of Romanian wine producers to enter the Chinese market and be successful.
In the second phase of this study, we aim to illustrate the internationalization of a Romanian wine producer-Murfatlar in the Chinese market while proposing strategies to succeed in the Chinese market.
2.1. Opportunities and Perspectives for Romanian wine producers
2.1.1. Romania’s export potential
‘ Wine production
Romania can be considered a valuable wine-producing country as they have a great historical past and rich cultural traditions, which adds value to the name of Romanian wines and presents opportunities to globalize within the wine industry. Romanian land occupied by vineyards bearing fruit was 242,700 hectares in 2002, representing 1.7% of Romania’s farming land.
The main vineyards in Romania are of western European origin and possess well-known oncologic features. These vineyards have long been acclimatized in Romania and are known to produce red wines such as Merlot, Cabernet Sauvignon Blanc, Pinot Noir and white wines such as Chardonnay, Sauvignon Blanc, Pinot Gris and Muscat Ottonel. There are also extremely valuable red wines produced including Feteasca Roiala, Fr??ncu??a, Busuioaca Galbena and Tamaioasa.
Romania is a wine country member of International Organization for Vine and Wine since 1927.
According to FAOSTAT supply 2010, Romania was ranked in the top 21 best wine-producing countries and was also ranked 10th worldwide by their volume of wine production. Within the EU, Romania ranks 10th in terms of the wine production volume behind the countries Italy, France, Spain, Germany, Portugal, Greece, Austria, Hungary and Bulgaria.
Romania’s wine production decreased in 2010 to 4 million hectoliters due to bad climate change however by 2011 there was a significant increase in terms of the quality of wines.
In 2010, the main Romanian wine producers ranked by turnover were: Murfatlar Romania – 28,3 mil. Euro, Cotnari – 20 mil. Euro, Jidvei – 18,2 mil. Euro, Vincon – 16,8 mil. Euro, Angelli – 12,5 mil. Euro, Casa de Vinuri Zore??ti – 12,5 mil. Euro, Cramele Reca?? – 11,6 mil. Euro, Vinexport Trade-Mark – 10,8 mil. Euro, Cramele Halewood – 8,2 mil. Euro, Domeniile Viticole Tohani – 8 mil. Euro.
‘ Export potential
According to the classification and codification of goods for international trade, wines fall into two categories: ‘fresh grape wines’ and the second category, ‘Vermouth and other wine of fresh grapes flavored with plants or aromatic substances.’
Based on International Trade Centre statistics, in Romania, total exports of ‘fresh grape wines’ in 2011 marked an increase of 14.6% in value and terms of quantity. On the other hand in 2011 total imports of ‘fresh grapes wines’saw a tremendous growth in value of 146.3%.
In 2010, Romania exported ‘fresh grape wines’ on the following markets: China, USA, Italy, Estonia and Canada. The main external suppliers for this category of wines for Romania, in 2010, were France, Italy, Rep. Moldova, Slovakia and Germany. Romania exported ‘Vermouth and other wine of fresh grapes flavored with plants or aromatic substances’ to: Germany, Czech Republic, Bulgaria, Estonia and Russia. Romania’s main external suppliers for this category were Italy, Spain, France, Hungary and Slovakia.
In the international wine market Romania is ranked 40th amongst world exporters of fresh grape wines, with exports worth about USD 11.43 million. In terms of ‘Vermouth and other wines of fresh grapes, flavored with plants or aromatic substances’, Romania’s exports in 2010 were worth USD 4.85 million and ranked 27th amongst world exporters for such wines.
Listed below in Table 2.1.1. is what has been considered the most dynamic markets, offering the best potential growth and diversification for Romanian exports of ‘fresh grape’ wines according to International Trade Statistics.
Wine of fresh grapes Average annual increases:
1. > 100%
2. 50-100%
3. 25-50% Potential markets:
1. Indonesia, Pakistan, Sri Lanka, Syria, Turkmenistan;
2. Hong Kong, China, Oman;
3. Lithuania, Slovakia, Armenia, Jordan, Lebanon
Vermouth and other wine of fresh grapes flavored with plants or aromatic substances Average annual increases:
1. > 100%:
2. 50-100%
3. 25-50% Potential markets:
1. Argentina, Algeria, Oman
2. Australia, Ireland, Israel, Hong Kong, Lebanon
3. Estonia, Cyprus, Armenia, Syria
Table 32.1.1., Source: Centrul Rom??n de Promovarea Comer??ului ??i Investi??iilor Str??ine, Op. Cit. P. 21.
Based on this table, Hong Kong and China are classified as potential markets for Romanian wine exports. Although Romania produces appreciated and good quality wines in the European Union, Romania’s exported wines in the Chinese market are not sufficiently marketed and are not being effectively promoted. In order to successfully penetrate the Chinese market, Romanian wine-producing companies need to be able market/promote their products to the Chinese consumers in a way which will make Romanian wines well known while creating an image in the consumers’ minds that Romanian wines are of high quality.
2.1.2 Wine industry in China
The wine industry is developing rapidly in China. The growth of the middle-class, the growth of incomes, the growing interest for the Western lifestyle and tastes, the wine-promotion in the Chinese market, are some of the reasons why this industry is developing rapidly in China.
A study published by the Chinese Government estimates a 15% increase in wine consumption over the next 5 years. In 2008, wine imports in China had increased by 36% in terms of volume, and 50% in terms of value compared to 2007.
China ranks 5th in the world’s top wine-producing countries. 90% of the Chinese market is led by Chinese producers whereas only 10% of the wine is imported. The main local wine producers are Dynasty, Great Wall and Changyu, holding the majority of the market and enjoying strong recognition among Chinese consumers. However, the wines produced in China are not produced with the same quality compared to other countries like France, Italy, Australia and America.
Imports of wines in China are estimated to grow in the next few yeart with 20%. Currently, China’s main suppliers of wines are: France, Australia, Italy, Spain, USA, Chile, Argentina, New Zealand, Portugal and South Africa. The main countries to which China exported wines are: Japan, Myanmar, France, the Netherlands, Hong Kong, Belgium, South Korea, Macao and Britain.
The Chinese wine market is like an hourglass, that means there are two market trends in terms of trade of wines:
‘ a market segment that offers wines of inferior quality in which the Chinese producers are unbeatable in terms of price
‘ a market segment offering high quality wines, especially French wines and expensive wines, which are sold usually before being produced.
Figure: 2.1.2 Source: http://www.zhongguo-wine.com/wp-content/uploads/2010/06/AN-EGG-TIMER-MARKET-500-px.jpg
As we can see in Figure 2.1.2. between the two segments of the market is the Mid-Range Market, where there is a potential market for medium priced wines. In this market, imported wines such as those from Romania have great potential to capture this segment of the market. This segment remains a challenge of the coming years. More and more Chinese companies are importing these medium-priced wines and then they sell them to wholesalers, bars, hotels, local restaurants and supermarkets .
The main target of large cities winemakers are: Shanghai, Beijing and Guangdong. Shanghai remains the largest market for imported wines.
2.1.3. Opportunities for Romanian wine producers
‘ SWOT Analysis
In the following analysis we propose to analyze the strengths, weaknesses, opportunities and threats for Romanian wine producers who are exporting or they want to export wines to China. SWOT analysis will reveal the strengths and weaknesses of Romanian wine industry, and also will highlight the opportunities and threats that will meet on the Chinese market.
Strenghts Weaknesses
Internal Factors Romania is a wine country member of International Organisation for Vine and Wine in 1927 as the holder of a large area planted with vines
The beginnings of viticulture in this region dates back at least 4,000 years.
Romanian wines are internationally recognized and awarded
Romania can produce red wines: Merlot, Cabernet Sauvignon Blanc, Pinot Noir, ranging from white wines: Chardonnay, Sauvignon Blanc, Pinot Gris and Muscat Ottonel which could attract Chinese consumers.
Extremely valuable autochthonous vines are red wines category: Babeasca and Feteasc?? Neagra and white wines category: Feteasca Regala, Fr??ncu??a, Busuioaca Galbena
Weak advertising of Romanian wines
Weak interest of wine producers in educating the Chinese population in terms of wine drinking habit
Insufficient financial resources
Wine exports are not sufficiently encouraged by government
Lack of interest in studying the Chinese culture, consumer preferences and ways to penetrate this market
Lack of interest in developping long-term relationships with distributors in China.
Opportunities Threats
External Factors The Chinese wine market is growing
The purchasing power of population is increasing
The Chinese government is promoting wines
Consumers develop demand for quality wines
Imported wine gives a “western” quality among consumers
Health plays an important role in Chinese culture, and wine is a natural product that offers health benefits.
Chinese culture is characterized by providing gifts both in personal relationships and the business. Many consumers are offering wines as gifts.
Personal image and status are very important in China, wine consumption is considered as creating a certain status for consumers.
Recently, wine distributors are developing and promoting online shopping stores for wines.
Bottling wines on the Chinese market can provide a cheaper alternative
External producers can retain their brand and country of origin.
The opening of stores specialized in wine-selling is growing in China
The education of the public in wine consumption is increased
Vacations and national holidays can serve as a means of promoting wines
Promoting Romania as a tourist country, promoting traditional Romanian products and beverages by organizing exhibitions Cultural differences
Hard to build distribution in China
Non-tariff barriers in China
French wines are dominating the Chinese market
Corruption and counterfeiting can be considered a threat in terms of creating a bad image of products
The population does not have enough information about Romania and traditional Romanian products
Promotion on the Chinese market can be expensive
Local distributors does not have sufficient experience in trading wine
China is not a traditional wine consumer
Chinese consumers do not know the true value of wines and they do not know how to consume the wine
To enter this market is necessary to establish business relationships with local partners
Promotion and public education is particularly important, for example, France has promoted its wines for ten years in China
Imported wines are taxed very high in China, being seen as luxury products which gives an advantage to local wines. Local wines are very cheap compared to imported wines
The increase of the wine quality on the local market will bring competitivity between local and foreign producers of wines in the future years.
From this analysis we can say that the main weaknesses of “Romanian wines” mainly refer to: the lack of marketing activities, lack of promotion of Romanian brands on the market, lack of knowledge of Chinese culture and business habits etc. Romanian wine producers must study the Chinese culture, in particular the consumer behavior, consumer preferences, business customs and protocol in order to succeed on this market. Joint ventures through finding local business partners can help the Romanian producers to avoid the barriers and risks of entering this market. Promotion is very important to educate the population regarding wine consumption, and also important to build brand awareness for Romanian wines.
2.2. Murfatlar and the internationalization of business
This case study aims to apply the theory approached in the first chapter and to illustrate the internationalization of Romanian wine-producers on the Chinese market. As Romania is traditionally a wine-producing country, being ranked 21th in the world’s top wine producing countries, and at European level, being ranked 10th, we have chosen wine to be the product for international trade. At the same time, wine remains one of the few areas in which Romania has a competitive advantage in terms of quality.
We chose Murfatlar, because it is the largest wine producer on the Romanian market, as it has a market share of 30%. In 2011, at the Interwine International Fair, in Guangzhou, Murfatlar won two medals for the best sweet wine (Rai de Murfatlar Grand Reserve 2001) and best ros?? wine (Rai de Murfatlar). “At this edition more than 400 exhibitors from over 25 countries, world-famous wine-producers attended the fair (Romania, France, Spain, Italy, Chile, Argentina, South Africa, Australia, New Zealand, Moldova, USA, Canada, Bulgaria, Macedonia , Ukraine, Hungary, Georgia and Portugal etc.), as well as numerous local companies. Interwine 2011 attracted great interest internationally, being rated as one of the most important events which promotes wines on the Chinese market. The organizers stated that the medals obtained by Romanian producers at Interwine 2011, shows that Romanian wines are among the best in the world. ”
Murfatlar expressed its desire to increase its exports to Chinese and Russian market. Even if Murfatlar already exports its wines to the Chinese market, we believe that this market requires special attention in order to increase the exports and to be successful in the long term.
Firstly, business knowledge, cultural differences, behavior and consumer preferences should be carefully studied to prevent failure on this market. Also, this market requires a long-term decision, sufficient financial resources for promotion and finding the proper local partners which will help Murfatlar to expand on the Chinese market and to achieve success.
2.2.1. Murfatlar
Murfatlar is the market leader in Romania, with a market share of 30%. It produces and distributes wines on the Romanian market as: Rai de Murfatlar, Zestrea Murfatlar, Sec de Murfatlar, Conu Alecu, Ferma Nou??, 3Hectare, Lacrima lui Ovidiu, Murfatlar Rai Grand Reserve, Arezan, Babanu ??i Zaraza. The Murfatlar vineyards are located in southeastern Romania, in the center of Dobrogea Plateau, and enjoy particularly favorable micro-climate suited for achieving a wide variety of wines. This vineyard covers an area of 3000 hectares in around the Murfatlar, Valul lui Traian, Poarta Alb?? and Siminoc areas. Murfatlar’s annual revenue in 2010 totaled 28,3 mil. Euro.
‘ Company history Murfatlar
‘Even in a country with a long winemaking tradition, Murfatlar stands out as one of the oldest, largest and most innovative wineries. Murfatlar’s history is over 100 years old. In 1907, grape varieties such as Chardonnay, Pinot Gris, Pinot Noir, Muscat Ottonel and Folle Blanche were planted on an experimental basis at the initiative of two Romanian viticulturists, Gheorghe Nicoleanu and Vasile Brezeanu.The results were extraordinary. As early as 1943, the Murfatlar Wine Center was established. The vine varieties were extended to include valuable grapes such as Sauvignon Blanc, Muscat Ottonel, Traminer Rose, Italian Riesling for white wines and Merlot for red wines. At the end of 2000, state management of the vineyard ended when a private Romanian group took over the controlling stake. Since that point, the company has had the most spectacular development out of all the wine brands on the Romanian market, almost doubling its market share from 19% in 2001 up to 33% at present. Between 2001 and 2006, it put dramatic distance between itself and the other wine producers in terms of new technological investments, number of brands launched on the market, advertising campaigns and winning awards in the most prestigious international competitions.’
The main shareholders of the company are Euroavipo and Euro Trade Invest, both from Buzau, who holds respectively 41.94% and 39.01% of Murfatlar’s shares. Vitivinicola Basarabi, from Constanta, holds 19.04% of company’s shares. Murfatlar is indirectly controlled by Dobronauteanu family, George Iv??nescu and Catalin Bucura. Dobronauteanu family are the owners of Bibco Bibor??eni, Murfatlar, Principal Company, Euroavipo ??i Romanian Drinks Service.
The company produces a wide range of wines, covering all segments from white to red, from dry to sweet and liqueur. Company representatives are saying that when they are bottling the wine they put inside the bottle 2000 years of tradition, passion, enthusiasm, technology and
Over time, Murfatlar’s wines have received numerous awards in international competitions. The company has over 180 medals record, achieved in international competitions held in Barcelona, Bruxeles, Montreal, Sofia, Tbilisi, Ljubljana, Montpellier, Budapest or Bucharest.
Currently, Murfatlar exports its wines in over 15 countries including: China, USA, Finland, Israel, Germany, England, Poland, Italy, Spain etc.
‘ The company’s objectives
Murfatlar’s main objective was to gain and strengthen the leading position on the Romanian market. Therefore, in the beginning, the company has focused in this direction, and less on the foreign markets. Exporting has become a priority for Murfatlar since 2006, when the company began to regain its traditional position on the foreign markets and succeeding to create a very good image and to establish new contacts. Murfatlar is working on promoting its wines on the new markets and also on markets that already entered. Company representatives consider that they are encountering difficulties in the promotion, whereas there is no country brand abroad so they have to invest more in promoting the wines on the foreign markets.
Also, the company’s objective is to capitalize Murfatlar’s opportunities on foreign markets, such as: China, Russia and USA. For the domestic market, the company is investing a lot of money in advertising and promotion. For the US market they follow a program run by WEPA (Wine Producers and Exporters Association).
Murfatlar aims: to increase company competitiveness; to make known their products on the market; to facilitate the necessary modernization; to facilitate sales.
2.2.2. SWOT Analysis of Murfatlar
In order to analyze the internal and external factors for Murfatlar, we will make a SWOT analysis. This analysis will highlight the factors which influence the wine sector in China. Also, will help the wine exporter to see how the Chinese market is organized, the potential and inconveniences of thie market. Moreover, this analysis will help the company to choose the proper strategy for this foreign market.
Strenghts Weaknesses
Internal factors Murfatlar is a market leader in Romania (with a market share of 30%);
The vineyard, 3000 hectars, has a favourable geographical position, near the Black Sea;
Murfatlar is the wine producer with the most advanced and up-to-date technological support on the Romanian market;
The company produces a range of wines, covering all segments from white to red, from dry to sweet and liqueur.
Its wines have been awarded with over 180 medals at international competitions
The company is colaborating with one of the most famous oenologist worldwide, R??zvan Macici;
The company currently exports its wines in over 15 countries including: China, USA, Finland, Israel, Germany, England, Poland, Italy, Spain etc.
The biggest investment – nearly $10 million;
The most active brand
The biggest advertising budgets,
The largest investments in the distribution system; Attention was low in terms of wine exports to foreign markets
Its wines are not sufficiently promoted in China
The promotion requires time and financial resources
Opportunities Threats
External Factors The emergence of new markets
The increase of wine consumers in the Chinese market
The development of wine production
The increase of income
The increase of interest for quality wines
Attraction of Foreign Investments
The possibility of alliances or partnerships with other companies for the target markets Cultural differences
Weather conditions
The emergence of new competitors
Competition on the foreign markets
Taxes and excise duties
As we can see from this analysis, Murfatlar can be successful on the foreign markets by using their strengths in order to exploit the opportunities of the environment. Also, it can use its internal resources in order to avoid the threats coming from the external environment.
2.2.3. Market analysis
As Murfatlar decided to increase its exports to China, we will proceed by analyzing the Chinese market and give recommendations for Murfatlar in order to succeed on this market.. In this part of the thesis we will explore some insights of the Chinese market and Chinese business protocols, we will make a PESTLE Analysis in order to define the macro-economic factors which influence wine business in China, we will highlight consumer behavior and habits, we will analyze the main competitors of Murfatlar in the Chinese market, we will explore the ways of entering Chinese market and give some recommendations for Murfatlar in order to increase its sales in China.
1. China Overview
China, the East Asian country, also called “the middle kingdom”, has a history of over 4,000 years, covers an area of 9.6 million square kilometers and counts one billion three hundred million inhabitants, which is about one fifth of the Earth’s population.
Some of the Chinese contributions to the cultural heritage are: first calendar, first astrological clock, porcelain, paper, the compass, the seismograph, gunpowder, the largest palace, the world’s largest defense wall, biggest Dictionary, the largest encyclopedia etc.
China, is one of the world’s few remaining socialist states which is ruled by the Communist Party of China. Chinese politics has an all-pervasive influence on every aspect of Chinese life, Chinese business and politics can hardly be separated under the current Chinese social system. Chinese firms are not independent economic entities, but rather “factories” of the Chinese Government. The political structure is centralized, characterized by state planning and government control.
In recent years, China demonstrated a strong economic growth. Despite the rapid growth of the economy, China’s foreign trade has grown. Between 1978-2007, the total volume of China’s exports and imports grew, placing China third in the world and first in terms of foreign exchange reserves accumulation.
China had been trading with over 220 countries and regions, including: Japan, United States, European Union, Hong Kong Special Administrative Region, ASEAN, South Korea, Taiwan Province, Australia, the Russian Federation and Canada.
China is a country that attracts the largest foreign direct investments in the world. Since the world economy is regressing and international investments are reduced, China has achieved remarkable success in attracting foreign investment and capitalization. This is mainly due to developing a rational and efficient investment policy.
According to some experts, China is now at the middle stage of industrialization and urbanization. This is primarily due to the vast territory and large regional differences in China.
2 Doing Business in China
In today’s China, foreign companies have the opportunity to compete and conquer the Chinese market. However, there are a number of difficulties that may be encountered on this market.
Although China is a full member of the WTO, intellectual property protection is not consistently applied and almost 70% of all counterfeits seized globally come from China.
The diversity of the Chinese market is significant, requiring a variety of products that must meet the needs of the segment. Market research and identification of target market sectors are extremely difficult. Competition in China is very high, the low prices charged by domestic companies could cause big problems to foreign companies.
Besides this, cultural differences between individuals can create barriers that may affect the business on this market
The Chinese government controls the businesses, even though it claims to replace the traditional planned economy to market driven, the government still oversees every aspect of this field.
3.PESTLE Analysis
PESTLE analysis is used primarily to analyze the factors that can influence decisions, strategies, goals that the firm established for long term and short term. In other words, is an overview of the environment in which the company operates or wants to operate. The letters stand for: P for Political, E for Economic, S for Social, T for Technological, L for Legal and E for Environmental.
We will go through this analysis in order to analyze the factors which influence the wine business in China. With this analysis will help the company on a long-term orientation.
Political factors
The Chinese Government is communist. China as it’s called today, as admited into the United Nations in 1971 and is one of the five Permanent Members of the United Nations Security Council. China has played an important role in the creation of free trade zones and establishment of security treaties with its neighbors in the Pacific region. Over time, China has tried to improve its relations with other countries. Since March 2008, the number of countries that have developed diplomatic relations with China was 171.
Even though the government controls all the activities taking place across China, the communist state provides a stable environment not only for citizens but also for businesses. The country’s stability attracts foreign investors.
Economic Factors
China has the world’s second-largest economy in terms of nominal GDP, totaling approximately $9.469 trillion. has sustained average economic growth of over 9.5% for the past 26 years. China is a member of WTO and is the world’s largest trading power, with a total international trade value of US$3.87 trillion in 2012. China has the world’s largest foreign exchange reserves, totaling $2.85trillion by the end of 2012.
China has a high import duty and luxury tax (60%—120%). Duty rates in China vary from 0% to 100%, with an average duty rate of 12.47%. Goods imported into China are subject to VAT at a standard rate of 17%, or a reduced rate of 13% on certain products. Consumption tax is imposed inter-alia on imports of alcohol, petrol, jewelry and cars. The relevant rates are between 1% and 45% and it is calculated over the CIF value plus any applicable duty. China has a moderate corporate tax rate of 25% and a low labor cost.
In the wine sector, it is estimated that in the future China will become the largest wine-producing country in the world. The researchers believe that China wants to provide wines mainly for the Chinese market. As regards to the wine industry, the Chinese government promotes the wines more than other alcoholic beverages, which is an advantage for the company Murfatlar.
Sociocultural factors
Cultural differences. Murfatlar should pay attention to the cultural differences, as this is one of the reasons why foreign companies are not successful in this market. China is a collective culture and the decisions always represent the group’s interest. For example, in Chinese the word “self” carries negative connotations, therefore, on many Chinese business letters, you can find company’s red stamp instead of the signature.
Even though equality is one of the aims of communism, China rather reflects the Confucian ideal in which “children should obey their father and the subordinates must obey their superiors.” Business is conducted in a manner that ensures compliance with maintenance and long term relationships. Dignity is the main measure of a person’s prestige, mentain reputation and the contribution to the prestige of others are some of the greatest moral responsibility of every Chinese.
Language. The Chinese language is a factor that may affect the company’s activity. China should not be regarded as a single market, it is divided into several markets. In China are spoken many dialects, people preferring to use their own dialect, and not the official language- mandarin. For example, in the north-west of China, in Xinjiang province almost half the population have their own language and traditions, very different compared to those of Eastern China.
Relations between people. China’s culture is strongly group-oriented and maintaining harmony within it. Although younger generations this is gradually changing, forming long-term relationships still remains characteristic to this culture. The Chinese concept called Guanxi is based on strong commitments and mutual obligations in which relationships between individuals are based on familiarity, respect and mutual trust. Therefore, in business, relationships are not established between companies, but between individuals or groups of people. However, disrespectful, rude and arrogant attitude can cause disastrous results for all parties and business negotiations.
The consumption habits. Chinese consumers do not trust foreign products that are not sufficiently known. Also, the population does not know the true value of wine, for example, young people serve red wine mixed with Sprite and their only goal is to get drunk fast, and not to “taste” the wine along with a menu fit.
Technological factors
China puts great emphasis on research and development. It ranks 2nd in research. As regards wine, they have not yet produced win with the same quality as France, Italy, Australia etc. They focus more on quantity rather than quality. However, it is estimated that in the future they will produce wines that will reach a level of quality compared to that of Western countries. Distribution is very difficult on the Chinese market. To access this market, Murfatlar should seek local partners specialized in wine trading.
Legal factors
A foreign company needs a form of representation before it can distribute its products. In China, all activities by foreign companies must come with the scope that is permitted by local law regulating foreign companies. The easiest way to enter this market is to find a local distributor.
In 1994, China introduced tax system or value-added tax of 17% which applies to all goods, including those imported. Also, certain luxury products, which are considered harmless tax applies between 3-45%. In this category are included: tobacco, alcoholic beverages, cosmetics, perfumes, jewelries, gasoline, motorcycles, motor vehicles and fireworks.
In China, many products must be registered, certified or licensed by the Chinese authority before they can be sold, especially the ones concerning human health and safety.
Chinese law offers comprehensive protection of Intellectual Property, however, there is widespread violation and ineffective enforcement of law.
In 2008, the Government of Hong Kong announced the elimination of duties for wines. This policy was created to increase the wine imports to enter the Chinese market through Hong Kong. Murfatlar should export their wines through Hong Kong and then to penetrate the Chinese market. By this method, they can reduce costs.
Ecological factors
The Environment got influenced by the rapid growth of economy in China. The quality of air and the pollution are big issues for China. The climate is monsoon in China, and is characterized by changing air masses, with predominance of continental masses in winter and marine air masses in summer. Because of this climate, they cannot produce the quality of wines produced in the West.
4. The Chinese wine consumers
The Chinese have a cultural tradition of consuming alcoholic beverages. Because of the wine’s health benefits, more and more people are consuming wine. Also, the increase of incomes and the midle class growth influenced the growth of wine consumption among Chinese consumers.
In China, tea remains the drink consumed by the population, with over 50 billion liters consumed annually. Most wine consumers are in big cities where the incomes are above the average, such as: Shanghai, Beijing, Guangdong and Guangzhou. Studies have shown that young people, especially men, who are working in these metropolitan areas, are the main potential consumers of wine.
Over 80% of wines consumed in China are red. The consumers are associating the colour with happiness, celebration and heath. Wines are sold mostly during national holidays like Chinese New Year, Spring Festival and Mid-Autumn Festival. Also, many Chinese are buying wines to offer them as gifts for friends and also for business partners.
Consumption of wine is most often associated with refreshments. This happens mainly due to lack of knowledge in terms of wine consumption. For example, Chinese consumers are mixing red wine with Sprite and Coca Cola with white wines. Among young people, there is a saying: “Red wine with Sprite- The more you drink the sweeter you’ll become.” In Romania, consumers are mixing the white wine with sparkling water and the red wine with Coca Cola, which is the opposite compared with Chinese consumers.
The Chinese young consumers are drinking wine with the objective of getting drunk rather than sipped for taste. For example, in clubs, bars and karaoke bars, young people are serving wines in small glasses (as Tequila) and it is customary to shout ‘gambei’ (literally-to the end).
‘Face-saving’ is one of the most important factors that will influence the decision of customers in China. The Chinese are associating the quality of wines with a certain status in society. For example, consumers are purchasing wine to show their social status, to show that they are successful and to show that they have money good taste in choosing wines.
Chinese consumers do not trust foreign products that are not sufficiently known. For Chinese consumers, the country of origin and price are more important than the quality of wines. French wines are the most popular among Chinese consumers and they assume that wines are originating from France. For example, when a Chinese consumer was asked why he drinks whine she answered: “I love France and drink French wine. I’ve heard that Paris is a romantic city “.
5.Competition
The largest producers of wine on the Chinese market are Changyu, COFCO Great Wall, and Dynasty holding approximately 50% of the local market share. Changyu is the market leader in Beijing, Dynasty is the market leader in Shanghai, Hangzhou and Suzhou, Great Wall holds 30% market share in southern China. We can also say that the prices for local wines are very cheap and the imported wines cannot compete with them in terms of price.
Changyu is the largest wine producer in the Chinese market. Having over 4000 employees and an annual production capacity of over 200,000 tons, Changyu distributes its wines in more than 27 provinces through a network of distributors, wholesalers and over 3000 members. These networks consist mainly through long-term relationships and commitments. Also, Changyu formed joint ventures with a French group Castel, and with a Canadian company Aurora Ice Wine Co. Ltd.
COFCO’s Great Wall is a wholly owned subsidiary of China National Cereals, Oils and Foodstuff Corporation (COFCO). Great Wall is the largest wine producer by volume of production. It has an extensive distribution network in all parts of China. Note, however, that it purchased the vineyard “Ch??teau de Viaud” located in Bordeaux, France, becoming the first enterprise in China acquiring a vineyard for the production of wine. It also invested over $10 billion in acquisitions and mergers in countries like USA, Australia and France. ‘COFCO, the State-owned group is an importer and exporter of a grain, oil and food in China, as well as a major food manufacturer, wine and spirits producer, hotel operator, real estate owner and insurance provider. It is also the country’s biggest bottler and distributor of Coca Cola.’
Dynasty is a joint venture established in 1980, between Tianjin City Grape Garden and Remy Martin (the French company). Today, Remy Martin is its sole investor. To be successful in the local market, and to strengthen its position, Dynasty has established a partnership with a wine producing company from Australia. Recently, Dynasty expressed the desire to purchase vineyards in Australia, New Zealand, Chile and France to produce top quality wines for the Chinese market.
French, Australian and Chilean wines are comprising about 74% of the imported wines in China. These countries are investing heavily in promotional activities and promotion gain success on the Chinese market.
2.2.4 Ways of entering the Chinese market
Companies that want to internationalize their businesses in the Chinese market must choose the most appropriate entry strategy. Most companies choose to work with local companies to penetrate this market. In this part of the paper we will present the main market entry-modes and the factors that a wine-producer should consider before deciding to enter the Chinese market. In China there are four methods of penetration, such as: export, licensing and franchising, joint ventures and wholly owned foreign enterprises.
Export in China
Export is the easiest way to enter Chinese market. Companies can collaborate with local distributors or they can have their own people to handle the sale of goods on the market. It’s hard to find a good distributor and sometimes is better to have your own representative that is concentrating on company’s products. For example, many companies have said that their exports grew once they’ve sent a representative in China. Distributors are usually selling a large variety of products that can be competitive. They don’t focus their attention to the products of a single company. Also, there is a risk that the distributor can produce the same product, with a cheaper price, and so the company to lose customers.
Licensing and Franchising
Licensing is a contractual arrangement whereby the company provides property rights on its intangible assets to another company for a specific period of time. Franchising is similar to licensing, only involves a long-term commitment from partners. In the process of franchising, the franchisor does not just sell the property on its intangible assets to the franchisee, but also insists that the franchisee will respect business rules set by the franchisor. These forms of internationalization are less frequent on this market due to the fact that in China, protecting intellectual property rights are violated. Counterfeiting is a very common phenomenon on this market. To overcome this, many companies prefer to joint-venture with local companies.
Joint ventures
Joint ventures are contractual arrangements where partners may have equal or unequal shares (ie those where the host partner holds a higher participation). Joint ventures allow companies to play a role in managing foreign operations. Joint ventures involve more direct investment and staff training, management support and technology transfer. In the past, this was the only way that foreign companies could enter Chinese market. The Chinese government began to approve these contractual arrangements since 1979. At the same time, it strongly encourages the formation of joint ventures to access to technology, capital, equipment and know-how of foreign companies. But the biggest challenge comes in finding the right partner with which foreign company would form a joint venture.
Wholly owned subsidiaries
In a wholly owned subsidiary, the parent company owns 100% of the shares of the subsidiary. Wholly owned subsidiaries in foreign countries can be established in two ways: through buying an existing company (acquisition strategy) or through building a unit from scratch. Some companies feel that having a own subsidiaries is more advantageous than finding a local partner. For example, many companies want to protect their technology and fear that the Chinese partner could learn a lot from the partnership, and then become competitors to the company. However, local partners, know the business environment in China, local customs, and know how to operate in this market to be successful. This form of entry-mode is the most expenssive in terms of investment capital. Companies who use this method of market penetration, are often large companies, such as Microsoft or Boeing, who want to protect their technologies.
2.2.5.Recommendations for Murfatlar
Murfatlar has already entered the Chinese wine market through direct and indirect export. We believe that Murfatlar could form partnerships with local companies or joint ventures in order to have success on this market and to become competitive. In oder to gain success they should invest heavily in market research, study the consumer behavior and consumer preferences, and to establish long-term partnerships with local distributors. After researching and studying the customer preferences, Murfatlar must develop marketing and sales strategies which are specific for the Chinese market.
Promotional activities are absolutely necessary for the Chinese market in order to create an image of quality wine and to attract Chinese consumers. Murfatlar can promote its products through: Media, TV commercials, flyers, gift giving, fairs and exhibitions, wine tastings, etc. Also we recommend Murfatlar to create a website in Chinese language in order to make their products known.
Education is very important in China and we believe that Murfatlar could create seminars in order to bring as much knowledge about “wine-culture, consumption habit and value of wine.” In this way, Murfatlar could become popular among young consumers who are interested in foreign cultures..
In China, the status and personal image is very important, so most consumers who choose imported wines want to show that they have financial strength and a certain status. Murfatlar must create an image of unbeatable quality for its wines so that Chinese customers would feel special when they are drinking its wines. We also recommend wines to be red color, red wine being the most consumed by Chinese consumers. For this segment, we believe that ‘Rai de Murfatlar Grand Reserve’ would be successful on the Chinese market as the name shows a certain status.
In terms of competition, we recommend Murfatlar not to enter into direct competition with local producers, but to position its wines for the luxury class, such as: “VIP Members”.
In terms of entry-mode, the company could open chain stores for its wines or it could create a joint venture with a local company that is a wine distributor. Murfatlar must find local partners and create a long term partnership. The local partners should have experience and knowledge regarding Chinese wine market and distribution opportunities on this market. Also, Murfatlar could sell its wines directly to popular restaurants and bars so that consumers could test the wine and to consider Murfatlar’s wine as a high-quality wine.
Conclusions
Wine producers are now competing in a global market. The growth of the Chinese economy over the past years has influenced companies to enter the Chinese market. At the same time, the production and promotion of Chinese wines is also growing.
Wine industry is developing rapidly in China. Some of the key factors of this market’s growth are: income growth, emerging middle class and also the increase of interest for the Western lifestyle and consumption habits.
It is important for wine producers to study the history and wine industry of the Chinese market before taking the decision to expand to the Chinese market. The wine producers should study the culture and customs of this market, in particular to form an image in terms of market and consumer preferences. At the same time, by analyzing the market, the producer can take a decision regarding the foreign market entry mode, the risks they may encounter, and being able to form their strategies for the foreign market, in order to achieve its objectives.
Hong Kong and China are classified as potential markets for Romanian wine exports. Although Romania produces appreciated and good quality wines in the European Union, Romania’s exported wines in the Chinese market are not sufficiently marketed and are not being effectively promoted. In order to successfully penetrate the Chinese market, Romanian wine-producing companies need to be able market/promote their products to the Chinese consumers in a way which will make Romanian wines well known while creating an image in the consumer’s minds that Romanian wines are of high quality.
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