PROBLEM SITUATION
The following chapters are highlighting some important issues concerning background information and the development of the problem to undertake a critical literature review of the problem at hand. Hence, the problem situation is clarified before dealing with related theories and concepts. In this regards, the importance of the topic is pointed out by illustrating the problem within a wider context of international economics and international market selection which vividly portrays the research gap on this subject. Furthermore, a short analysis of company failures in Mainland China is conducted to visualize the findings of the preliminary investigation. Subsequently the results are presented and briefly discussed before continuing with the literature review to find a theoretical answer to the research question.
Increasing internationalization drivers and decreasing trade barriers have created many opportunities and challenges for domestically and international operating companies. Especially emerging markets, such as the markets of the BRICS countries – Brazil Russia India, China and South Africa – have attracted much attention. Hence, in recent years, the subject of international market selection and market failure in China has been increasingly discussed in the literature but also in the media. Most research within those areas covers the subject of internationalisation, moreover, market selection. However, the majority of the studies have been based on other markets than China. Therefore, it is likely that the results can not be directly transferred to the Chinese market. Furthermore, research on corporate failure in China highlights the need for localisation and higher cultural awareness in China. Even though the preliminary research showed that many Western companies fail due to a negligence of socio-cultural market factors, it is still questionable, if this is a result of underrepresentation within the internationalization process, the market section tools or other reasons such as the consumer. Therefore, these problems are investigated by combining several research areas. Hence, to answer the general focus research question “How to improve micro market selection in China towards a more consumer orientation selection process?”, it is necessary to understand the current economic and development in China before addressing the theoretical part. In this regards are relevant cultural attributes also addressed to provide sufficient background information to the reader to understand the complicity of the topic and to be able to comprehend choices and implications made by the researcher.
ECONOMIC SITUATION IN CHINA
After more than 30 years of strong economic development in China, recent media portrays a different side of Chinas economic development mainly based on worsening economic conditions. These are the negative development of the Chinese equity and foreign exchange markets as well as the decreasing economic growth and the problems of the real estate market. However, also the fact that the countries debts are rapidly raising both on the governmental and municipal level as a result of the extensive investment program during and after the 2008 financial crisis. Another factor which needs to consider is the traditional lending restraining of the bank towards private companies. as banks mainly serve state-owned enterprises. The 2008 financial crisis also led a weaker global demand, which hit the export unstable Chinese economy hard. As a result, significant production over-capacities emerged as exports slumped. Furthermore, growing wages are creating problems for the low-wage industry sign arise that unemployment in China is raising, but “really meaningful statistics on unemployment in China do not exist”. As a consequence, China is experiencing a larger number of protests by laid-off migrant workers since last summer. In this regards, the governmental, international broadcaster of the Federal Republic of Germany "Deutsche Welle” titles an article with “The Golden times in China are over” which states weak commitment to reform from the Chinese government and rising risks as main reasons for this. The article also states that the Commerzbank only sees 5.5 percent economic growth in China which is 1.5 percent under official Chinese goals.
Grant Reid, president and CEO of Mars Inc., assess the changing market conditions and operating environment in China rather positive by stating "I think the Chinese economy is still adamant. People are talking about 7 percent GDP growth now". He further elaborates by saying “believe me, there are lots of big economies around the world who would love to be growing, at 7 percent. Even if the growth drops to 5 percent, China is still a formidable player”.
According to the online technology news website “Wired” and contributing editor Clive Thompson, China has been transformed into an innovative economy with significant financial and production capabilities as well as a highly competitive economic landscape, but also as a centre for own product and service innovation. Thompson argues that China has many "profitable high tech firms, but they rarely took creative risks and mostly just mimicked Silicon Valley" to provide much-needed infrastructure within their industry, such as "Baidu was a replica of Google, Tencent a copy of Yahoo and JD a version of Amazon”. As most graduates used to "crave jobs at big, solid firms with a stable income", especially the younger generation in China is now seeking "prosperity", through increasing income and more education. This generation is particularly good at "trying something new", by using existing technology paired with other factors, so Thompson.
This factor, in combination with a large number venture capitalists, which invest in any business or start-ups leads to "entrepreneurs are being showered in funding” from both the private and governmental sector. Thompson mentions Xiaomi as “the fourth-highest seller of mobile phones worldwide last year” and WeChat, “Tencent’s globe-conquering social networking app” as examples of fast growing highly completive Chinese corporations. In this regards, Thompson particularly states, that “homegrown firms have distinct advantages, namely familiarity with local tastes, the ability to plug into a first-class manufacturing system built for Western companies, and proximity to the world’s fastest-growing markets in India and Southeast Asia.”
Transferred to other industries, increasing local competition within China can be seen not only as an effect of more international competition and rising foreign direct investment, but also as the effect of a maturing economy with own structures. The businesses are diversifying into its market or internationalizing into other markets now that the initial industry structure is provided, and financial resources are abundant. Example for this can be the transportation industry (infrastructure projects/ trains), the automobile industry (Geely-Volvo) or the food industry (milk production). These industries profit from the proximity to the state of the art factories and production facilities, or, at least, the financial capability to purchase these. Furthermore, plenty of relatively cheap labour, government incentives for further internationalization or acquisitions as well as most of all the large home consumer base do benefit corporations in China. Nevertheless, the consumers are relatively difficult to understand due to language and cultural barriers as well as the fast changeling business environment in China.
Export growth decreased through most parts of 2015 which can be seen in the lower economic growth rate. Furthermore, imports to China decline by 15.2% within the first ten months, from January 2015 to October 2015, so the General Administration of Customs according to China Daily. However, China Daily also reports the fact that consumption of Chinese outbound tourists grew at an annual rate of 25 percent from 2005 to last year which constitutes a different picture of the economic development in China. Zhang Jianping, director of the International Economic Cooperation Institute at the National Development and Reform Commission, highlights that “growing incomes, a stable yuan exchange rate, good services and simplified travel restrictions have attracted more Chinese consumers to stores and websites”. Therefore, these factors can be seen as main drivers for internal consumption which explains the overall economic growth. Cai Jin, vice-president of the China Federation of Logistics and Purchasing in Beijing, adds that import channels have been neglected due to a strategic focus on the expansion of the export channels in manufacturing, e-commerce and of the logistics industry in China. Cai puts emphasis on the high demand for foreign merchandise stresses the opportunities within this sector as competition is relatively small. Foreign logistic and service industries could profit from the country's 13th Five-Year Plan, so Cai.
Recent data also shows, that even though imports decreased within 2015, the overall consumption of imported food products experienced a substantial increase with an annual growth of 17.4% from 2010-2014 so the General Administration of Quality Supervision, Inspection and Quarantine according to Xinhua. The report also mentions that the imports came from 213 countries. However, that more than 84% constituted to only ten states with ASEAN, EU and US constituting to the first three places followed by countries such as New Zealand, Brazil, Canada, Russia, Australia, Argentina, and Korea as the tenth largest exporter of food products to China. A possible reason for this increase might be that Chinese consumers seek healthier and more exotic food products. Furthermore, the large developments of the Chinese middle-class do contribute to this development to a significant degree.
FIVE YEAR PLAN
China's economic development relies on the implementation of Five-Year-Plans which are, in a crude manner, blueprints to set growth targets and to launch reforms. As the 13th Five-Year-Plan is about to be executed, some professional assumptions about its content are given to grasp any future developments. Pei Changhong, director at the Institute of Economics of the Chinese Academy of Social Sciences, mentions in this regards that the current "structural slowdown" needs deeper reforms and a continuation of the opening-up strategy. Pai also said that "the macroeconomic plan should focus on boosting domestic demand and solving structural problems to support sustainable growth." Lu Zhongyuan, deputy head of the Development Research Center of the State Council, a government top think tank, on the other hand, does only consider a structural slowdown in the medium to long term. Lu believes, "the average GDP growth rate from 2016 to 2020 can still maintain 7 percent" and further mentions that "growth rate is not a problem for China."
According to National Development and Reform Commission Secretary Xu Lin, the new Five-Year-plan will continue to set economic growth and Chinas rise into the ranks of the World Bank's high-income countries by 2020. He underlines this by stating, that the legitimacy of the Chinese Communist Party is mainly based on increasing the standard of living. The goals also include a series of significant developments such as greater emphasis on food security issues, acceleration of agriculture developments and substantial increase of incomes in rural areas as well as enlargement of the middle class to achieve the goal of a more comprehensive well-off society. However, like the 13th, the five-year plan is quite comprehensive within its content, more areas such as institutional developments, environmental and welfare issues as well as industry structure and technological advances are also addressed as the base for further social and economic development of the nation.
THE CHINESE MIDDLE CLASS
The "2016 Analysis and Forecast of China's Economic Situation" by the Chinese Academy of Social Sciences (CASS) focus on many developments, one of these being the Chinese middle class. According to the report, the average annual income of the middle class in China is 200,000 RMB, which is said to be about 3.5 times than what the working classes annual income. Especially income levels of tier one cities are higher. Average middle-class income in Beijing is 256,016 RMB, in Shanghai 219,770 and Guangzhou has a mean income of 170,037 RMB within the middle class. The report also notes that the Chinese population has more awareness of their social status today with five years ago. This perception constitutes to the substantial increase within the middle-class, which, within the tier one cities, constitute of 55 % in Beijing, 51 % in Shanghai and 42.5 % of total population in Guangzhou. As the report acts as an important social and commercial blue paper, it is highly likely, that the highlighted developments are to be taken into consideration in future policy making.
To conclude; therefore, it seems that the Chinese market, even though it is currently experiencing a rather significant economic slowdown, and considering that the market has severe structural problems, which are partly due to external factors and partly due to internal factors, still holds vast development potential. A reason for this is its current growth rate, the overall market size, but, moreover the raising consumption capability of the Chinese consumer. Therefore, international corporations must be aware of the importance of market participation both on a national and an international scale. In this regards, especially micro market selection as part of internationalization is an essential factor for business success in China.