代写留学生硕士论文UNIVERSITY OF SHEFFIELD
SCHOOL OF EAST ASIAN STUDIES
COVER SHEET FOR NON-INVIGILATED ASSIGNMENTS
绿色已改 红色待改
Dissertation title
How multinational corporations enter and develop in Chinese market –The case study of IKEA investing in China.
Student Number
070196139
Module number
EAS6078
Degree code and title
EAST03 EAST ASIAN BUSINESS
Date of submission
05/09/2008
Word count
17,018
Abstract
In this era of globalization, multinational corporations play an important role in the international economy. As the largest developing country in the world, China has huge business potential with a total population of around 1.3 billion. The Chinese market has been an attractive market for foreign competitors since the economic reform in the late 1980s. At present, more and more multinational corporations have begun to establish business operations in China. The purpose of this study is to analyze how multinational corporations enter and develop in the Chinese market. In order to answer this, the research questions focus on which factors affect the performance of multinational corporations in the Chinese market.
In this thesis, I want to present a case study of the marketing performances of the Swedish furniture store Ikea in China. The study focuses on characteristics of the Chinese market and analysis Ikea marketing strategies in China. As one of the world’s largest retailers in the world, Ikea has seen great successes upon its entry into the foreign markets. This case study will contribute towards providing multinational corporations with a good starting point for operating successfully in the Chinese market. (solecism？1) The study indicates that the political environment, market entry model, degree of adaptation of products, cultural awareness and marketing strategies are the influencing factors on internationalization of Ikea in Chinese markets.
Key words: FDI, Ikea, Market entry, Marketing strategy, Culture study
Acknowledgement
I would like to express my sincere appreciation to my supervisor Dr Peter Matanle. This Master Thesis would never be completed without your support and confidence in me. I also want to appreciate my friends who helped me a lot during my life and study. The greatest gratitude of all, however, I reserve to my family. My parents have been a source of warm and enthusiastic support throughout my days in the Master program.
Needless to say, any errors or shortcomings in this thesis are my responsibility alone. All suggestions and discussions are warmly welcomed.
Table of content
UNIVERSITY OF SHEFFIELD I
SCHOOL OF EAST ASIAN STUDIES I
COVER SHEET FOR NON-INVIGILATED ASSIGNMENTS I
Chapter 1 Introduction 1
1.1 Overall purpose and research question 1
1.2 The methodology 3
1.3 Structure of the thesis 4
Chapter 2 FDI policy and Market entry 6
2.1 FDI policy and performance in China 6
2.1.1 Overview of FDI policy in China 6
2.1.2 FDI distribution in China 7
2.1.3 FDI performance in China 9
2.2 The impact of FDI in China 11
2.2.1 Technology and Service transfer 12
2.2.2 Increase regional GDP growth 13
2.2.3 Create job opportunity 13
2.3 Market entry 15
2.3.1 Market size and Geographical distribution 15
2.3.2 Foreign Market Entry Models 17
2.3.3 Identification of the distribution network 20
Chapter 3 Key issues for foreign enterprises entering Chinese market 22
3.1 Investment climate 22
3.1.1 Political aspects 23
3.1.2 Economic aspects 24
3.2 Concept of Culture and Chinese Culture 25
3.2.1 Culture study 25
3.2.2 Chinese business culture 27
3.3 Chinese Furniture Market 29
3.3.1 Characteristics of Chinese furniture industry 29
3.3.2 Marketing analyze 31
Chapter 4 One successful example of FDI in China–case study of IKEA 34
4.1 The IKEA saga 34
4.1.1 The IKEA Philosophy 34
4.1.2 IKEA in China 35
4.2 Factors affect Ikea’s performance in China 36
4.2.1 Entry models 36
4.2.2 Location advantage 37
4.2.3 Cultural influence 38
4.3 Marketing Mix – IKEA on the Chinese market 40
4.3.2 Price 42
4.3.3 Place 44
4.3.4 Promotion 46
4.4 Findings and Recommendations 49
4.4.1 SWOT Analysis 49
4.4.2 Recommendations 52
Chapter 5 Conclusion 54
References 56
List of Tables
Table 2 - 1 Foreign Direct Investment by Sector (2006)…………………………...…8
Table 2 - 2 Total Value of Imports and Exports……………………………….…..….9
Table 2 - 3 FDI Stock as of Year-end 2006……………………………………….…10
Table 2-4 South, East and South-East Asia: top 10 recipients of FDI inflows, 2004-2005…………………………………………………………………………..
Table 2-5 Numbers of Employed Persons at Year-end in Urban and Rural Areas….
Table 2 - 6 Ratio of Regional Foreign Direct Invest to Country’s Foreign Direct Investment……………………………………………………………………………13
Table 2 - 7 Amount of Foreign Investment by Form…………………………..…….16
Table 3 - 1 China Furniture Import and Export (2005) ……………………………...26
Table 4 - 1 Ikea’s SWOT analysis in Chinese market………………………….……48
List of Figures
Figure 3 - 1 Growth of Gross Domestic Product…………………………………….21
Figure 4 - 1 the plate set sold during the Spring Festival time in 2007………...……35
Figure 4 - 2 Ikea’s store in Shenzhen………………………………………….……..42
Figure 4 - 3 Bus route and timetable in Shanghai store………………………….…..44
.
How multinational corporations enter and develop in Chinese market –The case study of IKEA investing in China.
Chapter 1 Introduction
1.1 Overall purpose and research question
Since the economic reform began in the late 1980s, China has been engaged in a process of economic liberalization and opening up to foreign trade and FDI (foreign direct investment). Since China’s entry into the World Trade Organization (WTO) was approved in 2001, barriers to foreign trade are gradually removed. As a result, more and more multinational corporations have joined the competition to attract huge Chinese consumer. What drives the financial performance of multinational corporations (MNCs) has long been a topic of great interest to academics. For example, Chen (1999) examines linkage between entry mode choice and international performance of MNCs. Furthermore, /determinants of foreign equity ownership in joint ventures in China are discussed in many researches (Pan, 1996) 2
In a study of financial performance and survival of multinational corporations in China, Pan and Peter (1999) concluded that making successful strategy decisions about the foreign market depended on such factors as including entry timing, mode of entry and considering the competitive environment and organizational resources. They also proposed that EJVs were more likely to survive compared to cooperative operations, while wholly owned subsidiaries did not differ from EJVs. 3
In my thesis, I want to investigate several key questions in the context of Ikea investment in Chinese market. Ikea has been considered as a legend in the global business world and there have been a lot of studies on Ikea from different perspectives. Barthelemy (2006) present the history of the successful Swedish furniture retailer and discuss Ikea’s unique business strategy in the international market. Some researchers show great interest in Ikea’s founder, Ingvar Kamprad (Business Strategy Review 2004). Not much attention has been devoted to the relationship between service business culture and services marketing strategy. Hence, the aim of this paper is to contribute to a better understanding of the strategic role that business culture and entry modes have for business performance in a long-term perspective. 4
I find case study to be the most appropriate research strategy for the research. “It is of great importance that the selected cases are relevant to the purpose of the study, and that the respondents have abundant information on the studied phenomenon when performing the case studies.” (Holme&Solvang, 1991, quoted in Isaksson& Suljanovic, 2006) 5 There are many reasons for me to choose Ikea Company as the case study. Firstly, the aim of the thesis is to investigate some key questions in the context of foreign investment in China. Ikea is one of the largest retailers in the world with a unique concept. Ikea also has strong position in the world retail market and it continues to expand in the Chinese market. Secondly, the sufficient information and research written on Ikea is also a reason for the choice of company. 6As a result, the outcome of this thesis can be beneficial to retail companies and other multinational corporations who want to do business successfully in Chinese market.
Based on the research gap identified above I want to find answers to the following questions through my research:（solecism？7）
1 What barriers had to be broken to enter Chinese furniture market?
2 What is the Ikea company do to adapt its marketing mix to achieve objective?
3 Does mode of entry affect the financial performance of Ikea in China?
4 Does cultural difference affect the performance of Ikea in China?
5 How Ikea conducts its marketing strategies in the multicultural society?
Among the mainly challenges facing multinational corporations are governmental bureaucracy, location advantages, complex furniture market, great competition and so on. I provide some information about market entry modes for foreign enterprises. For example, Sino-foreign Joint Ventures, Cooperative Joint Venture, Exclusively Foreign-owned enterprises and other new types of foreign investment are discussed. Through stimulating analyses of corporate culture, Goldman (1994) believes that effective communication influence all aspects of the international business, moreover, international competitiveness can not be separated from the business cultures. As a result, cultural factors are examined in detail. 8
1.2 The methodology
The methodology section explains what tools are selected to solve problems and achieve objectives. In this case, the case study of Ikea China is the preferred strategy when to answer the question--how multinational corporations enter and develop in Chinese market. According to Yin (2003), the case study is one of the several ways of doing social science research. Other ways include experiments, surveys, histories, and the analysis of archival information. He also proposed that case studies are the preferred strategy when “how” or “why” questions are being posed and when the focus is on a contemporary phenomenon within its real-life context.
In this thesis, most of the data and information have been gathered from secondary data sources such as literature, survey reports, journals, newspapers, magazines and the Internet. “For many research questions and objectives, the main advantage of using secondary data is the enormous saving in resources, in particular the time and money. If you need your data quickly, secondary data may be the only viable alternative. In addition, they are likely to be higher-quality data than could be obtained by collecting your own.”(Saunders, 2000)（10）
The thesis will use Ikea’s official websites as the fundamental source of knowledge and moreover journals and thesis previously done concerning the topic. For example, the analysis about Chinese marketing mix is based on the Ikea’s on-line catalogue. The information is considered to be valid, because the data collection is based on the company’s official Internet websites. At the same time, books and survey reports information are selected from University Library. For example, databases and e-journals, through library subscriptions or open access, are good for the research questions. They also help me identify relevant materials from a wide range of journal titles.（solecism？11）
The exploitation of the research problem includes both quantitative and qualitative methods. First of all, the quantitative method will help to understand some aspects of 4Ps analysis and SWOT analysis by presenting graphs and data. The qualitative method will investigate theories that are used in the thesis. For example, the question is introduced by a qualitative analysis of Ikea’s performances and marketing strategy in the Chinese market. In all, the whole thesis will include the interaction of qualitative and quantitative methods.
1.3 Structure of the thesis
In order to demonstrate the main arguments, the thesis consists of five chapters. The first chapter begins with an introduction of the research question. It also proposes the importance of the research to multinational companies and explains the methods used in the thesis and continues with a more detailed description of the theoretical information and the data collection. Finally, the first chapter comes to an end with the introduction of the thesis structure.
Chapter two provides an overview of the FDI policy and performance in China. This part deals with the economic impact of FDI in China. China as a large economy, FDI has significantly contributed to the acceleration of economic growth and improvement of the levels of production technology in many industries. (solecism？12)Furthermore, it discusses the market entry issues such as market size, geographical distribution, foreign market entry models and distribution network. At the same time, key issues for foreign enterprises entering Chinese market are discussed in Chapter three. For example, investment climate and the development of the culture concept are illustrated in this part.
Chapter four presents the Ikea’s marketing strategy in the Chinese furniture market. Research also shows culture’s impacts on international marketing. First of all, Ikea’s philosophy and its background in China are introduced. Then deeper research is presented done by usage of marketing mix theory i.e. the 4Ps—product, price, place and promotion based on the differentiation theory. In order to discuss the competitiveness of Ikea, SWOT analysis is studied in this part. Chapter five offers the findings and conclusions and answers the research question
Chapter 2 FDI policy and Market entry
2.1 FDI policy and performance in China
2.1.1 Overview of FDI policy in China
This part presents an overall view of development of China’s economic policy regarding FDI. “Multinational corporations consider FDI an important means to reorganize their production activities across borders, in accordance with their corporate strategies and the competitive advantages of the host countries. Host countries regard inflow of FDI as a significant opportunity for integrating their economies into the global market and promoting their economic development” (Long, 2005, 321). China has made major changes in its foreign trade policies since 1978. As part of the reform programmes in 1978, special economic zones in Shenzhen, Shantou and Zhuhai were established and subsequent fourteen coastal cities were open up to foreign investment in 1984. Meanwhile, China has made many changes in its trade policies, and particularly in connection with its accession to the WTO (World Trade Organization) (14) in 2001.
In fact, Chinese government has already shaped a series of laws and regulations on FDI. For example, these laws and regulations include the law of Wholly Foreign-owned Enterprises, Sino-foreign Cooperative Joint Ventures and Sino-foreign Equity Joint Ventures. Furthermore, on 1 December 2007, a new version of the Catalogue for the Guidance of Foreign Investment Industries came into effect. According to the amended Foreign Trade Law in July 2004, all types of enterprises are allowed to register for the trading right. At the same time, individual Chinese are able to operate foreign trade under the amended Foreign Trade Law. Particularly, since China joined the WTO in 2001, barriers have been reduced to imports, most industries are opening to foreign competition. (solecism？15)A report shows that from January 2002, barriers have been reduced from 15.3 percentages to 12 percentages on around 5,300 items and covered 73 percentage of the tariff schedule.
For example, in China, FDI occurs through joint ventures, cooperative enterprises and solely foreign-owned enterprise. However, in the past, solely foreign-owned enterprises were not allowed unless they either adopted advanced technology and equipment exported a majority of their products. After China joined the WTO in 2001 Chinese government has continuously removed such trade restrictions, in addition， the government has made many efforts on encouraging foreign-owned companies to usher in advanced technology and increase their export volume. Furthermore, in addition to traditional labor-intensive industries, Chinese government has issued series of laws to develop the market in telecommunications, insurance, banking and most of service sectors. “In the past, China’s FDI laws included some performance requirements. However, to meet WTO membership requirements, within a year of its entry into the organization China revised its three laws and removed the FDI requirements regarding such criteria as export proportion, local contents, balance of foreign exchanges, technology transfer, and creation of R&D centres”(Long, 2005,321).
2.1.2 FDI distribution in China
Because of the low costs of labor, most of FDI has gone into manufacturing industries. From the table 2-1 we know that FDI was concentrated in manufacturing industries, the distribution of the total projects amounted to around 60 percent in the year of 2006. The contracted FDI in tertiary industry such as transport, service industries and other industries only accounted for 20-30 percent. To some extend, the opening of China’s services industry is at an early stage.
According to the China Business Yearbook, until 2003, services FDI are concentrated in real estate industry, the share of total FDI stock in services was 61.7%. Furthermore, leasing and business activities account for 10.3%, wholesale and retail trade account for 9.8% and transport, storage, post and telecommunications account for 8.1%. (China Business Publishing House, 2004) To some extend, China encourages favourable FDI policies regarding services industries in recent years. In related to domestic companies, foreign companies enjoy preferential treatment. In addition, compared with other developing countries, China has lower production costs and huge potential of its domestic market. The following study is focus on the growth of foreign trade and the growth of FDI.
Table 2 - 1 Foreign Direct Investment by Sector (2006)
Sector Number of
Projects
(unit) Contracted
Value
(USD
10 000) Investment
Actually Utilized
(USD
10 000)
Total 41473 19372734 6302061
Agriculture, Forestry, Animal Husbandry and Fishery 951 319863 59945
Mining 208 193785 46052
Manufacturing 24790 11888844 4007671
Production and Supply of Electricity, Gas and Water 375 332632 128136
Construction 352 214702 68801
Transport, Storage and Post 665 517422 198485
Information Transmission, Computer Services and Software 1378 304942 107049
Wholesale and Retail Trades 4664 652475 178941
Hotels and Catering Services 1060 289321 82764
Financial Intermediation 52 75972 29369
Real Estate 2398 2946928 822950
Leasing and Business Services 2885 938762 422266
Scientific Research, Technical Service and
Geologic Prospecting 1035 260234 50413
Management of Water Conservancy, Environment and Public Facilities 132 92901 19517
Services to Households and Other Services 236 219730 50402
Education 27 10794 2940
Health, Social Security and Social Welfare 20 10942 1517
Culture, Sports and Entertainment 241 100373 24136
Public Management and Social Organizations 4 2112 707
Source: Calculated from China Statistical Yearbook
2.1.3 FDI performance in China
After about thirty years of economic reform, China has become one of the most important destinations for foreign investment. China’s rapid rise as a leading power has been considered an economic miracle. In fact, FDI has played an important role in developing Chinese economy.
Table 2 - 2 Total Value of Imports and Exports
Year (USD 100 million)
Total Imports& Exports Total Exports Total Imports Balance
1978 206.4 97.5 108.9 -11.4
1980 381.4 181.2 200.2 -19.0
1985 696.0 273.5 422.5 -149.0
1990 1154.4 620.9 533.5 87.4
1991 1357.0 719.1 637.9 81.2
1992 1655.3 849.4 805.9 43.5
1993 1957.0 917.4 1039.6 -122.2
1994 2366.2 1210.1 1156.1 54.0
1995 2808.6 1487.8 1320.8 167.0
1996 2898.8 1510.5 1388.3 122.2
1997 3251.6 1827.9 1423.7 404.2
1998 3239.5 1837.1 1402.4 434.7
1999 3606.3 1949.3 1657.0 292.3
2000 4742.9 2492.0 2250.9 241.1
2001 5096.5 2661.0 2435.5 225.5
2002 6207.7 3256.0 2951.7 304.3
2003 8509.9 4382.3 4127.6 254.7
2004 11545.5 5933.2 5612.3 320.9
2005 14219.1 7619.5 6599.5 1020.0
2006 17604.0 9689.4 7914.6 1774.8
2007 21737.3 12177.8 9559.5 2618.3
Source: Calculated from China Statistical Yearbook
Note: Data in 1978 were from the Ministry of Foreign Trade; and data since
1980 are from Customs statistics.
Table 2-2 provides some information about China’s international trade as well as import and export performance from 1978 to 2007. We can clearly find that China’s exports and imports volume have expanded continuously from a few hundred million dollars to almost US$2173.73 billion during last three decades. Generally speaking, China’ exports are much more than its imports, with the exception of 1993. According to the data, in the year of 2007, exports volume reached to US$1217.78 billion while imports volume increased to US$955.95 billion, resulting in a trade surplus of US$261.83 billion.
Table 2 - 3 FDI Stock as of Year-end 2006
(Unit: US$ 100 million)
Year No. of Projects Contractual value Realized value
Total 594,445 14,979.28 7,039.74
1979-1982 920 49.58 17.69
1983 638 19.17 9.16
1984 2,116 28.75 14.19
1985 3,073 63.33 19.56
1986 1,498 33.30 22.44
1987 2,233 37.09 23.14
1988 5,945 52.97 31.94
1989 5,779 56.00 33.93
1990 7,273 65.96 34.87
1991 12,978 119.77 43.66
1992 48,764 581.24 110.08
1993 83,437 1,114.36 275.15
1994 47,549 826.80 337.67
1995 37,001 912.82 375.21
1996 24,556 732.76 417.26
1997 21,001 510.03 452.57
1998 19,799 521.02 454.63
1999 16,918 412.23 403.19
2000 22,347 623.80 407.15
2001 26,140 691.95 468.78
2002 34,171 827.68 527.43
2003 41,081 1,150.70 535.05
2004 43,664 1,534.79 606.30
2005 44,019 1,890.65 724.06
2006 41,485 2,001.74 694.68
Source: Ministry of Commerce (MOFCOM)
The table 2-3 above shows the FDI inflows to China from 1984 to 2003. Generally speaking, economic reform has eventually built a safe and fair environment for international business. (solecism？17) We can find that inward FDI grew from a few million dollars in the early 1990s to around US$11 billion in 1992. Furthermore, since the beginning of 1993, China has been the largest developing country in the world. We can find that China has attached increased amounts of FDI and the realized value climbed to almost US$45.4 billion in the year of 1998. In 2006, 41,485 foreign-invested enterprises were newly set up, with a contractual foreign investment value of US$200.17 billion and an actual utilized foreign investment value of US$69.4 billion.
In all, FDI has played an important role in China's push toward a market-oriented economy. For Chinese economy, it means access to new domestic and international markets. With its FDI policies, China not only encourages advanced technology to the country, but also seeks to promote specialization of local companies. For example, foreign companies’ entry into the local market increases the intensity of competition and forces domestic firms to become more efficient hence innovation activity growth. (solecism？18)In all, Chinese economy has continued developing strongly and attracting much foreign investment.
2.2 The impact of FDI in China
Since China called for foreign capital participation in its economy, China has received a large part of international direct investment flows. Foreign enterprises have become important players in China’s economy. In addition to this, China has been the world largest FDI recipient among developing countries in the early 1990s. The table 2-4 shows the top 10 recipients of FDI inflows in Asian countries. China nevertheless remained the most important country for inward FDI. From 2004 to 2005, FDI inflows into China and Hong Kong (China) continued to rise. Flows to China and Hong Kong (China) rose by 11.8% and 1.9% respectively.
Table 2-4 South, East and South-East Asia: top 10 recipients of FDI inflows, 2004-2005
(Billions of dollars)
Source: UNCTAD, FDI/TNC database Despite there are shortcomings of FDI, foreign trade and FDI have positively contributed to China’s external and internal economic structure. For Chinese economy, it means access to new domestic and international markets. The following part of the thesis examines the major contributions of FDI to Chinese economy in terms of technology progress, economic growth and total factor productivity.（19）
2.2.1 Technology and Service transfer
As the largest developing country in the world, China’s modernization needs the advanced technology of the foreign investment. At the same time, foreign enterprises are likely to be predominantly motivated by a search for resource advantages in developing countries. It is beneficial for a foreign enterprise if an FDI flow goes abroad from its comparatively disadvantaged marginal industry for the purpose of producing goods in the host country at costs lower than at home through the transfer of advanced technology and efficient service. As a result, the central government always encourages technology transfer through different forms of foreign investment. For example, some of the preferential treatment toward foreign companies is based on the technology transfer.
FDI is able to provide better access to advanced technology for the local economy. For example, multinational corporations may transfer technologies to local subsidiaries. Local firms may learn about the superior technological, marketing and management skills from foreign companies. Meanwhile, most imports of domestic companies are usually complementary goods and advanced technologies which contribute to the high productivity. In addition, multinational companies promote the competition in host-country markets and hence productivity growth. In order to improve the productivity, most of domestic inefficient companies have to develop new products and efficient processes. (solecism？20)
During the early years of reform, however, FDI in China were mostly concentrated in relatively low-tech, labor-intensive, and export-oriented industries such as toy industry and garment industry. These projects result in the transfer of low and intermediate technologies. As a result, the technology transfer from FDI is very limited. In recent years, as I mentioned above, foreign enterprises have become an important part in advanced industries with higher technology requirement, including machinery industries, electronic and telecommunication industries.
2.2.2 Increase regional GDP growth
According to Lawrence (1996), for example, “China, the world’ most popular country, has enjoyed the most rapid growth by embracing a strategy of export-led growth driven by foreign investment”. Most of the growth of China’s exports can be attributed to foreign-invested companies. Furthermore, average income in regions of China where FDI is concentrated has been significantly higher than in other regions. Table 2-5 provides some information about data on China’s total investment and investment by FIEs as well as GDP growth by provinces.
According to the data, from 1992 to 2000, the three Southern coastal accounted for the highest GDP growth, with around 20% investment coming from foreign enterprises and about 14% annual GDP growth. In addition, these developed coastal provinces concentrated around 70 percent of the country’s GDP. In particular, the inland provinces have relatively the low rate in both FIEs’ investment (4.1%) and in GDP growth (10.1%).
Table 2-5 Total Investment, Investment by FIEs and GDP growth by provinces, 1992-2000
100 million Yuan/%
Investment between 1992 and 2000
Total Investment by FIEs
Amount (A) Ratio to Provincial GDP Amount (B) % in all investment (B/A) GDP growth
Coastal Regions 37.8% 13.7% 12.3%
Major Cities 49.6% 17.8% 11.9%
Beijing 7395.28 55.1% 1471.29 19.9% 11.0%
Tianjin 3637.18 40.6% 612.50 16.8% 12.2%
Shanghai 12966.39 53.0% 2160.08 16.7% 12.5%
Southern Coastal Provinces 37.9% 20.2% 12.6%
Fujian 6501.9 30.4% 1462.4515.2% 22.5% 15.2%
Guangdong 19516.18. 37.0% 3938.67 20.2% 13.4%
Hainan 1472.15 46.3% 262.16 17.8% 9.2%
Other Coastal Provincies 31.9% 8.5% 12.4%
Liaoning 7756.04 29.1% 889.07 11.5% 9.5%
Hebei 9810.12 35.0% 529.0 35.4% 12.7%
Shandong 13254.79 27.8% 854.34 6.4% 12.9%
Jiansu 15812.91 32.7% 2183.29 13.8% 13.5%
Zhejiang 12648.92 38.0% 792.6 76.3% 14.1%
Guangxi 3722.93 28.5% 286.18 7.7% 11.8%
Inland Provinces 32.0% 4.1% 10.1%
Eastern and Mid-Inland Provinces 27.3% 5.0% 11.0%
Western Inland Provinces 36.3% 3.3% 9.4%
Source: Calculated from China's Statistical Yearbook, various years.
In particular, industries that were originally controlled by state-owned enterprises will see increasing interest from foreign investors. Initially, low government efficiency and lack of market transparency directly reduced the confidence of foreign investors. After 1992, the fast growing marketization of coastal cities provide a much better investment environment for FDI from western countries. At present, Shanghai, Zhejiang and many eastern coastal cities become conspicuous land scenery in China’s opening process. In the future, the opening up of domestic market will attract FDI in industries such as banking, telecommunication and insurance.
2.2.3 Create job opportunity
As we know, China is the largest developing country where capital is relatively scarce but labour is abundant. The creation of employment opportunities has been one of the most positive impacts of FDI on the Chinese economy. Foreign investment into the manufacture industries has created many jobs opportunities for thousands of workers in China. Both rural employment and urban employment in China have increased significantly. Table 2-6 provides information about numbers of employed persons in urban and rural areas from 1978 to 2006. It is clear that urban employment in foreign funded firms has increased dramatically while urban employment in State-owned units has declined gradually in the past decades. Meanwhile, the employment rate in rural areas has climbed significantly.
In addition, foreign firms always pay higher rates of employee compensation such as wage, salaries, bonuses and monetary fringe benefits than domestic firms. At present, more and more university graduates and other higher education labor will be drawn into foreign firms away from local firms, particularly in capital intensive and technology intensive industries. For example, many world-famous foreign companies have set up branches in China. We can easily find world retail giants Carrefour, Wal-Mart and Ikea in China big cities. Especially the retail giants Wal-Mart provided around 24,000 job opportunities for Chinese people in 2007.
Table 2-6 Numbers of Employed Persons at Year-end in Urban and Rural Areas
(10 000 persons)
year Urban Areas Rural Areas
State-owned Units Units with Funds
From Hong Kong, Macao and Taiwan Foreign Funded Units Township and Village Enterprises Private Enterprises
1978 7451 / 2827 /
1980 8019 / 3000 /
1985 8990 / 6 6979 /
1990 10346 4 62 9265 113
1995 11261 272 241 12704 969
2000 8102 310 332 12820 1139
2001 7640 326 345 13086 1187
2002 7163 367 391 13288 1411
2003 6876 409 454 13573 1754
2004 6710 470 563 13866 2024
2005 6488 557 688 14272 2366
2006 6430 611 796 14680 2632
2007 6424 680 903 15090 2672
Source: Calculated from China Statistical Yearbook
2.3 Market entry
2.3.1 Market size and Geographical distribution
Since the economic reform in 1978, China has become one of the large economic countries which have the most development potential. Generally speaking, due to the rapid economic growth, the Chinese market offers great business opportunities to foreign investment. For example, China GDP growing at around 9.6% a year since 1979 and now it reach to the fourth largest economy in the world. According to the economists in the Beijing Normal University, China's marketization level has reached 73.8% in 2003, already exceeding the market economy critical level of 60%.（22）
As the third largest country in the world, China has considerably geographical variations from east to west and south to north. Along the South China Sea, the East China Sea, the Yellow Sea, and the Bo Sea, east China has approximately 14,500 km of coastline, with ports and harbours for sea transportation to many developed economies. As we know, Japan, Hong Kong, Taiwan, and South Korea have become significant global investors. These world large economies are close to East areas. In comparison, west areas are quite different geographically to the east areas, with no nearby ocean routes for handle export processing. 23 In addition there are small and poor markets in neighbouring countries. Export processing is unlikely to prosper in these areas. According to the National Economic Research Institute (2001), east China had a much higher marketization level than central and west China in 1999 and 2000. As a result, eastern provinces explain more of the investment growth.
In addition, China’s FDI has been characterized by its unequal regional distribution. The vast majority of foreign investment is concentrated in coastal areas, including Guangdong, Jiangsu, Zhejiang, Fujian, Shandong provinces, and Shanghai. The trend is due to economic reforms that caused the FDI flowing into special economic zones.
Table 2-7 shows the ratio of regional FDI to country’s FDI from 1985 to 2003. East regions have attracted relatively more FDI than central regions and west regions. The western less developed provinces received a very small amount of FDI inflows. Their share in the national accumulated FDI stocks has been declining from 7.7 percent in 1985 to 4.0 percent in 2003. From 1983 to 2000, the eastern region accounted for average 87.8 percent of actual FDI in contrast to around 9.0 percent and 7.0 percent in central and west region. In 2003, 84.9 percent of FDI was generated in the east region, in contrast to only 11.0 percent and 4.0 percent in central and west region. On the whole, the differentiated regional development policies have created the best investment environment in coastal China. However, the increased gap between east and central regions resulted in social and political problems in China.( 24) In 1989, in order to attract more FDI in central and west regions, a series of policies were introduced. Now there are many preferential treatments for foreign enterprises that invest in central and west regions.
Table 2 - 7 Ratio of Regional Foreign Direct Invest to
Country’s Foreign Direct Investment (percent)
region Year 1985 1990 1995 2000 2003
East Region 87.3 89.7 83.0 85.4 84.9
Central Region 5.0 3.5 9.1 8.9 11.0
West Region 7.7 6.8 7.9 5.7 4.0
Source: Various versions of China Statistical Yearbook, China Population Statistics Yearbook, China Statistical Yearbook on Science and Technology.
Note: The East Region includes the provinces of Beijing, Fujian, Guangdong, Hebei, Jiangsu, Liaoning, Shanghai, Shandong, Tianjin and Zhejiang; The Central Region includes the provinces of Anhui, Heilongjiang, Henan, Hubei, Hunan, Jiangxi, Jilin and Shanxi; The West Region includes the provinces of Chongqing, Hainan, Inner Mongolia, Guangxi, Gansu, Guizhou, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Xinjiang and Yunnan.
2.3.2 Foreign Market Entry Models
According to Cheng (2006), it is imperative for a firm to choose the proper FDI mode in order to effectively expand into international markets and reduce existing entry barriers. FDI mode choice strategy can also be used to help the firm formulate an effective international operating strategy. Furthermore, the proper FDI mode can help the firm to establish itself successfully in a foreign market, enhancing its international competitiveness. Calof (1993) believes that foreign market entry mode is defined as institutional arrangements that allow firms to use their product or service in a country exchange. Daphne and Shige(2002) point out that the choice of organizational structure (including entry-mode) can not be viewed only as a level of control, but as a consequence of organizational responses to isomorphic pressures arising from both a firm’s external environments and its internal organizational practices and routines.
Basically, the direct investment includes Sino-foreign joint ventures, Cooperative Joint Venture and exclusively foreign-owned enterprises and other new types of foreign investment in China. At the same time, there are other means of investment, for example, compensation trade, processing and assembling. The foreign firm’s mode of entry affects the degree of competition and extent of risk in the host country. As a result, in order to effectively enter and develop to the Chinese markets, it is important for a firm to choose the proper FDI entry mode.
(1). Sino-foreign joint ventures（EJV）
In China, Sino-foreign joint ventures are formed with joint capitals by foreign companies and other economic organization with Chinese companies and other partners. They are also known as share-holding corporations. This kind of joint ventures is the first form of China's absorption of foreign direct investment. Nowadays, EJV is still an important entry mode for foreign investments.
(2). Cooperative Joint Venture (CJV)
A Sino-Foreign Cooperative Joint Venture (CJV) is a joint venture between a Chinese and a foreign company, it is also called contractual cooperation businesses. On the one hand, the foreign enterprises usually supply most of the capital and technology. On the other hand, Chinese enterprises supply land, useful facilities and a small amount of capital.
In China, EJVs and CJVs are similar in many respects. Both of them can benefit foreign investors. The main advantage for the foreign investor when entering into JVs is the reduced risk.We should know that the lack of a Chinese partner often puts a serious strain on the development of the international business. For example, a good relationship with local government and bank sectors is of great importance in China. Basically, Chinese enterprises usually have certain strengths such as local government support, brand reputation, land, capital, distribution, and access to local suppliers. Furthermore, if the Chinese partner is a SOE enterprise, the government will assist in supply of raw materials and the allocation. Hence, JVs may help to reduce the costs of the processing and improve the chances of success.
There are also some disadvantages of JVs entry models. On the one hand, the foreign enterprise should consult its Chinese partner when handling management issues, which may cause conflicts of interest. On the other hand, foreign investors must transfer technology and managerial skills to the domestic enterprises; it means that the Chinese partner will have full access to it.
(3) Wholly Foreign-Owned Enterprise (WFOEs)
A Wholly Foreign-Owned Enterprise is totally invested by foreign party in China by foreign companies, other economic organizations and individuals. Because there is no participation of any Chinese investors, the foreign enterprise completely control over the business. Since China's WTO entry, foreign investors have been choosing to establish more WFOEs. Generally speaking, exclusively foreign-owned enterprises always adopt international advanced technology and facilities. Most of their products should be export-oriented. At present, it is becoming increasingly popular among all the FDI entry models.
There are many advantages about this type of entry mode. On the one hand, foreign enterprises have complete independence on how to run the company business. As a result, they have a higher level of efficiency than joint ventures in the daily operations.
On the other hand, WFOEs may protect intellectual property from being stolen by joint venture partners. However, it is difficult for exclusively foreign-owned enterprises to establish good relationships with local government banks and other organizations.
(4). New types of foreign investment
In order to expand the huge domestic market, China is exploring actively many new types of utilizing foreign investment. There are many new types of foreign entry modes such as acquisition entry, Joint development, Investment Company, Compensation Trade and so on. For example, Joint development is a widely adopted entry mode of economic cooperation in the international natural resources industry. Because the features of Joint development are high risk, high investment and high reward, compared with the other three means mentioned above, joint cooperation accounts for a small percent.
Table 2 - 8 Amount of Foreign Investment by Form
(USD 100 million)
Item 2006 2007
Number of
Projects Actually
Utilized
Value Number of
Projects Actually
Utilized
Value
Total 41473 670.76 37871 783.39
Foreign Direct Investments 41473 630.21 37871 747.68
Equity Joint Venture 10223 143.78 7649 155.96
Contractual Joint Venture 1036 19.40 641 14.16
Wholly Foreign-owned
Enterprise 30164 462.81 29543 572.64
FDI Shareholding Inc. 50 4.22 38 4.92
Joint Exploration / / / /
Others / / / /
Other Foreign Investment / 40.55 / 35.72
Sale Share / 13.55 / 4.02
International Lease / 0.36 / 1.80
Compensation Trade / 0.21 / 0.18
Processing and Assembly / 26.43 / 29.72
Sources: Calculated from China Statistical Yearbook
The table 2-8 shows some information about FDI by vehicle type from 2006 to 2007. It is clearly that WFOEs and EJVs are the two most popular FDI entry modes for multinational enterprises. The number of WFOEs projects reached to 30,164 in 2006. Meanwhile, EJVs projects accounted for around 10223. On contrast, because of the high cost operation and inconvenient management, the indirect investments are not popular for foreign investment. The actually utilized value was only 30.72 in 2007.
2.3.3 Identification of the distribution network
At the beginning of China’s international trade, professional distribution options were scarce. For example, most of the distribution companies were parts of some governmental supply system，others were private enterprises. As a result, foreign firms had no choice but to use state distribution network. Since the economic reform, China has been engaged in a process of economic liberalization and opening up to foreign trade and FDI, the central government has made great effort to liberalize the system. Many foreign firms have managed to establish national distribution networks in post-WTO China. According to Powers (2001), one of the best examples of the change that has occurred in the distribution of goods in China is the development of the hypermarket/big-box retail format since 1996. Wal-Mart Stores, Inc. of the United States, Metro AG of Germany, Carrefour SA of France, and China's own Shanghai Hualian Supermarket Co. and Lianhua Supermarket Co. Ltd have altered the traditional distribution practices and selected the hypermarket/big-box retail format.
However, it is not easy to cover the 9.6 million square kilometer market in a short time. There are many distinctive worlds in one China. As it is known to all that, China is the biggest developing country in the world with a total population of around 1.3 billion. According to the data from National Bureau of Statistics of China, 11.9% of the total population is middle class, which is rapidly increasing to 290 million to 2011. People are very different in their income level, education, and culture in the local social and political atmosphere in which they live, that market segmentation and targeting is crucial. In order to establish business successfully, we must know the cultural background, living environment, consumption level and characteristics of Chinese residents. In all, China has a strong foundation to develop into a developed economy. Furthermore, this improvement will occur at an ever-increasing step
Chapter 3 Key issues for foreign enterprises entering Chinese market
Based on the study we know that China has developed series of laws and regulations in attraction of foreign investment to the Chinese market. Furthermore, China has wider opened its property and retail markets to recent development. In a word, China has been much open to the international society. As a result, more and more multinational corporations have joined the competition to attract huge Chinese customers. Investors should consider the investment climate that influences the cost of doing business in a foreign country.
In the earliest days of China trade, foreign firms are confronted with significant entry barriers in the foreign markets. For example tariff barriers, legal restrictions, import licenses, technical standards, unfamiliar market environments, and insufficient financial and human resources are big blocks for their business. As a result, foreign enterprises must consider a wide range of marketing strategies and business structures. I construct several indices to measure the risk of doing business in China. On the one hand, the political risk index measures the political stability of China, the government’s attitude toward inward investment and the degree of law and regulation. On the other hand, the economic risk index is based on the inflation, export and import volume and real GDP growth.
3.1 Investment climate
3.1.1 Political aspects
Generally speaking, China’s political conditions are very stable. Since the economic reform, China has been much open to the international society. For example, China has developed series of laws and regulations in attraction of foreign investment to the domestic market. Foreign enterprises now are able to establish WOFEs rather than operate through joint ventures. In 2006, the central government announced that China would more actively seek to target investment in higher value-added sectors rather than basic manufacturing. These sectors include high technology research and development, advanced manufacturing, energy efficiency, modern agriculture and services sectors.
A decision by the Ministry of Commerce, the industry regulator, to devolve responsibility for approving small-and-medium sized foreign-invested retail operations from Beijing to local provincial Mofcom entities from 1 March 2006 further eases the process for multinational retailers (governmental regulations).
However, foreign investors continue to face many challenges, such as a lack of transparency, weak intellectual property protection, underdeveloped laws and regulations, corruption and an unreliable legal system. On the one hand, onerous requirements have limited foreign investment in some newly opened service sectors, including education, culture, arts, film, and television broadcasting. Furthermore, China's legal system is complex, contradictory, and lacks consistent enforcement. Although central government policy has become more and more favourable for foreign enterprises, the environment also lacked an effective competition policy. The situation tends to be worse in internal regions. On the other hand, the Chinese logistics industry is historically prone to local protectionism, unfair competition. For example, State-owned enterprises are protected in markets where they operate. They are benefit from local governments in terms of secure access to land, assets, finance and markets. In all, it is difficult for many foreign companies to enter a new market because of local protectionism.
3.1.2 Economic aspects
Economic conditions primarily show in what shape the economy is, so speaks about e.g. the GDP rate, the inflation rate, export and import strength, tax ration, and also what kind of possibilities are available on the market to finance an own market activity. (此句要修改，拆成短句29) According to the report from the Word Bank, China became the fourth largest global economy with a total GDP of US$ 2,229 billion. Meanwhile, according data from National Bureau of Statistics of China, the average annual Growth Rate is at 9.7% from 1979 to 2001, 10.2% from 1991 to 2006, and 10.1% from 2001 to 2006. As I mentioned before, in the year of 2006, exports volume reached to US$968.94 billion while imports volume increased to US$791.46 billion, resulting in a trade surplus of US$177.48 billion.
Focusing on market size, the growth of domestic market size has a positive and significant effect on FDI. During the past 30 years, Chinese people’s income levels and living standards have improved greatly. As a result, the rapid economic growth has led to the rapid emergence of an urban middle class of consumers. They are demanding higher quality, variety and innovation from the retailers. Average earning of Employed Persons in Urban Units rose from 8255.8 Yuan in 1995 to 24262.3 Yuan in 2006, nearly double increase in 11 years. At the same time, Chinese people achieved as a whole a four times increase in their income in the rural regions. In 2006, the average income grew to 3587 Yuan. Table below shows the growth of Chinese gross domestic product from 1978 to 2006. In a word, China’s economic trend is better and better. Especially since China’s WTO entry in 2001, the business potential in China has been further boosted. At present, China is one of the most suitable markets for foreign investment. If the investments are carefully planned, the risks can be greatly removed.
In summary, China’s attitude towards foreign companies has changed from indifference to demanding after economic reform. On the one hand, China tries best to attract FDI, and on the other hand, the government also strictly control over FDI such as industry constraints and export requirements. Despite these problems, for many multinational enterprises, China remained an attractive market in which to invest.
Figure 3 - 1 Growth of Gross Domestic Product
(Unit: 100 million yuan)
Sources: Calculated from China Statistical Yearbook
3.2 Concept of Culture and Chinese Culture
3.2.1 Culture study
The potential of the Chinese market is fully observed, however, one of the key questions for investors in China is how to reduce conflicts from social and cultural dimensions. Since the purpose of the thesis is to study how multinational corporations enter and develop in Chinese market, it is essential to have knowledge about Chinese culture. The study of culture will provide the grounds for further studying marketing strategies. However, the definition of culture is in fact too complex to define in simple terms. In this paper, culture has been defined by different authors as follows:
"Most social scientists today view culture as consisting primarily of the symbolic, ideational, and intangible aspects of human societies. The essence of a culture is not its artifacts, tools, or other tangible cultural elements but how the members of the group interpret, use, and perceive them. It is the values, symbols, interpretations, and perspectives that distinguish one people from another in modernized societies; it is not material objects and other tangible aspects of human societies. People within a culture usually interpret the meaning of symbols, artifacts, and behaviors in the same or in similar ways." (Banks and McGee, 1989).
"By culture we mean all those historically created designs for living, explicit and implicit, rational, irrational, and nonrational, which exist at any given time as potential guides for the behaviour of men." (Kluckhohn and Kelly, 1945)
"Culture is the shared knowledge and schemes created by a set of people for perceiving, interpreting, expressing, and responding to the social realities around them" (Lederach, 1995) (30)
More recently, according to Fan (2000), culture can be described as the collection of values, beliefs, behaviours, customs, and attitudes that distinguish a society. A society’s culture provides its members with solutions to problems of external adaptation and internal integration. He also proposes that culture can be studied at different levels such as international, national culture, regional culture, business culture and organizational culture. However, a national culture is best embodied in the values its people hold. At the same time, he examines the core values of Chinese values are unique and consistent. This cultural value system is uniquely Chinese that distinguish itself not only from Western cultures, but also from other Eastern cultures. Because of limit space, the traditional culture’s influences shown in Ikea Shanghai’s marketing performance are studied in detail.
3.2.2 Chinese business culture
In fact, Cultural awareness plays an essential role to multinational corporations. For example, business culture can affect the structures of successfully opening a business in foreign countries. All companies want to establish globally should have the cultural sensitivity. For example, Chinese business culture is well known for its unique traditions. Loyalty and harmony to partners are key values in Chinese society. Because of the traditional sense of value, some stable, long-term international relationships are established with foreign companies. Paying attention to cultural differences also can give foreign companies that culture a better chance of acceptance. Furthermore, more and more overseas companies build business in China. Those who have cultural sensitivity are at an advantage compared to those who don't. Foreign companies with strong cultural sensitivity are also able to create a good first impression for the colleagues and clients. In that case, foreign enterprises can build strong business relationship with domestic business.
Generally speaking, Chinese business culture does not act as an obstacle to enter the Chinese market. In the collectivist society, we can find that group decision-making is epitomized by the government. In other words, collectivistic cultures have a great emphasize on groups. For example, Chinese people share the same identity and look after each other in exchange for loyalty and harmony. 33 In this case, Chinese consumers always choose certain products because they have previously been satisfied by them. Furthermore, Chinese consumers consider it waste the time and effort to choose other brands.
The key for understanding Chinese social behavioural patterns is Confucianism. Liu Shu xian (2000) has stated some meanings of some key Confucian values in modern society such as the Knowledge for Oneself and Benevolence, Righteousness, Ritual Propriety, Wisdom and Honesty.(33) Thus, this Confucian approach should be considered as the cornerstone of all business issues and thinking. In China, prestige and status are important factors for people negotiation. Chinese are also very conscious of age and social status. Everyone has a particular place in the family unit and business organization. At the same time, saving face is very crucial in Chinese society. People could try to do everything to save face. In another word, they do not criticize publicly or put people on-the-spot. Because personal relationship deeply embeds into every Chinese’s ethic, FDI from Hong Kong, Taiwan, Japan and Singapore may utilize the cultural ties to solve the institutional barriers. (34)
As a summary, it is useful to be introduced or recommended by consumer who already has a good impression with the products. In order to establish business successfully on the Chinese market, the theories explained about cultural differences, Chinese traditional culture and customer behavior are all aspects that multinational corporations should be taken into account. Hence, in order to test these theories, it is feasible to analyze our case study by examining the marketing tools (the 4Ps). The following part presents the characteristics of Chinese furniture industry. In Chapter 4, a case study of Ikea is analyzed in detail.
3.3 Chinese Furniture Market
3.3.1 Characteristics of Chinese furniture industry
The furniture sector is a basic industry among other industries. Due to the economic reform from 1978, China's furniture industry has been experiencing dramatic changes during the past 30 years. Because authorities did away with state-allocated housing and subsidized rentals, China has seen a huge surge in homeownership.
As the whole industry develops, the international competitiveness of China furniture industry has made a remarkable progress. Actually, China is becoming an important export base and a world-class location for the export and production of solid wood furniture. Table 3-1 provides some information about China furniture import and export volume in 2005. China’s furniture export value increased by 32.98% to US$ 13.767 billion from 2004 to 2005. The export of wooden furniture, metal furniture, plastic furniture and other furniture parts were increased remarkably. Driven by the market, the furniture industry continued to keep a high growth rate in 2006. In the first quarter of 2006, the export value of China furniture manufacturing industry increased to USD 4.042 billion.
Because of the huge differences in topographies, China’s furniture industry is different in each region. The China Furniture Market Report (2006) states that after the reform and opening-up policy, the furniture industry started developing towards Guangdong, Zhejiang, Northeast, North China, and current four industry regions gradually came into being. They are respectively, South China furniture industry region cantered by Guangdong and Fujian; East China furniture industry region cantered by Zhejiang, Jiangsu and Shanghai; North China furniture industry region cantered by Beijing, Tianjin, Hebei and Shandong; and Northeast furniture industry region cantered by Shenyang and Dalian. (索引一定要标好 35)
Table 3 - 1 China Furniture Import and Export (2005)
Item Import Export
Total Import Volume Total Import Volume
(US million) Growth in Volume over 2004(%) Growth in Value over 2004(%) Total Export Volume Total Export Volume
(US million) Growth in Volume over 2004(%) Growth in Value over 2004
(%)
Wood Furniture
(10,000 pieces) 72,92 68,745 4.92 18.07 14936.99 4657.832 16.49 26.53
Metal Furniture
(ton) 4946.68 25.542 49.57 43.2 1554227 1973.525 25.57 42.74
Plastic Furniture
(ton) 3448.09 23.18 -3 1.89 153235.8 239.285 20.17 34.88
Others (ton) 71600.08 531.174 2.01 -11.08 931072 6103.065 17.32 33.95
Mattress
(10,000 pieces) 2.06 1.88 5.1 29.83 317.95 83.507 51.48 34.39
Furniture parts
(tons) 18907.39 33.891 -3.44 18.7 517590.9 709.792 29.54 43.8
Total 684.414 -5.74 13767.01 32.98
Source: calculated from China Furniture Market Report, 2006-2007
In China, the retail market for furniture is highly competitive. There are thousands of medium-small furniture enterprises that take the majority of the overall market. Most of furniture enterprises are distributed in South China, East China and North China. Furthermore, Guangdong province is famous by the furniture industry. It owns more than 6000 enterprises, accounting for 12% of the total. (solecism？36)However, there is no any enterprise whose market share can exceed 1% at present. It is known that for Chinese home furnishings design, copy and imitation are the main streams in the furniture market. The lack of design ability is the main obstacle for its further development. With the development of foreign furniture sector, furniture brands are becoming increasingly important for the consumers. There are many famous furnishing brands in China such as MeiKe Xinjiang, Guangming, Heilongjiang, TianTan Beijing, Richman and Land Bond Guangdong, XiLinMen Zhejiang and so on. As a result, the furniture price was declining in the past years. In summary, on one hand, Chinese furniture industry market will offer great opportunities for the advantageous companies, but on the other hand, some small enterprises with weak competitiveness will be washed out in the future.
In the economic globalization world, furniture manufacturing as typical labor-intensified industry is shifting to some developing countries. For example, China is one of the most suitable markets among other countries. China has many advantages in the big market size and low labor cost. According to the data, the total domestic demand increased above 26% to 226.1billionRMB from 2004 to 2005. However, Chinese are famous for their reluctance to spend money. They have the highest savings rates in the world, on average 30% of their income. At the same time, the domestic consumption per capita is around US 17 dollars, only amounts 1/18 of developed countries. As a result, there is a big market with great potential in China.
3.3.2 Marketing analyze
Some foreign enterprises want to sell their products in the huge Chinese market while others may concentrate on exporting what they produce to outside China. As a result, it is an important strategic choice for foreign enterprises who want to do successfully business in China. Doherty (2007) (37) proposed that market attractiveness factors affect a foreign retail enterprise’s decision to enter a market, including retail structure and regulation. Retail structure include the retail environment, site location, IT infrastructure, the potential price positioning of merchandise, and an estimation of sales potential in the short-, medium-, and long-term. Furthermore, the regulation of the retail market in the form of import duties and trade relationships has a major impact on market selection for foreign retailers.
As we know, a mass-market retailer will seek markets with a large population. Generally speaking, the market for large international furniture retailers is domestic market. In China, low labor cost, large consumer market and reduction of import tariff rates offer great opportunities for foreign enterprises. In addition, Wrigley (2005) stated that transnational retailers should be aware of the local variations in cultural tastes, norms and preferences. At the same time, compared to manufacturing firms, retailers experience high levels of consumer contact. (38)
In other words, foreign enterprises with a local furniture market focus should call for a high level of local adaptation. They should pay more attention to the local furniture market conditions and become more prepared for the changes in the local market. Furthermore, because of the high competition in the domestic market, foreign enterprises need to establish the necessary business network in China. At the same time, products and services of foreign enterprises should much ahead of domestic competition.
In China, the growing demand of consumers for high-quality and well designed furniture also calls for the introduction of famous brands from overseas. In order to further expand the consumption field, Chinese government put forward that prosper the rural economy thoroughly and accelerate the pace of urbanization. In other words, the reform will definitely further promote the furniture industry and related industries. （solecism？39）
As millions of Chinese people have joined the ranks of the middle class, they are willing to invest more and more money in their apartment in furnishing and decoration. Meanwhile, Chinese consumers call for well designed and high quality furniture brands. The furniture industry is very competitive between foreign brands such as Ikea, B&Q, and local brands like Homes Orient. How to choose the style of products is one of the key questions for foreign brands.
The magazine <<Furniture and Decoration>> provided some information about Chinese consumers’ expectations of furniture needs in 2003.
“About 80%of interviewees considered furniture design should be a functional emphasis based on people’s needs. 44%of them would prefer buying assembled furniture which can be moved easily from one place to the other. The price is not the only important factor. (It is related to the power purchase), about 52%of interviewees hope the price can be lower, 48%of them ignore the price, and they pay more attention to the furniture’s function and design style. Environmental concept influences the consumers’ behaviour too, 60%of interviewees required the furniture should be made of clear material that is no poison and no damage for healthy, only 6%of them considered this environment factor not important. Wooden furniture is the most popular in the consumer’s mind. 42%of interviewees prefer wood furniture, 38%of them like furniture made of glass, leather and fabric, other material accounted for 20%.36%of interviewees normally change their furniture every 10 or 15 years, only 5%of them want to keep their furniture for 30 years.”（引用于Yihong Li, IKEA success in Chinese furniture, bachelor’s thesis, 0ctober 2007 标好索引，此文章有重要参考价值 这个我不会弄索引40）
In all, China’s furniture industry is at the early stage of its growth and has great potential despite the problem of instability in industrial structure.
Chapter 4 One successful example of FDI in China–case study of IKEA
4.1 The IKEA saga
4.1.1 The IKEA Philosophy
Ikea was established in 1943 by Ingvar Kamprad in order to sell pens, wallets and picture frame. In 1958, Ikea was introduced as a leader of Swedish Furniture Company. They started from producing local furniture by local manufacturers and gained positive attention from customers. Later, they began to create furniture for flat packs and self-assembly in order to reduce storage space which is the prominent style of Ikea. They are also expanding the business line such as restaurant and kitchenware. Ikea, the largest furniture display in Scandinavia, opened the first store in Almhult and Sweden. Then they opened more stores in other countries such as Norway, Denmark and Germany. They do not only offer inspiring home furnishing solutions to customers while keep the prices affordable for people but also locate in less-expensive areas in different countries. Nowadays, Ikea is the major retail company that experience in 36 countries around the world. Though, there are 279 of IKEA stores in 36 countries, Ikea group owns 247 Ikea stores in 24 countries and the rest is managed by franchisees in 16 countries. (Ikea Group Corporate sites, n.d.) At present, Ikea has created its own stylish, functional and low-priced furniture and home furnishing products to attract the consumer.（solecism？41）
Ingvar Kamprad’s (2007) will is to maintain what he called the “Ikea philosophy”. He proposed his wills in the “The Testament of a Furniture Dealer” in 1976. He wrote about the product range as their identity and the ambition to offer a wide range of well-designed, functional home furnishing products at low prices that many people will be able to afford them. At the same time, he also emphasized the “Ikea Spirit”, which is the readiness to take responsibility and help out; the art of managing on small means; cost-consciousness, humbleness, undying enthusiasm in work and the wonderful sense of community through thick and thin. In addition, he meant that the true Ikea spirit should still be found in every one of workplaces. Furthermore, the Ikea spirit must be cultivated and developed to keep pace with the times. (Ingvar Kamprad, 2007). 42
4.1.2 IKEA in China
IKEA is considered as retailer internationalization that expands into Chinese market because of supporting environments such as political, social and economic conditions as well as transaction advantage. In China, Ikea get success in marketing and branding itself. The existing five stores of Ikea are located in Shanghai, Beijing, Guangzhou, Chengdu and shenzhen. The new store is scheduled to open in Nanjing in 2008. Furthermore, giant Ikea has announced that it will speed up the expansion in China from its 2008 fiscal year.
Ikea’s name in Chinese, "Yi Jia," means "comfortable home". Ikea Group is a franchisee of Inter Ikea Systems BV. Ikea’s mainland China stores belong to the Ikea Group and they are operated as joint ventures. According to Chinese regulations, all foreign retailers should have a local partner before 2005. The franchisee policy help Ikea explore an unfamiliar market rapidly without many troubles. Because Chinese partners have certain strengths such as local government support, brand reputation, land, capital, distribution, and access to local suppliers. As a result, Ikea’s first two stores in China were operated as joint ventures. With the change in regulations, Ikea opened its first wholly owned store in Guangzhou in 2005, setting the trend for all future stores. In this way, Ikea has complete independence on how to run the company business.
Ikea entered China in 1998 when it opened its first store in Shanghai, and in early 1999, Ikea opened its first Beijing store in the city's northern Chaoyang district. In 2003, a new, redesigned Shanghai store instead of the original one. The new Puxi district outlet is now Ikea’s second-largest in Asia, at the same time, it is four times larger than the first store. On the opening day, Shanghai's new Ikea offered more than 7,000 products and received around 80,000 visitors. More then 6,500 hotdogs were sold its food centre.
According to the local media, Ian Duffy, Ikea's president for Asia Pacific division, says that Ikea is carrying out a three-phase strategy in China, which includes a period of landing, setting up standard stores and then increasing the rate of opening of new outlets. Meanwhile, Ikea will keep an expansion speed of opening one or two stores each year.
4.2 Factors affect Ikea’s performance in China
China is considered to have huge difference from Sweden in many aspects. There are many factors that affect the Ikea’s business performance in Chinese market, including entry models, country specific factors and culture environment. In this section, factors that can contribute to the success of Ikea in China are discussed.
4.2.1 Entry modes
Foreign firms that entered China were rewarded with incentives in the first few years after 1979. For example, foreign firms were granted a wide variety of privileges in terms of size of investment, concessions in tax and market access. As a result, these privileges and policies should translate into better business performance in Chinese market. The foreign firm’s mode of entry affects the degree of competition in the host country.
As I mentioned above, the Swedish furniture retail giant entered China in 1998. Because of lacking of knowledge about Chinese market, Ikea has adopted an advanced policy that is joint ventures for its globalization. At first, Ikea’s mainland China stores are operated as joint ventures. This kind of model is suitable for entering the new Chinese market. Joint-ventures as an entering model are able to reduce the local competitive and take advantage from local government. In China, it is also quite usual that a company has to build a stable, long-term relationship with business partner in order to show that one can be trusted. Ikea can understand the consumer culture and products that suits the local market. (45)
After seven years’ entering into Chinese market, Ikea has become more familiar with the characteristic of Chinese regional market and the local culture. With the change in regulations, Ikea opened its first wholly owned store in Guangzhou in 2005. From then on, Ikea has complete independence on how to run the company business. As a result, they have a higher the level of efficiency than joint ventures in the daily operations.
4.2.2 Location advantage
Since the economic reform in the late 1970s, China has implemented many special locations across the country. In order to attract the foreign investment, these designated cities offer a wide variety of conveniences and incentives for foreign firms. (46). As part of the reform programmers in 1978, special economic zones (SEZs) in Shenzhen, Shantou and Zhuhai were established. Meanwhile, subsequent fourteen coastal cities were open up to foreign investment in 1984. Furthermore, the State Council announced in 1997 that tariff and import taxes would be levied on imported equipment and raw materials for MNCs in the no prioritized location. As a result, more and more foreign firms established business in these zones.
More than 200 multinational enterprises have invested in over 400 industrial projects in SEZs. Because of their proximity to transportation hubs and major economic countries, the economy in SEZs is also developing most rapidly in China. Meanwhile, MNCs located in the municipalities of Beijing, Shanghai, and Tianjin and those located in coastal cities had a higher level of profitability than MNCs located elsewhere in China. (47) In a word, location advantages are important in China. The existing five stores of Ikea are located in Shanghai, Beijing, Guangzhou, Chengdu and Shenzhen. These regions are profitable locations, as well as the open coastal cities. In these regions, infrastructure and transportation are better and the market is more open.
4.2.3 Cultural influence
As I mentioned above, China is the world's largest social system and it is not familiar to the Western firms now operating there. China has its own unique culture which totally different with the western culture. This kind of culture affects customers’ purchasing behavior. In order to adapt the local culture environment and cater to local customers, Ikea has done a lot of market research about what Chinese consumers want. For example, in some special occasions such as traditional Spring Festival, Ikea introduced some special product series to Chinese consumer. According to the traditional animal year, 2007 is the year of Pig and the pig pictures means prosperity and fortune. Picture below is the plate set sold during the Spring Festival time in 2007.
Ikea also has adapted its do-it-yourself (DIY) assembly concept to China. In other words, customers have to do much by their own such as pick up the furniture from the self-service area, take them home and build them by themselves. However, unlike some western consumers who actually enjoy assembling the furniture, Ikea’s DIY products are not appreciated in China. Because labor is cheap in China, Ikea’s assembly services are more welcomed in China.
Figure 4 - 1 the plate set sold during the Spring Festival time in 2007
Source:
In China, different kinds of the SULTAN HOGBO series are divided into categories of single, double, standard double and big double. In Sweden, people always put two single-sized beds together to form a double-sized bed. At first, Ikea stated that this kind of design ensures a good night sleep free from the disturbance by the person you share the bed with. However, this idea is not appreciated by Chinese consumer. According to Chinese traditional culture, couple sleep separately means a bad relationship between them. It is also believed to bring bad luck. In all, different understanding of culture may lead to implicit conflicts in global business. If businesses want to perform successfully, cultural sensitivity must be at the heart of doing international business. As a conclusion, Ikea has both been able to adapt itself to the local market and also keep a certain level of standardization.
4.3 Marketing Mix – IKEA on the Chinese market
This section is devoted to Ikea’s marketing performances in Chinese market. In order to argue more systematically, this section analyzes Armstrong and Kotler’s (2006) model of the marketing mix (the 4Ps). This part puts an emphasis on Ikea’s product policy, pricing strategy and the methods of Promotion used by Ikea. Furthermore, the culture’s impact on designing marketing strategies centred on Chinese consumers is explored.
4.3.1 Product
One of the key elements in the market offering is product. There were several complaints about the products. For example, people criticize that Ikea selling the exact same products in the international market. (48) In fact, Ikea offers the same products range in all countries--8,000 to 10,000 products depending on the store's size. However, more and more products are designed for the Chinese market in recent years. According to Ian Duffy, Ikea’s CEO of Asia-Pacific region, Ikea’s localization in China is to appeal to Chinese customers’ taste. The range of products offered in the Chinese market should suit the customers’ needs. Furthermore, the design and outlet of showrooms should be taken consideration of Chinese style. For example, since many Chinese apartments have balconies, the Ikea stores even include a balcony section. (49)
Ikea is the only company which successes in both channel and products operation in the world. Other retailers always sell different brands for manufacturers. However, in Ikea store, the products are designed and manufactured by Ikea people. Ikea offers nearly 8,000 products in the Chinese market, which are categorized into 21 ranges. Ikea of Sweden develops the Ikea ranges and gives each product its name. The basic thinking of Ikea is “…offer a wide range of home furnishings with good design and function at prices so low that as many people as possible will be able to afford them.” (http://www.ikea.com) Classical Chinese furniture is darker and always with fancy carvings such as flower and animals. However, Ikea provides well-designed, functional and simple style. Actually, Ikea has a great influence on the Chinese customers' traditional concept of household commodities. More and more young people now like these simple, delicate and special products. At present, it's considered a fashion to go shopping in Ikea, even if for people who living in neighbouring cities.
In addition, Ikea offers a whole furniture series for children, because kids are the most important people in the family. All the products are made of tough, resilient materials. In order to keep kids’ safety, products also have rounded corners. Furthermore, Ikea designers develop products that are good for the development of kids' social skills, coordination skills and creativity. These products are very attractive for both parents and children in China. In fact, Ikea does not offer brand new design of product in the Chinese market. In order to control the cost, Ikea alternated some product features. Taking the SULTAN series of spring mattresses as example, in China, the SULTAN HASSELBACK is divided into categories of 189*92*28 cm, 189*152*28 cm and 189*135*28 cm. *（49）
In all, although Ikea’s products across the world look more or less the same and they share the same value, Ikea still tries to fit the products into a Chinese home. In addition, the company tries to look for the best possible compromise between standardization and adaptation to local markets. The product policy adopted by Ikea seems to take effect. At present, more and more people appreciate the simplicity of light-coloured, Scandinavian style.
4.3.2 Price
As we know, price is a significant element of communication between customer and seller. A number of factors have an impact on the price, including market share, material costs, product identity and the customer's perceived value of the product.（50）Ingvar Kamprad (1976) claimed that the first rule of Ikea is to maintain an extremely low level of prices with a meaning. He argued that Ikea should always be a substantial price difference compared to their competitors, and Ikea should have the best value-for-money offers for every function. (51) In fact, the pricing model play an essential role to create and capture customer value.
According to Ikea website, low prices are the cornerstone of the Ikea vision, business idea and concept. The basic thinking behind all Ikea products is that low prices make well-designed, functional home furnishings available to everyone. Ulf Smedberg, marketing manager of Ikea China, described Ikea’s mark as "to provide smart solutions for homes by implementing three criteria: good design, functionality, and low price."
When Ikea first entered China, the products impressed customers as innovative, fashionable, and expensive. At the beginning, Ikea added a lot of import tax and transportation cost. Ikea was a middle-class brand in China. Most of Ikea’s products sold in market were imported. Ikea’s target market fell into the young, professional couples. These people have top-tier urban income with 5,000-8,000 RMB per month. Furthermore, they are generally better educated than the average Chinese. However, most of the consumers considered the products were too expensive for them. As a result, the company lost its worldwide image of affordable. The company decided to compromise the prices for Chinese and slashed down the prices. The Ikea’s on sale campaign was astonishing. Ikea Shanghai store has reduced the price of its products by 50% from 2000 to 2007, even as Chinese consumer incomes have increased. As a result, the total sales have remarkably increased 345% during past 8 years. For instance, a set of flower picture that was sold at 19 RMB in 2000 only cost 1 RMB in 2004.
The new target market fell into Chinese consumers with a monthly income of 3,500 RMB. In fact, most of Ikea customers were 30 to 45 years old with high incomes in the past. After the reform of price strategy, the stores now attract an increasing number of young customers. Many customers are double-income and well-educated couples with children. Generally speaking, compared to the national average income about Yen1, 000 ($121), a typical Ikea customer earns about Yen3, 300 ($399) per month. The consumer on average buys Yen300 ($36) of products per visit. After several rounds of price reduction, the products now considered mid-range in China.
In China, reducing prices seems to be the most effective way for the company to increase sales. In order to lower prices of its products without sacrificing the quality, Ikea has taken many kinds of methods. One of the most effective ways is to source locally. As we know, furniture manufacturing is a typical labor-intensified industry. China has many advantages in the big market size and low labor cost. At present, more than half of the products sold in China are manufactured locally, compared with about 23% in Ikea stores overall, with the rest made in Poland and Sweden and other countries. Furthermore, Ikea has taken other ways to reduce prices immediately to its Chinese customers. For example, from September 2006, Ikea China has switched to cheaper, thinner and smaller brochures instead of the Swedish furniture retailer's traditional phone-book-size annual catalogue. The booklets will be distributed five times a year and each with a different theme. The switch from the thick catalogue to the booklets cost less to produce, and it help Ikea reach more consumers. It will expand its distribution from 40% to 80%. Meanwhile, because of the price competitiveness of Chinese products, the average Ikea price was decreased by 6 percent on a year-on-year basis in 2004.
According to Ulf Smedberg, if the launch goes well in China, parent company Ikea International AS may consider expanding the practice to other countries. In order to attract consumer, Ikea also has cut prices in China to some of its lowest in the world, for example, the company is offering the lowest price for more than 120 kinds of goods, such as 12-cent ice-cream cones and $1 place mats. Ikea outlets pushed prices on some items as low as 70% below prices in many western countries. For example, the price of an Ikea's single-seat Ektorp armchair is $112 in China. It is 67% cheaper than the same one sold in the U.S. (52)
Based on the study, we can see that Ikea consider price as an essential part in the marketing strategy. The company offers good designed products with affordable prices. Meanwhile, the entry of Ikea to Chinese market gives the company transaction advantage to produce locally. Overall, Ikea’s pricing policy is cost oriented and customer-value oriented. In my opinion, Ikea’s success in the world is based on the idea of keeping the cost down between manufacturers and customers.
4.3.3 Place
Distribution is known as the place variable in the marketing mix, it is often a much underestimated factor in marketing. Distribution includes getting the product from the manufacturer to the customer. An efficient distribution plays a key role to keep the price low. Ikea has 28 distribution centres in 16 countries supplying goods to Ikea stores around the world. The main task of these distribution centres is to ensure availability of products from supplier to customer, at the lowest possible cost and with effective route. Distribution in China is the fastest growing organization in Ikea’s distribution network.
Two logistics centres in Shanghai were approved by Chinese authorities. Phase 1 was completed in Song Jiang District September 2005. This is the first full-size international-standard distribution centre in China. Furthermore, it is the largest Automated Storage Retrieval System by any foreign enterprises. According to David Hood, director of Ikea Asia-Pacific distribution services division, the $150-million facility can hold 300,000 cubic metres of products and it will be Ikea’s largest in the Asia-Pacific region. Ikea is building the second one in suburban Feng Xian district, close to the deep-sea Yangshan port. The distribution centre will also be the biggest foreign-owned warehousing facility in China.
Generally speaking, in order to keep prices low to consumer, Ikea stores are located in less expensive areas in western countries. However, the locations of Ikea stores in China are built in downtown areas. For example, Ikea Beijing is built in the one of the most expensive districts, Zhaoyang district. Other stores in China are also located nearby the downtown areas or city centre. There are two main reasons. Firstly, Chinese people have limited private cars, would be prefer convenient transportation to the store. Secondly, from a cultural perspective, Chinese consider that shopping in big stores in city centre is a modern phenomenon. The shopping environment is very important to Chinese consumer. As a result, Ikea had built stores near public transportation lines that offer local home delivery and long-distance delivery to other cities in China.
Ikea Shenzhen was opened in April 2008. Located at European City, Nanshan district, Shenzhen, the general layout is almost the same as other Ikea stores in the world. For example, the shop floor design of Ikea forces consumer to walk through every single display area. Total area of the new store is about 30,000 square-meters; consist of 66 different model rooms. It offers more than 7,500 practical products to the customers. At the same time, there are three complete homes in the Ikea Shenzhen European City store. Compared to common model rooms, those homes have all important elements, including living room, bedroom, dining room and bathroom, which can offer an overall home solution to customers. In addition, there are Swedish restaurants and Chinese restaurants in the store, With 660 seats, delicious food and unlimited refills of coffee.
Although Ikea has succeeded in the big cities like Beijing and Shanghai and Shenzhen, it is not easy to cover the distribution network from North to South. New locations to place stores in other cities are new challenges for Ikea. Dalian and Wuhan are main second level cities in China. In all, Ikea has to established efficient and economic network of logistics and distribution in Chinese market.
Figure 4 - 2 Ikea’s store in Shenzhen
Source:4.3.4 Promotion
The promotion mix targets raising brand awareness and communicating the benefits of the products with customers. The company uses the set of tools to persuasively communicate customer value and build customer relationships. Promotion in the local market has to adapt for cultural reasons. Generally speaking, there are four common promotion mix tactics: Advertising, Personal Selling, Sales Promotion and Public Relations. In this section, I describe the four key elements of the promotional mix in detail.
Advertising focuses on brand recognition and identity. It plays an effective role in Chinese market. Ikea always advertises on TV or on the magazines of its upcoming sales and other promotion activities. Ikea also produces brief TV spots that show living areas before and after Ikea’s magic touch. According to Charles Sampson, CEO of Saatchi & Saatchi China, many Chinese consumers follow an 'all or nothing' way to interior design. （修改此句，拆成其他句式）Generally speaking, Chinese consumers will either completely replace everything or do nothing about the interior design. Ikea’s ‘Small changes, a refreshing new life’ advertisements introduce a new message to Chinese consumers. The advertisement conveys that it is good to make small changes step-by-step.
Ikea also operates a detailed website. The internet increases the options that allow customers to provide quick feedback. On the webpage www.ikea.com/cn/zh/, customers may look for the Ikea products and other services such as delivery service and store information. The webpage offers some information of what consumers are looking for. Every store has its own webpage where is presented its offer. Some specific customer service is offered in the website. For example, consumers can find the food in the store and transfer bus to every Ikea store within the city. The picture below shows the bus route and timetable in Shanghai store.
Figure 4 - 3 Bus route and timetable in Shanghai store
Source: From http://www.ikea.com/
Personal selling is one of the most common methods of selling. This form of promotion includes personal contact between sales representatives and customers. Often this occurs face to face and sales by phone. In Ikea’s stores, the labels attached to the products provide useful information for visitors. In most western countries, customers always look for product information by themselves. If that is not enough, consumer can also ask Ikea’s assistants. In China, there are some shared cultural characteristic among consumers. For example, Chinese customers are get used to have lots of salesman in the shop. It is very convenient for them to consult and have feedback information. Furthermore, Chinese consumers also prefer have the product delivered home for free. Therefore, some promotion has been introduced in Chinese market. For example, in order to attract the consumer, on the occasion of Ikea Shanghai 8th anniversary in April 2007, free delivery was provided for purchase over 3,000 RMB.
Sales promotion provides short-term incentives to encourage sales of the products. It plays the most important role in the retail marketplace. For example, buy one get one free, discounted or free product, cash discounts, prizes and products refunds. In China, retailers often send the retail coupons with expiration dates to customers. As mentioned above as part of Ikea’s pricing strategy, the company switched to cheaper, thinner and smaller brochures instead of the Swedish furniture retailer's traditional phone-book-size annual catalogue in 2006. Promotion material was printed every month in the catalogue.
The definition of Public relations is to build good relations with the company’s various publics. It includes distributing press releases to the local newspaper, to radio and magazines. Ikea has done very well in building a good relationship with Chinese consumers. Ikea use different communication forms to promote its furniture.
In order to help Chinese customers understand the Ikea products, the company adopts many methods, including posts in-store instructions, design advice, publishes brochures and catalogues. Ikea brochures show Chinese consumers how to make the most of their living space and give consumer advices on how to match colours, designs and concepts. As a result, more and more potential customers can be reached without increasing the overall costs.
Although Ikea has faced some difficulties and obstacles in Chinese market in the past ten years, the company reformed their structure in both pricing strategy and store location in order to survive in the Chinese furniture market.
4.4 Findings and Recommendations
Based on the study, we find that the success of Ikea is based on the relatively simple idea of keeping the price low. Meanwhile, Ikea’s success in Chinese market has wider implications: only adapting the culture environment and catering to the local consumer can do business successfully. Additionally, this section use SWOT analysis to provide a detail report on Ikea’s current position in the Chinese market from my perspective.
4.4.1 SWOT Analysis
Strengths
Grol and Schoch (1998) argued that Ikea’s strength today comes from their mastery of three key aspects of the value chain: unique design capabilities, unique sourcing, and tightly controlled logistics. In other words, Ikea is able to produce products that are distinctive enough to provide market recognition, secure sourcing at profitable levels in the long term. In addition, Ikea may reduce inventory costs through regional warehouses which located close to the stores.
In other words, the company offers good designed products with affordable prices. At the same time, the customers still want to come back for more. The well-designed, functional and simple style is now appreciated by Chinese people. The fact that Ikea targets all age groups and households makes it more attractive to Chinese consumers. In addition, Ikea also maintains completely control of its design and the supply of products across the world. As a result, the company has a product portfolio that caters for Chinese consumers’ lifestyle and budget.
/Weaknesses
Although Ikea has some favorable strength, the company clearly has some weaknesses. In Sweden, America and many European countries, Ikea is a typical furnishing supermarket. The products are both good quality and low price. Even students can buy the Ikea products. However, Ikea is still considered as a luxury furniture brand in China. Ikea’s market orientation is totally changed in China. With China’s fast growing economy, although there are an increasing number of middle class consumer groups, they are just around 11% of the total population. Only a small part of Chinese people can afford to buy them. At the same time, Ikea is also very reliant on European market, with 82% of stores located in this region. In China, although spending power is increasing, it remains relatively low.
In addition, although more and more products are designed for the Chinese market, Ikea still offers a very similar product base in the world. Ikea will suffer from a lack of innovation. To some extent, this is because of the lack of fresh blood in the company organization. For example, Ikea hires the same genre of people leads to inhibiting diversity and creativity to meet changes in the huge Chinese market. At present, Ikea is something new and fresh to the Chinese people. In the long run, Ikea is just too far out of the mainstream Chinese traditional culture. The company may have difficulty in meeting customer expectations of service as well as price in the long term.
Opportunities
Since Ikea has expanded successfully in European countries, Ikea also has seen great expansions upon its entry into the Chinese market. In my opinion, there are still many opportunities that Ikea can take advantage of to further ensure the continued success in Chinese business market.
Ikea firstly open its stores in metropolitan areas like Beijing and Shanghai. It is a wise decision for Ikea to gradually test Chinese market. At present, as millions of Chinese people have joined the ranks of the middle class, there is a growing demand of consumers who call for high-quality and well designed furniture. Especially people who living in the suburbs and metropolis also like to buy foreign products. Ikea has an enormous opportunity to establish business in both suburbs and metropolis locations. For example, Tianjin is one of the most progressive and rapidly growing cities in China. The city will offer a golden business opportunity for Ikea in China.
In addition, there has been an increasingly demand for electrical products in the past years. The strong growth in the electrical market was fuelled by high demand for flat-panel TVs and the introduction of High Definition ready TVs. In the author’s opinion, the introduction of electrical products would prove complementary to Ikea's range of furniture. Ikea is able to use its stores to showcase room sets. At present, more and more Chinese consumer would like to improve their homes and to buy into the Ikea concept. In all, with a strong brand reputation, plentiful space for storage, it is a useful additional revenue stream for Ikea.
Threats
At present, Ikea faces one key threat in China: domestic competitors always copy technologies and products from Ikea. Unlike the optimum competition from UK-based B&Q, the largest DIY retailer in Europe and the third-largest in world, there are too many Chinese furniture companies that counterfeit Ikea products. They often introduce similar product ranges at low prices.
As we know, Ikea opened its first store in China in 1998. Aika, one of its biggest local competitors, uses a brand name that is disturbingly similar to that of the Ikea. In addition, the two companies’ local brand names are almost the same. Ikea’s Chinese name is YiJia, meaning “a comfortable home”. Aika’s Chinese name is AiJia, meaning something “a love home”. It sounds almost the same as Ikea’s YiJia, but adds the “love” element. In summary, I make a table below to show Ikea’s SWOT analysis in Chinese market.
Table 4 - 1 Ikea’s SWOT analysis in Chinese market
Strengths
Well-designed products with affordable prices
Wide range of products and lifestyles
Good on-line presence
Showrooms
Weaknesses
Hard to meet customer expectations of service and price
Few locations
Far out of the mainstream Chinese culture
Opportunities
More stores
Sell electrical products in stores
Threats
Loss of intellectual property rights
Copy and imitation
4.4.2 Recommendations
Through 4Ps analysis and SWOT analysis, we have gain a much better insight of the marketing strategy of Ikea in the Chinese markets. Although Ikea has many competitive advantages in Chinese consumers, the company needs to solve some problems. As I mentioned before, Ikea target customers were those high-end customers such as white-collar, entrepreneur and foreigner in Chinese market. The prices are far more expensive than Chinese local furniture. Only a small part of Chinese families can afford to buy Ikea products. Since the research finds that prices reduction is be the most effective way for the company to increase sales in the Chinese market. It is crucial for the Ikea continues to offer it consumer much less money.
In addition, Chinese traditional culture has a great influence the huge rest of potential consumers. For example, family orientation and long-term orientation are typical elements of Chinese culture. Ikea is just too far out of the mainstream Chinese traditional culture in the long-term. In author’s opinion, it is benefit for Ikea to introduce much more localized products suitable for the Chinese consumer. In order to promote diversity and creativity of the products, Ikea should enlarge its selection base of hiring people. On one hand, Ikea should also put an emphasis on the hiring of people from a mix of backgrounds and personalities in order to cater to the local consumer. On the other hand, Ikea should display some classic designs in the stores so as to stimulate customer's purchasing desire.
Chapter 5 Conclusion
In the last part, the conclusion of the thesis provides the summary of the findings based on the study above. At the same time, advices are provided for further study. This thesis showed the FDI policy and key issues for multinational corporations entering Chinese market. I also take Ikea case as example to deeply analyze Chinese business environment and culture environment. The success of Ikea in China has wider implications for other foreign enterprises who want do business successfully in Chinese market. There are some kind of points should be considered when multinational corporations want to invest in China. I came to some conclusions at different aspects as following:
(1) Supporting environments
To sum up, Chinese political and economic conditions as well as transaction advantage are the important influences that support IKEA to do business successfully in Chinese market. After about thirty years of economic reform, China has become one of the most important destinations for foreign investment.
On one hand, the central government make great efforts to attract international capitals, for example, opening up of new sectors, removing the FDI requirements regarding local contents and technology transfer and reducing government intervention over market demand. As a result, more and more foreign enterprises may benefit from structural transformation from a planned economy to a market-based economy. On the other hand, China’s rapid economic growth has led to the rapid emergence of an urban middle class of consumers. Chinese people’s income levels and living standards have improved greatly. At present, they are demanding for higher quality, variety and innovation from the foreign products. With China gradually integrating with the globalization process and playing an important role in it, there are many opportunities that foreign enterprises can take advantage of to develop the Chinese market.
(2) Appropriate market entry model
In Chinese market, Ikea chose the appropriate market entry model and leaded to success as a consequence. For example, it is a wise strategic choice for Ikea to develop the Chinese market because of its low labor cost, large consumer market and reduction of import tariff rates. Furthermore, Ikea has adopted an advanced policy that is joint venture for its globalization since the firm enters a new potential market. A joint venture approach could solve the problem of lacking of knowledge about Chinese market replace and increase cultural sensitivity and operational controls through the establishment of strategic networks. To some extent, Ikea’s achievements in Chinese market are built on an appropriate market entry model.
(3) Culture adaptations
Through the theory study and 4Ps analysis, we find that culture difference has great influence on customer behaviour. The most important element of foreign company to enter international market is adequate cultural awareness. Ikea has undertaken high degree of adaptations in its marketing strategies such as translating the name in Chinese and designing products for Chinese consumer. In addition, Ikea chose the best possible compromise between standardization and adaptation to local markets.
In all, multinational corporations in China may face many problems such as inner company cultural conflicts, harmonization with governments and market entry. The case of Ikea provides implications for other multinational companies: through more active localization, multinational corporations can make full use of local resources, reduce production costs, and achieve more market penetration opportunities in a more comprehensive way.
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And
Department of Economics
University of Sydney （23）
Authors: Landry Capdevielle Min Li Paulina Nogal
Halmstad, 23rd of May 2007 University of Halmstad Bachelor Degree
A creation of competitive advantage by using differentiation of company’s strategy actions. The case study of IKEA Sweden with experiences on Chinese and French markets.
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