China’s Business Risk Assessment:
Potential Expansion of Yum Yum Ice Cream Parlor
Michael J. Kalil, Jr.
In today’s society, there are many obstacles that plague businesses when they attempt to enter the global market. Cultural differences, age differences, views on business matters, legal issues, and religious beliefs, force business owners to research every aspect of difference to analyze the potential risk associated with expanding into foreign markets. The potential risk in taking the Yum Yum Ice Cream Parlor franchise into the Chinese market place should be considered. This paper addresses cultural factors that should be focused on during a business venture that crosses the threshold of the Chinese marketplace. These include the market potential through analysis of the current economy, the 12th Five Year Plan, the population growth, and current state of private enterprise in the Chinese marketplace. The focus will be on business etiquette and customary practices associated with Chinese business. These elements will be followed by analysis of factors as they relate to franchising the brand in China and to make a reasonable assumption on potential risk that may be involved with this venture.
A review of historical events that have transformed China into its current state can provide some insight on the culture of China today. According to H. Yeung, in 1979, the Chinese government realized that a market transition was a necessity to promote economic growth; so in an evolutionary step toward market reform, China passed a law known as the Joint Venture Law that allowed foreign firms into the Chinese market. This had not been allowed since 1949 (Yeung, 2007). Since the passage of the Joint Venture Law, there have been many other substantial events in China’s progression toward the China of today such as the implementation of the five year plans, which are a series of social and economic initiatives, the death of Mao, and becoming a member of the World Trade Organization (WTO). The membership with WTO alone is a symbol to the world that China is charting its course to be among the leaders in the global market place. “This commitment to the WTO shifted China’s regional approach to opening up towards a multi-directional effort for modernization, creating transparency, and access to compete on the global marketplace” (Sun, 2010, p. 111). China led the way in that its transition to a capitalist economy was conducted without any form of democracy used in the process, which some thought was the only path to success (Yu, Chan, & Ireland, 2007).
China’s Growing Economy
“World trade has made the People’s Republic of China the fastest growing economy in the world. In 2004, China became the largest merchandise trader in Asia and the third-largest exporter and importer in world merchandise trade” (Nelson, 2009, p. 311). Economically, China’s growth is attributed to the reforms that have been instituted to develop the economy and spark growth. China’s economic growth has gained momentum from the forces of urbanization, middle-class development, and the current political economy (Lieberthal, 2011). In the late 1970’s, China’s government had come to the realization that strategies that focused on inward foreign investments paired with modern management techniques were the answer to much needed economic development (Yeung, 2007). This market-driven reform resulted in policies that were used in the formation of institutions and laws that focused on the transition to a market economy (Yeung, 2007). The current state of the economy of China should be described as a hybrid of Western capitalism and Chinese socialism or simply “capitalism with Chinese characteristics” (Yu, Chan, & Ireland, 2007, p. 5). The research into China’s capitalist economy presents a market potential for the Yum Yum Ice Cream venture through analysis of fundamental elements such as the impact of the current Five Year Plan and the growth of the population.
Current Five Year Plan
China’s current Five Year Plan is the 12th installment of these Five Year Plans, which outline strategies that will be used to reach the current goals of economy. The goals that are addressed in the current plan are strategic plans to change China’s growth patterns from fixed asset investments, which result in a reduction of net exports and, since the financial crisis of 2008, are questionable as far as sustainability (U.S. Commercial Service, 2012). These strategic plans to change the current growth pattern will be implemented alongside plans to protect the environment. “This plan aims to increase consumption activity from approximately 35 percent of GDP in 2010 to 50 percent by 2015. About 70 percent of the United States’ GDP is derived from consumption” (U.S. Commercial Service, 2012, p. 1). President Hu Jintao announced in 2005 that China was on course to achieve their goal of a GDP around $4 trillion by 2020 (Lou, 2010). With regards to forestry, fish, and agricultural exports, China is the United States’ second largest overseas market, which has contributed to a record high of 21.9 billion sales in 2011 (U.S. Commecial Service, 2012).
The population of China currently is an astounding 1,338,300,000 people compared to 309,712,000 in the United States (World Bank, 2012). The current Gross National Income (GNI) per capita of China is $4,260 which is categorized as being in the upper middle class income level (World Bank, 2012). Both of these statistics reveal the drastic growth experienced over the last few decades. Just to reinforce, the difference of GNI per capita in China from 1997 to 2004 revealed an increase of 30 percent or $1800 (Yu, Chan, & Ireland, 2007). According to Yu, this would be equivalent to an average U.S. household income from $54,135 to $70,375 over the same time frame (Yu, Chan, & Ireland, 2007). China contains a very large and growing percentage of middle class income levels, which is evident in the major cities by the number of private cars, home ownership, and quality restaurants that are present in the landscape (Lieberthal, 2011). China has instituted a one-child policy to force a reduction in, or at minimum, to contain the current rate of the population growth. This is due to the realization that if the population continued on the same course of historical growth, China would not be able to support the population with the current infrastructure and available resources. China’s one child policy has removed the dreams of big families among working parent families while creating an opportunity to invest in the best education for their only child (Reuvid, 2008).
Business of Thought
A crucial element to a successful business venture is in understanding the differences between the business mindsets and the practice of proper business etiquette. Before considering a venture into the Chinese markets, both the Western and Chinese cultures must be analyzed for differences. In China, the business of building relationships is generally more important than the business itself. “We must lay aside our insistence on agenda, time, and outcome driven business models….and prove the adaptability of our relationship skills” (Reuvid, 2008, p. 82). The business world of “China does not merely want to see the nature of our business collateral, but the state of our intentions, manners, and disposition” (Reuvid, 2008, p. 82). In the Chinese culture of today, just as it was in the past, reputation is of the utmost importance. As we approach a Chinese business venture, we must relate to them “in a way that meaningfully communicates our commitment to partnership, professionalism and trustworthiness” (Reuvid, 2008, p. 78).
In an effort to express commitment to dealing with a Chinese company, the Chinese representatives respect face-to-face meetings (Staff A. , 2012). The respect anticipated can be lost quickly through improper etiquette. Business cards are synonymous with Chinese business, and will commonly be exchanged when meeting for the first-time. The appropriate method for the giving and receiving of business cards is to do so with both hands (Staff A. , 2012). After acceptance of another’s business card you should study it to express the notion that they deserve your attention. The importance in the development of these business relationships, which they refer to as guanxi, is often misunderstood. When you meet a Chinese business representative, it is vital to communicate clearly and effectively; so the use of an interpreter is crucial if your company members are not fluent in their native language, Mandarin.
“With China becoming a highly attractive and lucrative market, the use of franchising to capitalize on this business potential is an attractive solution to many new entrants” (Dayal-Gulati & Lee, 2004, p.72). Due to the failure of local Chinese restaurants to provide food that passes the standards of the local residents, an opportunity is created for Western fast-food restaurants to bridge the standards gap in order to satisfy the demand for appropriate food products (Dayal-Gulati & Lee, 2004). There are several regulations that should be understood when considering franchising in China, such as Regulations on the Administration of Commercial Franchises and The Administrative Measures for the Information Disclosure of Commercial Franchises. These regulations cite critical regulations such as the two-plus-one requirement. The two-plus-one requirement is a regulation that states that before a franchise will be allowed to enter the Chinese market landscape “they must own at least two directly operated outlets anywhere in the world before allowance will be granted to enter the market” (U.S. Commercial Service, 2012, p. 9). There are many benefits to franchising. One important benefit of the use of a local franchisee is gaining the expertise in the local markets, market conditions, and the relationships that local partners bring to the table (Dayal-Gulati & Lee, 2004). If partnered with the right franchisee, this could be the deciding factor in our success in the Chinese market.
Due to the explosive growth of the Chinese economy, a huge market potential has been created. This, coupled with current cultural settings that show an acceptance of the Western concepts and products, will provide great opportunities for the progression of the Yum Yum Ice Cream Parlor as a profitable business venture in China. Crossing the lines of cultural diversity while keeping an open mind to the different needs of potential Chinese business partners and customers will be a challenge, but a challenge that if it is successfully implemented, could result in making the business venture profitable for the foreseeable future. The Yum Yum Ice Cream Parlor should have the capacity to capitalize on the market potential by targeting the younger generation and the growing middle class to profit from their elevated disposable income levels as well as their willingness to try non-Chinese products available in their respective markets. It would be a strategic advantage to initially open franchises in the highly populated areas such as Shanghai and Hong Kong. This would allow the generation of brand recognition, in addition to adapting the business model to function efficiently in the Chinese marketplace. In 2001, private restaurant ownership made up approximately 95 percent of that sector and is steadily increasing; this should allow the entry of businesses such as the Yum Yum Ice Cream Parlor (Dayal-Gulati & Lee, 2004).
The Support of the United States
The United States has devoted many resources to aid in education and support with the transition in foreign markets. The United States provides a wealth of knowledge including market research by industry, legal processes, duration of time devoted to register for business necessities, important contact information for a variety of industries, and lists of potential pitfalls for businesses wishing to enter the market. The U.S. Commercial Service was established to provide support through targeting the best markets, aiding the promotion of U.S. products, providing awareness of potential challenges in pursuing overseas ventures, and facilitating meetings with the best agents and suppliers for specific products (U.S. Commercial Service, 2012). A business should use all available resources including these mentioned here to gain an educated footing before jumping into any foreign market.
“China has seen rapid growth despite the unfavorable global environment. Rising profitability, affiliates operating in China, increasing export and import growth, and growing domestic consumer demand have positively affected regional growth rates, sustained prices for a wide range of industrial commodities, and benefited trading partners. These trends suggest that China’s sustained growth will continue to have a significant impact on the global economy” (Dayal-Gulati & Lee, 2004, p. 4). “The simple truth, and one that has been poorly grasped, is that only those individuals, companies, and entities who embrace the challenge of relating China in a rounded and meaningful manner, and one that resonates with Chinese values and business practices, will become the preferred partners in the choice filled contemporary climate of the new China” (Reuvid, 2008, p. 78).
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Michael Kalil is the owner of MJK Construction which has been in business since January 2006. His company began as a builder of residential homes and has now ventured into the commercial market. He is currently pursuing a degree in Logistics and Supply Chain Management. Mike resides in Arab, Alabama with his wife and young son.