Introduction

In recent years, the world has shifted its focus towards China in terms of business development. The country is strategically placed to benefit from this shift due to the high population of 1.37 billion people. In fact, the high population is one of the stimuli for the establishment of businesses in the country as it provides a cheap and readily available labor market. In addition to the cheap labor market, the country boasts of one of the largest consumer markets in the world again due to the high population. These, among other factors, are reasons why most companies have shifted at least part of their operations into China. For instance, one in every ten US companies has some parts of their operations in China. Evidently, the country is a positive bet when it comes to business development and acts as an attractive force in retaining businesses. Currently, the country is one of the most developing and its GDP matches that of the US even threatening to surpass. In today’s world of modernization, it is only prudent for businesses to base their operations where the costs are minimally low thus gaining a competitive edge. This paper analyzes the feasibility of having a business in China and the background information of the country.

Background Information

Geography

China is the third largest country after Russia and Canada and is located in Southeast Asia next to the Pacific Ocean coastline. Its image on the map resembles a rooster covering about 9.5 million square kilometers with a coastline of an accumulated size of 18000 kilometers. Its vast land consists of plains, basins, plateaus, mountains and foothills. The Qinghai-Tibet Plateau forms the highest step among the mountainous features at about 4000 meters high. Some of the famous plains in the country include the Yangtze plains that cover the country from the north to the south. Despite these geographical features, the country is normally divided into four regions that include the North, Northwest, South and the Qinghai-Tibetan areas (Tanner, 2008). The geographical differences in these regions dictate a difference in the customs and lifestyles of the people that occupy the regions.

China has no shortage of water bodies including rivers and lakes that are either exterior or interior depending on their drainage areas. The country boasts of having the third largest river and the largest in Asia in River Yangtze. In second place is the Yellow River which is considered to be the mother river of the Chinese people and flows into the Pacific Ocean just like the Yangtze River. Most of the country’s lakes are concentrated along the Middle-Lower Yangtze Plain with most of them being salty lakes. However, the southeast part of China has most of its lakes being fresh water lakes including Poyang and Taihu lakes (Rujivacharakul, 2011). The existence of rivers and lakes provide the country with numerous resources including natural gas, mines, aquatic products and renewable resources such as tide power.

Climate

China is located within the northern temperate zone and is under direct influence of the monsoon. The monsoon winds blow from the Mongolian Plateau and Siberia into mainland China during the months of October to April of the next year. However, the monsoon decreases in magnitude as they travel southwards thus causing dry and cold winter in the country. Ultimately, the results are a 40 degree centigrade temperature difference between the north and the south. In view of the conditions, the country experiences lower temperatures of about 10 degree centigrade lower in winter compared to the temperatures of other countries within the same latitude in winter. The complexity of the topography in China coupled with the expansive area occupied result in differences in climate between different regions in the country.

During the summer, monsoons blow into China from the ocean and carry warm and wet currents that ultimately result in rainfall. The regional differences in climate are visible in the fact that the Hainan Island has no winter but has a long summer while northeast China has no summer. In addition, the western part of Qinghai-Tibet plateau has snow for the larger part of the year and the Huaihe River valley contains four distinct seasons (Marks, 2012). In sharp contrast, the southern part of the country covering the Yunan-Guizhou Plateau has spring-like conditions throughout the year. In the northwestern inland region, there is a big drop in temperatures during the day relative to that of other regions. Besides temperatures, the precipitation levels also vary across the different regions of the country with the highest being in the southeastern coast which receives 1500 millimeters of precipitation. However, these volume decreases landward with the northwest China region receiving the lowest precipitation of 5o millimeters.

History

China has a rich history and is privileged to be among the first few countries where writing started. The earliest records of human settlement trace the people of China as having lived in the Huang He basin at about 5000 B.C. Between 1500 and 100 B.C., a period dominated by the Shang dynasty, the precursor of today’s Chinese writing system was developed. This form of writing was effective in allowing the feudal states of the time to attain an advanced level of civilization. Indeed, this piece of history makes China unrivaled by any society that lived in America, the Middle East or Europe during the time. Following the success in civilization, the Chou dynasty, lasting between 1122 and 249 B.C., witnessed the foundations of Chinese philosophical thoughts (Xu, 2012). These thoughts were advanced by Confucius, Mo Ti, Mencius and Lao-tse among other great thinkers.

During the reign of Emperor Ch’in Shih Huang Ti, the country began works of building the Great Wall as a way of preventing invasion from the West. In the following years of the Han dynasty, China conducted extensive trade with the West despite there being a wall against the western countries. Later, the T’ang dynasty witnessed a flourishing of sculpture, maintaining and woodwork printing. These forms of art together with poetry enabled the huge production of books between 618 and 902. The Yuan dynasty was the first of its kind to rule the entire China with Beijing as the capital between 1271 and 1368. The Republic of China was formed after the overthrow of the Qing dynasty powered by students, young officials and military officers. The revolution was steered by Sun Yat-sen who became the first president of the republic. The People’s Republic of China was proclaimed in 1949 with Mao Zedong being the first president (Tanner, 2008).

Government

The People’s Republic of China is a single-party state with the Chinese Communist Party accumulating the power. The country’s constitution as amended in 1982 governs the people and is the fifth constitution since the Communists ascended into power in 1949.  The National People’s Congress is the legislative branch and consists of indirectly elected deputies serving for terms of five years. The Congress has powers to decide the country’s strategy, change the constitution and elect high officeholders. In its dealings, it follows the directives of the Communist party’s politburo. The president is the head of the state while the premier heads the government and together forms the executive branch. Xi Jinping and Li Keqiang are the current president and premier respectively. While the president is elected by the NPC, the premier is nominated by the president before approval by the NPC.

Administratively, the country has five autonomous regions, four municipalities and 22 provinces. Although the power is centralized in the Communist party, there is little government control over provinces and local governments thus leading to impunity on their part. The Supreme People’s Court heads the judicial arm of government and is the highest court of the land. It supervises lower courts in local municipalities and is headed by a chief justice who is appointed by the national people’s congress. Other judges are appointed by the committees of the national people’s congress after nomination by the chief justice. There is a state council which is responsible for administration of governance and consists of the premier, four vice premiers, five state councilors and 29 ministers.

Infrastructure

China is a leading country in terms of infrastructure development as evidenced by the high investment it places in the sector. The development of infrastructure in the country has for a long time been a key focus area for the government and is captured in the regular Five Year Plans. Each of these plans underlines the increased attention from both government and private players in terms of infrastructural development (Standen, 2013). That China is a leader in infrastructural development is an internationally held axiom in today’s world. The rationale is that development in the areas of railways, roads, water, energy, airports and rural projects support the economic development of the country to a large scale. Today, the country is consistently expanding its high speed rail thus enhancing the transport systems and benefitting the wider economy.

Infrastructural development is one of the top priorities for the country. The government has consistently held the view that the success of its modern economy is dependent on reliable telecommunications, rails and electricity. Indeed, more than 100 million Chinese have benefitted from telecommunications and power upgrades for the last 25 years. In addition, the country has focused on rural development as witnessed in the 51% increase in rural roads investments between 20001 and 2004. The leadership of China in infrastructure continues to chart very ambitious plans for the future of the country. Today, the government uses infrastructure spending to hedge against flagging economic growth. The goal of eth country is to attain the infrastructural threshold of modern middle income countries by using very efficient transport systems of bringing the country together.

Demographics

China has the largest population of any country on Earth at more than 1.37 billion people according to 2013 data. About 52.6% of this population lives in urban areas amounting to slightly over 711 million people. The population in China is highly uneven in distribution with the most people living in the east and fewer in the west. In fact, the east witnesses about 300 persons per square kilometer as opposed to the west which has an approximate of 40 people for every square kilometer. Overall, however, the national density averages at about 143 people per square kilometer which is a high figure compared to other countries in the world. In addition, the average number of persons per household in the country lies at about 3.7 persons largely due to the one child policy rule.

The one child policy is largely blamed for the relatively small youth division in the country. As thus, the proportion of persons aged between 0 and 14 is 26.5% with those aged between 15 and 64 taking up 67.1% of the population. People aged above 65 years accounted for 6.5% of the population. In addition, the country had an average lifespan of 70.8 years with males having a lifespan of 68.71 and females having 73.04. The Han Chinese ethnic group forms the largest percentage of people in the country at about 92% of the total population (Marks, 2012). Minority tribes in the country only amount to a meager 8.49% of the country’s total population and are exempted from the one child policy. The population growth rate ranks at 159 in the world at only 0.47% largely due to government interventions to reduce the population.

Culture

The culture of the Chinese, otherwise known as the pinyin, is one of the oldest culture sin the world and traces back to many thousands years. There are various customs and tradition covering components such as literature, music, visual arts, philosophy, religion, architecture and ceramics. There are 56 recognized ethnic groups in the country with Han Chinese being the largest group. Over time, some groups have disappeared, maintained their distinct cultures or merged into neighboring ethnicities. Each of the different regions in China has distinct sub cultures based on their ancestral items. The values of the Chinese people are largely derived from Taoism and Confucianism as well as other concepts such as Buddhism and Neo-Confucianism. The concept of guanxi is largely documented and is used in business culture to indicate the primacy of relations over rules.

The standard language in China is the Classical Chinese and was mostly used by scholars and intellectuals to form part of the top social class. An entry into this social class required one to pass in written exams and display a mastery of Confucian texts (Standen, 2013). A large part of the Chinese culture is based on the fact that a spiritual world exists as well as the broader concept of heaven. The people often use countless methods of divination in answering divine questions and as an alternative to medicine. There is a belief of both holy and evil and some practices such as the Taoist exorcism concept of fighting mongwai using peach wood swords are widely practiced. The people have a rich culture of literature including classical texts in poetry, astronomy, calendar and constellations. The cultural music and dance dates back to the entry of Chinese civilizations with artifacts showing clear music cultures. In addition, eth country is one of the key birth areas of Eastern martial arts under the famous name Kung Fu.

Labor Market

Over the recent past, China has increasingly focused on transforming its labor market to become a market driven system. Indeed, China provides one of the largest labor markets due to the high population that it has. As a result, the country has attracted large multinational organizations that have set foot in the country to take advantage of the ready labor. In the country, there are two segregated economies namely the rural and the urban which define and dictate the nature of the labor market. In the past, from 1949, the Chinese economy prohibited any labor mobility between the urban and rural sectors of the economy. The hukou system of household registration greatly enforced the rural urban segregation rules with people born in the rural areas being attached to agricultural labor. In the rural areas, the employment and income were linked to the community system of production.

The country has however undergone reforms in its labor market sparked by demands from labor unions and human rights groups. Today, the country boasts of having one of the most vibrant labor markets in the world thus attracting the top multinational companies (Brahm, 2011). The country now witnesses great interactions of the rural and urban labor markets due to migration. In addition, the country offers relatively cheaper labor prices compared to other countries due to the high population of unemployed people. It is not surprising that most of the international companies have their operation bases in China to tap into the cheap labor market. Despite these efforts to streamline the labor market, the hukou system is still in place with more than 70% of the country’s population identified as rural hukou holders. The strict restrictions of rural urban migration condemn most of the workers to inhumane treatment from the corporations as they are abused continually. That notwithstanding, the country has the largest labor markets in the world that largely remains untapped.

Education

China is one of the many countries that greatly value education ever since the dynasty rules. The education system in China is a public affair and is run by the state through the ministry of education. By making the education system public, the country ensures that all the people in the country undergo some form of formal education and training. Every person must attend school for the nine year compulsory education with the rest of the education levels being optional for students. The system includes six years of primary education plus three years of education at the junior secondary level, otherwise known as middle school. In some provinces, the arrangement is somehow different with the primary level taking up five years and the middle school taking up four years. Regardless, the compulsory education is nine years and must be met in all the provinces (Rujivacharakul, 2011). After the middle school, students are allowed to continue with a three year education program in high school where they complete the secondary education.

At the moment, there is a 99% attendance rate for primary school and an 80% attendance of both primary and middle school. In addition, higher education is financed through scholarships that are awarded competitively to the best performing students. China continues to support more than 10 million students to pursue their higher education every year in more than 1500 institutions of higher learning. Today, the country’s spending in the education sector stands at over $120 billion with graduates in science and engineering courses surpassing 1.6 million. It is no wonder that the country continues to record a very high number of published papers at about 200,000. In fact, China ranks number one in popularity for international students in Asia as well as third most popular internationally. The education system in China has been touted as being very rigorous as well as focused on test preparation and rote memorization.

Economy

The Chinese economy has witnessed tremendous growth over the last few decades making it the second largest economy in the world. This is in contrast to 35 years earlier when the country ranked ninth in gross domestic product (GDP). The economic reforms initiated in 1978 have seen the country establish itself as a manufacturing hub with the industry and construction sector owning up to the largest share of GDP. The tertiary sector has been on a steady increase as well due to a focus on modernization and surpassed the secondary sector by a slight margin in 2013. Perhaps the stability of the country’s economy is well evidenced by the manner in which it weathered the economic crisis. In the wake of impeding financial crisis, the country injected $585 billion into the economy fuelling economic growth when other countries’ economies were shrinking.

The country is the fastest growing economy at an annual rate of 10% over the last 30 years. It is the largest trading country in the world and plays a leading role in international trade with treaties and agreements with dozens of countries. After the financial crisis that affected the entire globe, China exited with a 9% growth rate and a low inflation rate. However, the high population pulls the country back in terms of per capita income and ranks at 72 by nominal GDP. Regions in the coastline are more developed compared to regions in the hinterland creating an imbalanced economy. Recently, there have been talks of slowing the economy of China in a bid to tackling the macroeconomic imbalances in the country.

Section B

Suitable industry and product

China has several stable industries in the manufacturing, services and agriculture sectors. Although the service sector has gained ground over the recent past, the manufacturing sector continues to dominate in terms of revenue. Collectively, the manufacturing sector contributes more than 40% of the country’s GDP and has done so for a considerably long period of time. In particular, steel manufacturing is one of the industries in which China leads the world.  Venturing into steel industry in China is therefore a suitable business idea for international investors. The Chinese steel industry has grown over the last few decades to become the world’s biggest and accounting for over 50% of the world’s total steel production. In 2012 for example, the country produced 683 million tons of steel representing a 9% increment from the volume produced in 2010 (Song & Liu, 2012).

Statistically, the steel production industry is most viable since about 60% of the largest steel producers are based in the country. Although this means that there is relatively high competition among the producers, it is usually competition for markets outside China. Moreover, the high number of available laborers means that the investor can benefit from relatively cheap labor thus lowering the production costs. Last year. Last year, the government embarked on large scale closures and redundancies in a bid to oust zombie companies. The effort by the government is a pointer to the benefit of investing in the industry since most of the companies were closed in the process. In addition, the laid off workers are readily available for employment thus offering skilled labor to the investor.

Competitors

The steel producing industry is dominated by international leading players in the sector. About 6 out of 10 leading steel producers are located in China thus leading to stiff competition among the best producers of steel. Hebei Iron and Steel leads the group with more than 47 million tonnes produced in 2014. Over the last five years, the company has been increasing its production when other companies in other parts of the world have been lowering their production. Indeed, this is a good sign of the healthy business environment in China and the growing opportunities for steel production in the country. For instance, the leading producer, ArcelorMittal which is located in Luxembourg has consistently lowered its production over the last five years to hit a volume of 98 million tonnes in 2015. Other companies have shown similar trends perhaps due to competition from Chinese companies.

Other competitors include Baosteel Group with a production of 43.3 tonnes in 2014 and Jiangsu Shagang which has an output of slightly over 35 million tonnes for the year 2014. In addition, Ansteel, Wuhan Iron and Steel as well as Shandong Iron and Steel Group provide sources of competition for the new entrant. Each of these competitors has an annual production above 30 million tonnes except Shandong Iron and Steel group which produced 23.3 million tonnes in 2014. The competition for steel is not just in China but is also witnessed in the region and even in the world. Inherently, the company would face competition from companies in Japan and India such as Nippon Steel which is ranked at second position internationally. In addition, POSCO of South Korea and Tata Steel of India also pose threats of competition as they produce 40 million tonnes and 26 million tonnes respectively.

Strengths and weaknesses of competitors

Evidently, the Chinese steel manufacturing companies have a competitive edge over other companies located in other locations of the world. One of the strengths that these companies have is the availability of both iron and coal ores in large volumes. Steel is manufactured as an alloy of both iron and carbon. The availability of the two ingredients within the country provides a source of strength for the companies operating in the country. In addition, the country has among the cheapest labor wages in the entire world. This development means that Chinese companies have a relatively cheaper operating cost when all the other factors are held constant. In addition to cheap labor, the available manpower is of high quality thus increasing efficiency in production of the product. The result is the emergence of highly competitive products that can compete in the international market.

In addition, the companies have more funding at their exposure due to an inflow of foreign direct investments thus ensuring a highly skilled workforce. Besides the strengths, Chinese companies have weaknesses resulting from a lack of investment in research and development. In fact, most of the companies depend on research done in other countries thus undermining the practicality of steel production in China (Song & Liu, 2012). Moreover, most of the companies are crippled with debt resulting from foreign direct investments thus leaving little money for production.  Moreover, the lack of focus on quality is a source of weakness for the Chinese companies as they struggle to maintain high profits to cover up for money lost to debts. The lack of huge market within the country is also a weakness since they have to look for markets overseas.

Mode of entry

There are two broad types of foreign entry, that is, equity and non-equity modes. In terms of the risks involved and the return on investment promised, equity modes of entry are most suitable when entering foreign business markets. Among the equity modes of entry, it is most advisable, in the case of steel manufacturing industry, to use joint ventures. In this regard, the investor can approach a company that is already incorporated and buy part of their shares (Prescott et al, 2010). The partner selected for this joint venture is Shougang Corporation that is based in China and is in the business of steel manufacturing. The advantage of having a joint venture is that the investor shares the risk with an already tested company thus increasing his chances of success. Evidently, joint ventures guarantee more returns on capital compared to other methods of entry because of the shared risk.

The joint venture between the investor and Shougang Corporation is such that the foreign investor buys interest in the local company. The advantage of this is that the local company is most suited to introduce the investor to the market rather than the investor introducing them. In so doing, the challenges of management are overcome and the investor only worries about their investment and the returns promised. Shougang Corporation forms an ideal partner because of its position as one of the largest steel manufacturing companies in China. As thus, it has ready systems as well as a ready market for its products and therefore minimizing the risk on investment. Moreover, the company has been in business for a very long time and therefore understands the business environment both in China and abroad.

Process of doing business

China is known for having very strict and sometimes harsh procedures of doing business especially when dealing with foreign investors. Nevertheless, there are clear guidelines on the process of doing business right from the stage of conception to implementation. In this case, the mode of entry is defined as an equity joint venture because it involves a foreign investor and a local partner. The agreement is incorporated in both Chinese and English languages with limited liability as in any other private company (Moser, 2014). In this model, the partners share profits, losses and risk in proportion to their respective contribution to the venture. The partners have to sign a joint venture contract and the articles of association documents. After the signing of the two documents, the companies then agree on the modes of operations including the import of materials and the export of final products.

China provides for the signing of shareholder’s agreement reflecting the valuation of individual partner’s intellectual rights. In addition, the document further details the number of directors in the joint venture as well as the dividend policy. Moreover, the document ascertains the management policy including who makes the decisions regarding the company’s operations. Normally, joint ventures with equal shareholding between the partners often turn out to be more successful than other joint ventures (Prescott et al, 2010). The Chinese law only approves joint ventures after all the terms of registration have been met including compliance to laws governing the operations.

 

References

Tanner, H. M. (2008). China: A history of one of the world’s oldest civilizations. Indianapolis, Ind: Hackett.

Xu, Z. (2012). China: A new cultural history. New York: Columbia University Press.

Rujivacharakul, V. (2011). Collecting China: The world, China, and a history of collecting. Newark [Del.: University of Delaware Press.

Marks, R. (2012). China: Its environment and history. Lanham, Md: Rowman & Littlefield.

Standen, N. (2013). Demystifying China: New understandings of Chinese history.

Song, L., & Liu, H. (2012). The Chinese steel industry’s transformation: Structural change, performance and demand on resources. Cheltenham: Edward Elgar.

Prescott, D., Swartz, S., & American Bar Association. (2010). Joint ventures in the international arena. Chicago, Ill: ABA Section of International Law.

Brahm, L. (2011). Doing Business in China: The Sun Tzu Way. New York: Tuttle Pub.

Moser, M. J. (2014). Doing business in China. Huntington, NY: Juris.

 
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