Country Evaluation Report-Arcadia enter into Chinese market
Arcadia Group is a famous fashion company based in UK. It is also the UK’s largest privately owned clothing retailer with just over 2500 outlets. It has 8 high street brands, such as Topshop, Topman, Miss Selfridge, and so on. Although Arcadia is very successful in the local brands, the company still wants to be a fashion leader in other countries. Now the Topshop brand has opened new shops at American. However, the fashion industry has no country boundary. Even the developing country like China is also like fashion leader coming into Chinese market. Therefore, China is a huge potential market for the Arcadia Group if it would like to expand its business in a developing country. On the one hand, many Multinational Corporations (MNCs) put great emphasis on the Chinese market due to the fact that large consumption required in China. On the other hand, the Chinese government will set certain barrier to the MNCs in order to protect the local industry. Therefore, it is required a careful report to evaluate the probability to enter Chinese market. This report will provide a systematic assessment of the political factors, market size, trade and investment barrier, and other factors. By developing such assessment, this report will give out the recommendation about the investment in the Chinese market.
An assessment of political factors:
Moosa (2002) defined that foreign direct investment is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (home country). Wei and Liu (2001) pointed out that the main types of FDI in China are equity joint ventures (EJVs), contractual joint ventures (CJVs), and wholly foreign –owned enterprises (WFOE). Goldstein (1991) suggested that an unstable political and social environment is not conductive to inflows of foreign capitals. The fear is that large modification in the legal and fiscal framework will have a huge impact on the given investment. Therefore, a systematic assessment of political factors is quite essential. Billet (1991) stated that the level of FDI was influenced by the political and economical factors, which is government policies regarding political factors, static national attributes, and dynamic socioeconomic characteristics of developing country.
Besides understanding the political factors have a huge impact on the FDI, the market factors also play an important role in determining FDI. Hess (2008) pointed out that market size has been a long established predictor associated with FDI, because larger market provides greater sales potential and possibly greater local support and supply opportunities for business.
An assessment of Political Factors
According to Haksoon (2010), the saturation of domestic capital market drives each country to invest in the foreign capital markets in terms of financial internationalization. Obviously, the emerging market like China has attracted the foreign investment companies due to its huge market potential. Moreover, further economic development of China depends on continuous FDI and policy making that would facilitate inward investment. (Ali and Guo, 2005) Especially, China entered into World Trade Organization (WTO) suggested trade would play an important role to its domestic economy. There is no doubt that since the 1980s China decided the “Open Door” policy had opened its foreign investment policies to attract the foreign investment. FDI contribute a lot in Chinese economy structure. As the Arcadia Group is a fashion leader in UK market, it considered a lot in Chinese textile and apparel market. Gillespie et al (2010) suggested that Chinese textile and apparel industries had several advantages over other developing countries. The low labour costs and high productions are the key factors attracting the investment. Moreover, the substantial economies of scale and good transportation infrastructure with especially quickly turnaround times for ships in Chinese ports. Currently, Arcadia has chosen some developing countries as its manufactures due to the low labor and manufacturing cost. Especially, the Guangdong Province is the major textile and apparel manufacturing exporter.
However, before Arcadia decided to invest in China, it has to figure out the political factors in Chinese market. Haksoon (2010) found that investments in many developing countries are exposed to large political risks. Singh and Jun (1995) claimed that political risk and business operating conditions are the important determinants of FDI for countries that have attracted high FDI. According to Wang (2004), the political instability and risk in China is that supremacy of policy over law combined with China’s politico-economic dilemma towards foreign investment has resulted in regulation of foreign direct investment being characterized by policy instability and inconsistent regulatory performance in many aspects. In other words, policy is over the legal framework in China has brought about the doubt when the investors want to make the investment in China. Without a strong legal framework or regulation to guarantee the foreign investors, when the policy has changed, the foreign investors may suffer the huge loss. Bureaucratic interference will complicate the process when the foreign investors trying to get the licence in China. The detailed paper works and inspections all make the foreign investors afraid of the investment. Another concern is that the past rapid growth will continue or not, and whether the political system would be able to survive in the future of low growth. (Spero and Hart, 2009)
Therefore, the Chinese government adopted the “open door” policy has attracted a lot investment opportunities. The Chinese textile and apparel industries have many substantial advantages over other developing countries. The low labor cost and manufacturing cost, and open policy become the key attracting factors. However, the concern about the political risk the Arcadia also put great emphasis on it. The current political system in China is the single party leading, but the low growth in recent years suspect the future of single party. The policy over the legal framework also becomes another concern because it will cause the political instability if the policies change, Arcadia may suffer the loss. Although, the China has the potential political risks, the political benefits obviously surpass the risks. This means Arcadia Group still could gain the profit in the Chinese market on the political level.
An assessment of Market Size and Market Potential
Chen (2011) pointed out that market size is an important factor because it is a location indicator in the determination of the inflows of FDI is primarily based on the theory of economies of scale. The larger economies can provide more opportunities to realize and discover economies of scale, to realize the specialization of productive factors and to absorb more efficiently the technology which foreign investors want to introduce. According to Jackson and Shaw (2006), China has approximately 40,000 textile and garment manufacturing firms and 24,000 textile mills. China has 15 million people employed in textile and garment manufacture and a forecast growth rate of 17 percent per annum to increase its capacity. In 2005, 20% of clothing purchases by consumers in the UK had been made in China, enough for each person on the planet to have 4 garments from China in his or her wardrobe.
Moreover, China has already become the second-largest apparel market in the world, reaching $110 billion in 2009. Now the household monthly income up to RMB8000 will spend 30% on apparel in the whole year. In 2014, apparel spending in China will reach $200 billion compared with US apparel Sales were $287 billion with only 2 percent increase. (Guild and Hu, 2011) They also found that although economic recession expanded around the world, China’s GDP still increase 10 percent in 2009. Incomes are rising and the middle class is expanding. Therefore, this means the apparel market in China has the great potential because the Arcadia Group’s positioning is the high street brand. The fashion brand targets to the people who afford the high street fashion. In China, the middle class will become the key target customer. However, the consumer preference differs from region to region. Generally, the coastline cities would like accept the fashion trend compared to the middle cities in China. The consumers in China look for the value for money deal. Therefore, it will become a challenge to Arcadia Group. How to build up the customer loyalty will be the key mission. The good trend is that about 70 percent of apparel sales in China are branded. (Guild, and Hu, 2011) Once the high street brand is build up in China, and the customer loyalty is cultivated, the market potential in China could be perceived very high. Young people and middle class households have the strong purchasing power in China.
An assessment of trade and investmentbarrier
According to Ma and Yang (2010), governments set the tariffs rates on proper level to maximize tariff revenue. Import tariff applied by this purpose cannot be perceived as the tariff barriers. Actually only those extremely high and additional tariff as quantitative measures of restriction are the real tariffs barriers. Moreover, Pigott (2002) found that production of textiles and apparel is labour-intensive (where China enjoys a comparative advantage), the lowering of trade barrier would lead to significant increase in China’s output and export of such products. Limitations on China’s export under the MFA are believed to have had a significant effect on the size and growth of China’s textile and apparel industries. The good thing is that the importation quota has dismissed, Chinese apparels companies benefit from it. This means for Arcadia Group invest in China. On the one hand, it could benefit from the low cost in China. Setting factories or collaboration with the local factories is a good way for them. The garments could export to UK market. On the other hand, Arcadia investing in China enables it to enter Chinese local apparel market. However, Zhang et al (2002) claimed that China’s current economic transition and its status as a developing country, the channels for distributing foreign-brand apparel products to Chinese retailer presents special obstacles that foreign investors may not expect. Therefore, the trade barrier in distribution channels becomes the key concern for Arcadia to consider if they wish to enter the Chinese market. The special situation in China requires Arcadia keep a good relationship with Chinese government and local retailers. Thus, the trading barrier may be fade away or the trading cost will decrease. Overall, the trading barrier is not so high.
Although China’s political situation is the policy overpower the legal framework, the current political system still proved to be a strong and stable political party in China. The great market potential showed in apparel industry in China give the confidence for Arcadia to consider the investment in China. Moreover, the low labor cost, manufacturing cost, and garment cost are low compared to other countries. Especially the excessive labor cost compared with the high labor cost in Europe. Moreover, the good transportation infrastructure links the main ports in China, and reduces the overall lead time if the apparel exported to UK. In addition, white collar, young adults, and middle class households showed their strong interest in the high fashion brand. In particular, the success and obsession of HM and Zara in China presents the great potential in the Chinese market regarding the high street brand. Arcadia Group as the fashion leader in UK market has strong brand influence such as Top shop. It’s already become the fashion icon in UK and US. Therefore, it could be anticipated that it become the fashion icon in China as well. The western style has been widely accepted in today’s Chinese market. Above all, it recommends that Arcadia should enter into Chinese market.
The entry mode could be the equity joint venture. The corporation with the local manufacturing firm or the agency company is a good choice for Arcadia to think about. For one thing, the joint venture mode could decrease the manufacturing cost or the operation cost for their professional knowledge in the local market or retail channel. For another thing, the route of joint ventures often moves the enterprises from an export marketing approach to true international marketing approach. (Koshy, 2006) It is easier for Arcadia to access the China’s apparel market. Meanwhile, it will decrease the manufacturing cost due to the fact that the finished products exporting from China to the UK market. If it collaborated with the local agency company, it will increase the speed for example the Topshop reach the local retail market because the local agency’s retail network and relationship with the local government.
It is inevitable to face the cultural difference when a company decides to invest in the foreign country. It is essential to integrate the culture difference and eliminate conflicts arising from cultural difference by organizing and amalgamating the values, psychological states, and behavior modes of different communities. (Zhu and Huang, 2007) Normally, the foreign companies put great emphasis on the internal integration and external adaption, while local companies pursue the company’s performance. Arcadia could make the local company to develop the ventures in a long-term basis. Because the internal integration and external adaption will enable the company develop in the market much healthier. However, the Chinese company may be aggressive to the short-term performance. Therefore, Arcadia could focus on the short term goal setting while developing the long-term vision for the China’s local collaborator.
It is important to make all kinds of assessment if a foreign company decides to make the investment in another country. Arcadia is the leading UK fashion company which owned many famous high street brands such as Topshop, Miss Selfridges. It is obviously the manufacturing cost is relatively low in the developing country. Therefore, China as its low labour and manufacturing cost and its potential market become a good candidate for Arcadia to consider the FDI. The political assessment indicates currently the political system in China is quite stable and suitable for the investment. The market assessment presents the considerable middle class consuming abilities. Not only it is good for developing the new market in China such as open the new stores, but also it is good to the finished garments exportation. The trade barrier assessment demonstrated that if the Arcadia could develop the good relationship with China’s government and local retailers, its distribution channel will be successful and the trade barrier will minimize. Therefore, this report suggested the Arcadia Group adopted the joint venture mode as the entry mode because the local manufacturing factories or the local agencies could achieve the economies of scale on the production, and have a good network over the whole great China. Meanwhile, the Arcadia Group as the western company could put the emphasis on the short term goal and develop a long term vision for the collaborator due to the cultural difference. Thus, the FDI for Arcadia in China’s apparel market is feasible.
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