China
has been an undisputed emerging economic power in the world in the last two
decades. In their quest to expand their businesses, Chinese multinational
corporations MNCs have been observed to have a preference for emerging markets
especially in Africa in comparison to their affinity to the established markets
in Western Europe (Giry, 2004.). The choice of a target market is determined by
the company’s vision and objectives, the level of competition in the markets
under consideration, the socio-political environment of the regions, and the
customer preferences in the markets under consideration. If Chinese companies
prefer to engage in emerging markets in Africa, there must be market
characteristics that suit their companies’ objectives. Chinese companies also
seek to expand by exploiting their government’s strategy for economic dominance
in the world. In the following paragraphs, this paper will explore these
characteristics in comparison with those of developed markets in a bid to
understand why Chinese companies would prefer these African markets to the
European Markets. As Alden, (2006) describes, a typical Chinese business has is
modeled on a strategy heavily reliant on political will, receives financial
backing from the State and is mainly dealing in capital intensive fields such
as mining and the energy industries. The Chinese companies seek to expand into
emerging markets using as a leverage the booming economy in China that enables
them afford the expansion programs and in some cases acquire financial support
from their Government.
Emerging
markets contain markets and cultures that are demanding. The average customers
in these markets have relatively less money to spend on the products in the
market. At the same time, they demand high quality products with their scarce
purchasing power. Consumers also tend to have significantly different tastes
and preferences hence need conformity in the product design from companies in
the market. This characteristic presents MNCs with the opportunity to design products
that satisfy both the price need and quality needs of the market in question. The
levels of unemployment in these markets are also very high. This coupled with
the lower standards of living in these markets enables firms to pay much lower
wages as compared to the developed economies (Alden, 2005.). This enable
companies to cut on labor cost and are therefore able to charge lower for their
products, hence are able to meet the demands of the consumers. The Chinese
company’s have embraced the minimum cost approach to pricing where they bid
lower amounts for various government contracts as opposed to their Western
counterparts (Alden, 2006.). The already cash-strapped governments find it
easier to accept the lower bids hence giving Chinese corporations a head start
in the market penetration in these markets.
Secondly,
emerging markets are deeply fragmented and do not have many brands that can
command a national presence (The Financial Times, 2011.). Hence it is easier to
establish a new brand by winning a local market at a time. They are therefore
able to easily penetrate into the markets by tapping into the power of regional
markets. Developed markets, on the other hand provide no such opportunities.
The markets bear a level of homogeneity at a national level with no outstanding
unique characteristics between local markets. Many brands enjoy a national
presence and the approach to competition among the companies in the economy focuses
on the whole economy. This homogeneity heightens competition between the
already existing companies that it becomes almost impalpable to hope to engage
in such markets directly.
Emerging
markets are also characterized by populations that are youthful and growing
(Li, 2011.). This feature creates opportunities that Chinese MNCs have sought
to capitalize on. The youth have a high affinity for products such as beauty
products, fashionable clothing and textiles and fast foods among others.
Beside, youthful populations have a relatively low brand loyalty and would more
willingly try new products hence providing an avenue for introduction of new
products. On the other hand, populations in Western Europe are significantly in
the middle-age and old age. The population is relatively stable with little
growth late. These population segments are known for their brand loyalty and
are less willing to try new products that emerge in the market. A new entrant
would therefore be met with low demand for their products. Any new entry would
require massive publicity whose cost would be high and with no guarantees of
success. As Cui and Liu (2000) put it, the income levels in emerging markets
also prompts companies to come up with products that are subdivided into
smaller units as is characteristic of products from Chinese companies. The
level of infrastructure development is low in emerging markets. Large portions
of the population are inaccessible by proper roads and lack good sanitation and
electricity.
Weak
infrastructure in Africa, coupled with low GDP in these countries calls for
injection of additional funds through foreign direct investment, or loans from
development partners. The Chinese MNCs have been able to tap into these needs
by obtaining funds from their governments in order to cater for these
infrastructural developments (Giry, 2004.). Moreover, where bilateral
agreements are made between China and an African country concerning
Infrastructural development, the Chinese Corporations stand a high chance of
winning the bids for developing the infrastructure as the low income countries
seek to inspire confidence from the donor country. This gives Chinese MNCs a
relatively stable platform on which to establish themselves in these markets.
These opportunities do not exist in this form in the developed markets. The
governments in those regions have already developed the enabling infrastructure
and are fully capable of meeting any arising infrastructural needs in the
economy. The window of using government sponsorship to enter new markets is
therefore closed in the developed markets. Alden and Davis (2006) have termed
Chinese companies as highly competitive and backed by State that have embarked
on an acquisition drive that captures key resources and market share in the
developing world. Africa, like many other emerging economies is characterized by
under-exploited resources, and these are what Chinese MNCs find attractive. As
is the case with Sinopec, large investments have been made in the Sudan and
Angola oil sectors. CNOOC (China
National Offshore Oil Corporation) has also invested heavily in power
generation and petrochemicals (Giry, 2004.).
Emerging
markets are also known to be rapidly changing. A market will shift within
months quite frequently. These shifts may be as a result of rising incomes and
improving economic conditions (Li, 2011.). Other factors influencing these
changes include government regulations, and changing cultures. These changing
markets present an invaluable opportunity for new entrants into the market who
may come up with innovative products suited to the changes in the market. This
window of opportunity for new entrants makes it easier for Chinese MNCs to
penetrate and trade in the emerging markets, especially those in Africa. In the
mature markets, market shifts are relatively scarce. Unless, in a desperate
case of recession or a calamity of unfathomable proportions, the market tastes
and preferences will remain relatively stable. Companies only survive by
inventing ways of meeting the current needs better, but the opportunity to
maximize on innovations to meet an entirely new market need is not common. This
stabilization becomes a barrier to entry as prospecting companies may not have
the opportunity to enter the markets on the strength of their innovations (Cui
and Liu, 2000).
The
lack of technology in emerging markets also comes as an opportunity for
companies to avail their expertise in the exploitation of resources in low
income countries. Ventures such as mining, excavation and road construction
require high levels of technology that emerging economies may not be able, or
willing to acquire in pursuit of ventures that are not risk free (Alden, 2005.).
This phenomenon opens a new opportunity for the highly experienced Chinese
companies to exploit such ventures as an easy gateway into the emerging
markets. In the developed economies, the level of technological advancement is
enough to enable them optimize on any prospective opportunities without any
need for foreign investments. These countries conduct activities such as mining
and explorations by developing their own technology that enables them to make
use of the natural resources within their reach (Alden, 2005.). The motivation
to allow foreign MNCs to engage in such activities is therefore greatly reduced
hence discouraging the entry of related MNCs into such markets. Existence of
technology also helps the fast movement of information in the mature markets.
Any emerging opportunities are therefore easily made known to a large number of
potential competitors hence making competition stiff for any emerging opportunities
in the economy. In such circumstances, it becomes relatively difficult for a
foreign owned company to grasp the opportunities. The technological gap in
these markets have also enable the thriving of Chinese entities such as Huawei
Technologies, who are readily tapping into the market for items such Internet
provision services, ZTE Corporation, Lenovo, and TLC, all of which are a
growing authority in the ICT sector (Giry, 2004.).
The
Chinese government is known to capitalize on the political difficulties of
African nations as a strategy to strengthen trade between them and the country
in question. China has been known to stand against the sanctions imposed by the
United Nations on trade with certain countries that are deemed to fall short of
various parameters core to the fabric of the United Nations such as human
rights. China has adopted a foreign policy in a bid to promote trade and pose
no political threat to other countries by purporting to not interfere with
their domestic issues. In a continent still largely ruled by individuals who
are either corrupt, or dictatorial, the assurance that a donor country does not
intend to interfere with their domestic issues comes as great relief. Moreover,
many of these leaders facing sanctions usually have no option but to run to the
only partner offering to support them. A case in point is the political
hostility between the United Nations and ruling class in Sudan where China
stood against worldwide pressure to continue trade relations with the Sudan.
This stand seems to have bore fruit with the increasing number of acquisitions
by the Chinese companies Sinopec and the China National Petroleum Corporation
CNPC. China also exploits structural inefficiencies in the decision making
process in the African countries when they need to influence the outcome of a
bidding process. This is done using symbolic and economic diplomacy. High
diplomatic attention coupled with offers for support of various projects and
offers of low interest loans. This subconsciously tilts the bidding in their
favor. In developed societies, the bidding processes are remarkably transparent
and there is little room for manipulations.
Government
regulations also influence to a large extent the decision for Chinese companies
preferring the emerging African markets to the Western European markets. The
regulations on the quality standards of goods in the Western markets are
relatively high and may find many Chinese products wanting. That may not be the
case in Africa. The regulatory framework is weak, and the governments look upon
China favorably in gratitude for the grants and loans received. According to a
publication by China CSR, (2010), about 30% of furniture made in China are
substandard. This figure spreads across the industries with relative equality
and is a likely indicator that improvements need to be done on the quality of
products in order to be able to penetrate mature markets. The labor regulations
in the Western European markets are also stringent and require great expense on
the part of the company. With their low cost approach, Chinese companies find
it difficult to comply with these regulations given the narrow profit margin
they allow in their bidding. This makes their survival in the mature markets
more strenuous, hence their preference for African markets where the level of
protection accorded the labor force by the governments in significantly
lower.
Perhaps
unrelated to the principal characteristics of mature markets, but of significant
importance, is the attitude of the general population towards China. In Western
European countries, China as a whole is regarded with great suspicion and this
reflects on the demand levels for Chinese products. In Mature markets, the
consumers focus not only on the product features, but also on the conditions
under which such products were produced. Reports regarding the human rights
abuses and forced labor in their production facilities gives their products an
undesirable brand hence reducing their demand significantly. This coupled with
claims of unfair trade through currency manipulations reinforce the consumers’
attitude towards them and consequently lower demand for their products. According
to the US Department of State (2008), the Chinese government has been involved
or knowingly ignored the occasioning of arbitrary deprivation of life of its
citizens; kidnappings and disappearances of members of the society perceived to
be independent minded; torture and other cruel, inhuman or degrading punishments;
sexual abuse, physical abuse, and extortion in detention centers; arbitrary
arrests and detentions; denial of fair public trial or judicial process;
arbitrary interference with privacy in homes, and correspondences; highly
restricted freedom of speech; constant interference or tight control of the
media; and restriction on the freedom of assembly among others.
Societies
in Western Europe have evolved over time through political and social upheavals
to establish a highly accountable system of governance that recognizes and
protects the freedoms and rights that they hold dear. As seen above, the issues
listed as violations by the Chinese governments against their citizens are core
to the population in the West (US Department of State, 2008.). These abuses
give the products a bad brand name and the members of the society would
generally shun these products. These makes market penetration in those markets
almost impossible for Chinese firms. The recent actions of the Chinese
government have also reinforced the belief in the disregard for human rights.
China has been known to defy the United Nations restrictions on trade with
countries whose leaders are known to be human rights offenders. With this
record, China has little choice but look up to Africa for expansion of the
MNCs. The disparities in values often leads to diplomatic rows between China
and the Western Europe governments and could be a contributing factor to the
rigid quality standards against which Chinese products are vetted.
It
must also be appreciated that China is an upcoming economic and political
power. Their political influence comes as a threat to the influence of Western
Europe which has dominated world politics for centuries. This gives rise to
hostile political undercurrents between the rival factions. The resultant cold
war between these rivals spreads to the population who characteristically will
often agree with their leaders. Subconsciously, these political undertones
influence the choice of products by the consumers who would view consumption of
Chinese products as an act of disloyalty to their countries (Dickie, 2005.). On
the other hand, Africa which has felt oppressed by the Western powers for
decades seeks to capitalize on the race for dominance by these powers to reap
as much benefits from them as possible, and China, being aware of this offers
help with no ‘oppressing demands’ to the countries who in turn help them grow
economically and politically. Chinese system of governance is radically
different from most civilized societies in the world. Whereas in many countries
government exists at the pleasure and aims to serve the citizenry, the Chinese
system exhibits an all powerful government prone to abuses of power and the
citizenry have no right to sanction any of their actions. This fundamental
difference fuels the seething suspicions between these rival factions.
Having
examined the reasons for the choice of market to invest in, it is important to
have an overview of the mode of strategies that these companies use to grow
into global powerhouses. Firstly, they build commercial success in their
domestic markets, and then gain access to global supply chain using trade, and
thirdly they obtain management and technological skills that enable them build
true multinational corporations (Dickie, 2005.). In order to achieve this goal
they use the following outward business strategies: backward and vertical
integration which involves expanding into related fields as ones already engaged
in, optimizing on the availability of state resources to fuel the growth;
entering into partnerships and joint ventures; and the use of parent-satellite
investments which involves a willingness to use unlisted parent companies while
setting up subsidiaries to acquire resources.
These
expansion efforts are not without challenges. These corporations venture into
international markets with minimal international experience. These difficulties
are heightened by the negative publicity their products have worldwide due to
their protectionist policies as well as pathetic human rights record. Chinese
managers also face criticism of over-concentration on short term profits rather
than investment in long term technological advancement. Their practice of
under-bidding also generates heated criticism as well as their labor practices
which many stakeholders have expressed great dissatisfaction with.
Chinese
corporations have a unique feature in that, as opposed to other corporations
that are purely influenced by investor decisions, the political support is
their bedrock. They mainly tend to capitalize on the resources of State in
order to engage in major infrastructural and capital intensive investments.
Their choice of markets to serve is mainly determined by their nature as well
as the needs of the markets they need to serve. The ease of penetration into
these markets of a crucial factor to take into consideration while determining
which markets to serve. The emerging markets in Africa serves Chinese companies
well due to their need for foreign investment in capital intensive fields such
as mining and road construction projects. On the other hand, the State of
China, which is the major benefactor of these Multinational Corporations find
Africa as an attractive avenue with which to realize economic benefits and an
enhancement of its political power in world politics. African markets
therefore, for the reasons outlined in this paper, becomes a more preferable
destination for investment by Chinese companies than the mature markets in the
Western European regions.
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C. (2005). China in Africa. Survival Vol.
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(19 January 2011)
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CSR, (2011). AQSIQ: About 30% of China’s
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Available: http://www.chinacsr.com/en/2010/01/15/6966-aqsiq-about-30-of-chinas-furniture-products-substandard/
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