China is said to be leading the world out of the recession but MNCs are finding it difficult to set their foot properly in the land of Dragon. In spite of having the largest population in the world and a thriving economy it contributes to less than 2% of sales of global pharma companies like Pfizer,Bayer and Astrazenca. The FMCG giant P&G gets $3 billion from China which is far less than 5% of their global sales , Unilever gets almost $1.2 Billion from China and is running at very thin profit margins. AIG earns more from Taiwan than China which has just 2% of the population as compared to its Mainland estranged brother.
The foreign firms which are doing good are the two extremes of the value chain one being luxury goods, aeroplanes etc and other being Oil, Ores and recyclable waste. But all the firms in between these two extremes face lots of hurdle in spite of Chinese reforms since it joined the WTO in 2001. Several sectors like telecommunications, oil exploration, marketing, pharmaceuticals, banking and insurance all remain either fiercely protected or off-limits to foreigners altogether. To top it all the corruption and redtapism hamper all foreigners in the business.
Event though all the promises to be investor friendly any American business to start in Shanghai with one year licence may take 6 months , this would need clearance from US state department, Chinese Embassy in USA, Mayor’s office of Washington and Shanghai, Local Tax Authority etc .This is very costly affair but still silver lining is that there is a procedure indeed !!. On its entry in WTO China agreed to allow foreign firms to compete to offer booking systems to local airlines,but the promise is yet to be fulfilled.
State run companies get preferential treatment in allocation of land and credit or by easing the bureaucratic procedures for them. Multinational law firms are not allowed to function in China even if they employ Chinese lawyers. Govt also controls the advertisement rates which make the cost of reaching to the Chinese customers far more than that in US and Europe on the other hand rewards are not good as large chunk of Chinese population is poor.
Firms are trying to overcome this hurdle by producing locally in China and they are spending huge amount of money and time in order to setup distribution network and creating brand awareness. Companies also need to cater to the local tastes. Other obstacle faced by the MNCs are the about subsidised competition, restricted access, conflicting regulations, a lack of protection for intellectual property and opaque and arbitrary bureaucracy.
One strategy which helps MNCs to succeed in China is to price high which is a surprise looking at the low profits which they earn from China. The psyche of Chinese people that foreign goods are of better quality if they are expensive is the reason for this strange behaviour.
If China need to stay ahead of its western neighbour ,which is growing at just 2% lesser growth rate and has more liberal political system coupled with economic reforms , She needs to work on liberalisation of its economy and limit the protectionism which may not be totally eliminated looking at the communist regime in China
Paritosh Sharma
Roll No 26, Trendsetters
(Reference The ECONOMIST Oct 09)
No comments:
Post a Comment