Question

Starbucks in China

1. Describe the environment in which you will operate and the critical operational factors that you must consider and how they will affect your company.

2. What are the workers going to be like?

3. What kinds of reception do you anticipate from local governments, suppliers, and distributors?

Answer 1

1. The environment in which Starbucks will operate in china:

• Political factors play an important role in defining the factors which may affect the long-term competitiveness of Starbucks Company in a certain nation or sector. Starbucks Company invests in convenience shops in more than twelve countries and subjects itself to all kinds of international and network risks. The quality of such a diverse specialty restaurant. China is considered one of the largest economies in the world. It's also a permanent UNSC member. It is also by population the fourth largest country in the world. The capital of China is Beijing.
  The Communist Party of China is the People's Republic of China's founding and governing political party. Although China enjoys a secure political environment, there is a lack of political freedom. The degree of transparency of the political system in China is criticized by many observers.
  However, it must be remembered that China is placed as a major destination for foreign direct investment (FDI) with a stable political climate, cheap labor, and improved infrastructure. In 2016 China, was unstoppably the third biggest FDI destination in the world and received a record-high amount of 139 billion US Dollars in FDI. In 2018, it boosted FDI to a volume of $135 billion.
  China is a permanent UN Security Committee member, as mentioned above. He also belongs to the World Trade Organization (WTO), APEC, BRICKS, BCIM, ASEAN + and the G20. It keeps good diplomatic ties with many major global trading and political powers. His ties with the US have, however, been a long time really difficult. Recent protests were also a cause for concern in Hong Kong.
• Economic factors: The second element to be concerned with the PESTEL study of China is the economic environment. As already reported, China is the world's second-largest nominal GDP economy. But on a purchasing power scale, it is the largest economy in the world. In the late 1970s, several economic reforms began, allowing China to grow fast. The country has moved to a market-based economy from a central organized and annual GDP growth (World Bank, 2020) has reached almost 10 percent.
  It should be remembered, though, that China has faced several difficulties as a result of economic growth. Some of the problems facing the country in order to maintain economic prosperity include high inequalities, accelerated urbanization, and environmental damage.
  The availability of cheap labor is one of the factors that many global companies produce their goods in China. Cheap jobs for China are a big source of comparative benefit, but some critics claim that the country's fast economic development often contributes to high wage growth. The wage level in India was three times more than in Argentina, Brazil, and Mexico between 2005 and 2016, and now is higher. Does this imply that "cheap labor is over in China?" Well, there is a divide in analysts and no agreement on this subject.
  China is a leading creditor abroad. Over the years, foreign direct investment entered numerous countries. Some of the nations where Chinese participation has been noteworthy include the U.S., the United Kingdom, India, Pakistan, Malaysia, Thailand, the United Arab Emirates, Brazil, Chile, Senegal, Chad, and Niger.
  The regular corporate income tax rate is 25 percent, but for eligible companies working in government-encouraged sectors, the rate is lowered to 15 percent. The levels of income tax for people vary from 3% to 45% (PwC, 2020).
• Social factors: With a total estimated population of 1,4 billion, China is the world's most populous nation (World Meters, 2020).
  This is a huge consumer goods segment. The average level of wages has increased over the years and is leading to higher consumption expenditure. It must also be noted that many China's citizens, such as people from other developing economies, are striving to demonstrate their achievements by status symbols such as luxury cars and new mobile phones and designer clothing. There is no question that rising consumer spending and ranking indicators give both domestic and foreign firms great opportunities.
  China has a literacy rate of 96.4%. The nation has also achieved remarkable strides in poverty reduction, as has impressive progress in literacy. In the last five years, over 68 million citizens have been lifted out of poverty, according to a report published by the Leading Group of the Chinese State Council Office of Poverty Alleviation and Growth. It is worth noting that China is seeking, by 2020 (Brand 2017), to eradicate absolute poverty. But still, China is faced with some social challenges. Aging societies, for example, are a focus region. So how should the nation fulfill the incredible labor demands? Most analysts believe China will raise the rate of birth and welcome more foreign workers.
• Technological factors: With 829 million subscribers, China has the world's largest online population (CNNIC, 2019).
  In China, for starters, there are some big tech giants. To list just a couple, Baidu, Alibaba and Tencent. These and some other companies are so strong, that many large companies from other countries in China have struggled.
  China has a dream of becoming a regional science and technology pioneer. In 2015, the government initiated the plan for' mass business and creativity.' The goal of this program is to encourage entrepreneurship in China. It also plans to help the country transition to an innovation-driven economy. The opportunities for domestic and foreign firms, especially in the scientific fields and technology, are not difficult to imagine.
• Environmental factors: The rapid industrial growth of China has seriously impacted its natural environment. China's current problems include pollution of water and air, industrial waste, deforestation, climate change and biodiversity loss. It should be noted, however, that a range of policies has been introduced by the Chinese government to tackle environmental concerns. Definitions of programs involve decentralizing municipal accountability and promoting public participation in protecting the environment but are not restricted to.
• Legal factors: The legal environment is the last thing to be discussed in the case of China
  In China, there are a number of laws regulating industry and jobs. For example, the PRC Labor Law 1995, the PRC Labor Contract Act of 2007, as well as numerous administrative regulations (Chen 2019) are controlled by labor standards, workplace remuneration and benefits, labor disputes, and other important topics. FDI in the country is governed by the Catalog of Industries for Foreign Investment Guidance. FDI is categorized into four categories: promoted, limited, prohibited and authorized.
  384 businesses are included in the promoted band. Manufacture of farm machinery and processing of fruit and vegetables are two of the sectors in this category. 35 companies are in the limited band. In this area, power grids, banks, and financial firms are some of the sectors that build and operate. 28 businesses are protected by the banned category. Some of the sectors in this area cover air traffic control, mail services, and international express letters collection. The category permitted contains sectors not protected by any of the definitions listed above (Chen, 2019).

Operational Factors to be considered:

• Will foreign investment restrictions apply to the targeted sector?

To U.S. and foreign companies(' companies'), the first factor to consider is whether they are entering into a sector which restricts or forbids foreign investment. The Chinese government controls all Chinese foreign investment. In order for businesses to see what segment type their market is: promote, limited or forbidden, the 2015 List of Sectors of Foreign Investment Guidelines ("2015 Catalogue") should be checked. Putatively approved industries not included in the list of 2015. The degree of approval needed for foreign investment will be calculated by the classification of sectors.

The physical presence of companies in China for the restricted company group may be limited options. They can not set up a solely foreign-owned company for some areas of foreign investment or control in China, e.g. building and film operations (see Section 4 below for more definitions of "WFOEs"). However, if businesses wish to create a formal presence in China they should set up a representative office or develop a joint venture with a local Chinese partner.

• Location:

  The position of a sales office or warehouse in China can often be very significant. The big country is China. For a particular industry, different geographical areas in China offer a different consumer market. Likewise, entire cities were "constructed" to serve the pharmaceutical industry in certain industries such as Wuxi (outside Shanghai). Usually, these cities have universities and other major infrastructures (such as international airports and new highways). In fact, there may be mandates for local governments, in particular industries, to promote such growth areas and foreign investment. Industries must do their proper care and market research to make full use of these local opportunities.

  The Chinese city-level system needs a basic understanding. Beijing, Shanghai, Guangzhou, and Shenzhen are the first-tier cities in China. Features second-tier cities such as Tianjin, Chengdu, and Xiamen, hubs for provinces or coastal cities. Third-leading towns (sometimes inhabited by over 5 million) are typically medium-sized towns of each province. Every community form has its own market advantages and disadvantages. The city's population density, economic growth, GDP, transportation systems and historic and cultural significance are several factors that decide the city in China.

  Companies will conduct sufficiently detailed market analysis to determine which region best fits their company and growth strategies. We should be conscious of which global sector has the greatest growth potential and where its rivals are in China. For instance, cities of secondary level have been increasingly attractive in recent years due to lower cost of immobilization and labor costs and the high potential growth in the consumer market.

• Intellectual Property Protection Strategy:

  Until creating a physical presence in China, businesses should have a well planned IP strategy in place. While IP security has improved in China over the years, significant risks for foreign companies remain, especially due to the widespread IP theft and intensified antitrust compliance over recent years. Due to these and similar issues, businesses should consider consulting a local Chinese IP attorney strongly before initiating operations in China and should draw up an effective IP protection plan.

  Companies will seriously consider licensing their trademarks and patents in China as part of such an IP protection scheme, in order to ensure legal protection against IP violations. At a more practical level, stringent internal procedures and acquisition guidelines should be enforced both within the company and with your Chinese business associates to access and share sensitive information.

• Type of the Chinese Business Entity:

  In general, the Representative Office is a three-part business enterprise to use for physical activities in China. In order to assist with their business activities, businesses should create a representative office in China. A representative office with less complexity than other types of businesses can be set up relatively quickly. A regional office in China, though, has a very limited scope. It is limited to certain tasks only, including contractor location, quality control reporting at Chinese factories and other liaison operations. However, when seeking to establish a representative agency, corporations must have existing businesses for at least two years.

  For businesses not willing to spend considerable time and resources on the Chinese market a representative office is a great option. Setting up such offices will also be the first phase towards joining the business as it allows businesses to study the market, create local linkages, observe local industry practices, and fully understand the consumer and individuals. This is also a choice for businesses with a presence in China, for example, a US Medical Institute, but with companies in the limited or forbidden industries.

  Joint Venture. Joint Venture. A joint venture is a Chinese company with at least one international and one Chinese shareholder, and a Chinese shareholder is not an entity but a business. A joint venture allows companies to leverage existing business ties, distribution channels, manufacturing networks and local market information from their local Chinese counterpart. Although a joint venture provides exposure to many services and market channels of a local partner, it is not a choice that is attractive for many businesses. Second, it is complicated for many companies to find an acceptable local Chinese partner. Second, there are often differences in handling styles, market cultures, IP and local rules and procedures between parties within a joint venture.

  For companies that already well know a local Chinese partner and wish access to a strong Chinese market place and other business opportunities of the local partner, a joint venture is a good option. As described above, a joint venture is also an option for companies joining a controlled sector which is excluded from the establishment of a WFOE (see next segment for WFOE discussions) by the 2015 catalog (see paragraph 1 above).

  A wholly-owned foreign company(' WFOE, Wolf-ee'). A WFOE in China is a private limited liability company with non-Chinese owners owning half of the equity. A WFOE is a favorite choice for companies in China that are searching for a physical presence. This is advantageous as the parent company retains full control of the WFOE which contributes to better decision-makers, as is often the case with a joint venture, without the complexities of inherently contrasting management style or market ideologies. In comparison to a joint venture, WFOE also offers better security of IP rights in China.

  When determining if a WFOE should be formed, an organization must first test if a limited sector enters China. A WFOE that not also be permitted (see Section 1 above) if the market is limited. Furthermore, the organization must then decide whether the capital requirements levied on WFOE can be fulfilled. The minimum capital needed for the creation of a WFOE actually depends on its company's existence. The WFOE has no minimum licensed capital requirements for a company in consultancy, export, retail or records. Nevertheless, a minimum requirement of recorded capital is still needed in certain other sectors (e.g. banks). Nonetheless, it is often important or expedient for companies to declare any minimum recorded WFOE capital in order to mitigate the enforcement of the international monetary control policies of China.

• Trade zone in China:

  Where are FTZs and what? The right to set up a physical presence in free trade zones ("FTZs") has recently been extended to the US and other companies. Now, China mainland has three FTZs: the Shanghai Free Trade Zone, the Tianjin Free Trade Zone, the Guangzhou Free Trade Zone, Fujian FTZ, and the Shanghai Free Trade Zone. Mainland China has FTZ. Five FTZs are now functioning in China.

  Shanghai FTZ is mainland China's first free-trade zone, officially opened in September 2013. It covers an area of 120.72 km2 originally comprised of the free-trade zone of Waigaoqiao, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area, and the free trade zone of Pudong Airport. In April 2015, Shanghai Jinqiao's Economic and Technical Growth Zone and Zhangjiang High-Tech Park were extended to include the Shanghai FTZ in three new areas.

  In early 2015, China introduced another three new FTZs following the establishment of the Shanghai Pilot FTZ. Tianjin FTZ, Guangzhou FTZ, and Fujian FTZ are the three existing FTZs.

  The Tianjin FTZ in the north, including Tianjin Port, Tianjin Airport and the Industrial Park of Binhai New Area, is the only free trade area in Northern China. It occupies a surface area of 119.9 km2. The Guangzhou FTZ includes the New City of Nansha, with a total surface area of 116.2 km2 in Guangzhou, Shenzhen Qianhai and Zhuhai Hengqin New Area. Fujian FTZ is an FTZ adjacent to Taiwan including industrial areas of Xiamen and Pingtan, with a total area of 118,04 square kilometers, in the provincial capital of Fuzhou.

  How do I have to use FTZs? The Shanghai FTZ pilot is a trial area for economic and policy reform, which involves easing off the exchange cap and liberalization of the RMB interest rate. In order to enable foreign investors to be rendered more competitive in the city, the Shanghai FTZ has implemented many reforms by creating a listing of 18 services sectors, including medical, finance, telecommunications and value-added. A "poor investment register," which sets out limits or prohibitions for certain markets, is introduced in relation to foreign investment. This strategy has already been accepted by losing the Chinese Government's historically stringent rules and giving company owners more choices.

  Although the Shanghai FTZ proposes several innovative reforms aimed at attracting foreign investment, introducing such reforms has been a slow process. Most firms in Shanghai FTZ have not realized the business profits as high as it hoped. Many do not know how the Shanghai FTZ operates specifically since no comprehensive regulations were published in general. According to a new report by the Wall Street Journal, "an annual poll recently conducted by more than 370 U.S. Chamber of Trade leaders in Shanghai showed that nearly three-fourths of the respondents" claimed the Shanghai FTZ has no economic value. Nonetheless, several businesses think it is wise to set up today's small physical footprint in Shanghai so that the proposed changes can be strengthened on that day.

  The three newly established FTZs are targeted at carrying out economic reforms in China and at establishing a more competitive foreign investment climate as the Shanghai FTZ. The negative effects are many as those of the Shanghai FTZ. It remains to be seen whether the current Shanghai-FTZs will introduce the proposed changes in a more efficient and effective way. Industries should watch how these FTZs are evolving, but it will take China time to implement their expected reforms.

Work culture in China:

Overtime: One of China's excellent characteristics is that people are normally used to working overtime, which is often rarely paid. This can often confuse Americans who work typically 9 hours a day to receive an extra charge. To be clear, the Chinese government has a rule allowing people to operate just eight hours a day. Overtime is permitted for 36 hours. Such rules are, however, widely ignored, especially in the technology industry, where 12-hour cycles are the norm.

Alibaba's founder member Jack Ma also agreed with the strict working hours, claiming the firms shouldn't even be able to work 12 hours. Recently, an executive pushback has been introduced to reduce working time. However, because technology market leaders fear that their global dominance may be affected, no progress has been made. Therefore, if you work in any technology field, you may have to work longer than usual.

Deep relationships: Once you hit your Chinese office, everyone should know you well. Co-workers frequently hang out, drink, eat at the restaurants or even frequent other locations during office hours. You can not be too self-centered by not joining in their invites. So you better make sure in a collectivist culture that you are not seen as egotistical or prudish. Chinese residents are strongly connected to their communities and during significant events like the Chinese New Year, many of them are welcoming you to their family home.

Contractual flexibility: There is an iron-clad in the United States. The other party can find it challenging to attach such provisions or change current contractual agreements. Nonetheless, people in China are happy to be versatile. If you consider anything to be applied to a deal, talk with the other side. You would probably agree with the improvements if what you suggest is fair.

Napping is okay: This could be a shock for you— napping in China is deemed all right. One could think that a company mandating a 12-hour day could be stringent about how time is spent. Yet employers tend to be comfortable with workers sleeping because they are treated as a compromise to allow them to work for long hours.

Government connections: As an authoritarian state, the government maintains an inventory of all entities, corporations, and others. You have to build ties with officials so that you can't get embroiled in any trouble in a company with which you work. Don't ever challenge any authority, as in the future they will strike really painfully. Every crooked or condescending officer in America can be tried and tried.

The behavior of local governments, suppliers, and distributors are already mentioned previously.