Doing business in China

Doing business in China

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Doing business in China

Macy’s Inc. is a typical American brand with the 4th of July parade and thanksgiving parade started the retail store, a major part of the US culture and history. It was founded in 1858 as R.H. Macy & Co. and sold goods worth $11.06 on their first day of operating but by the end of the first year of operation the company made about $ 90,000 in sales.

Macy’s has played a key role in shaping the retail market industry as we know it today by introducing some of the products enjoyed today world over such as Idaho baked potato and tea bags. The store grew so rapidly that in 1902 it had to Herald Square (covering over a million square feet) and thus becoming the world largest store. In 1994 it merged with Federated Department Stores Inc. and changed its name to Macy’s Inc. becoming one of the largest premier retail stores on the globe. Macy’s is famous worldwide for selling accessories, shoes, men’s, women’s and children’s clothing.

The story of Macy’s is so intertwined with that of the US and the aspects that have made America great are the same that have shaped Macy’s into what it has become today.Macy’s believes in the promise that future holds and is determined to get there, Macy’s also believes in inclusion, integrity and optimism which leads to a stable future of maximum growth and lastly it also believes in takin opportunities that life presents. This aspects and the great history of Macy’s makes me to believe that they have what it takes to expand globally and make inroads in the Chinese market.

According to Dawson(1994) the retail industry is one the largest and the most lucrative there is and the competition is likely to increase due to variety of players joining offering various products and targeting different markets. The Chinese market is of the most attractive due to the economic growth that has been experience over the past decade and Macy’s stores will do well to grab the opportunity.

The entry of Macy’s Inc. into the Chinese market will not be a gamble but a calculated move that is likely to pay because there is already a substantial presence of in China. Although Marcy’s has been largely focused on the US market but in the year 2011, it started an e-commerce services for its customers abroad and many orders came from China. In the year 2012, Marcy’s also bought a minority stake in the Chinese retail company, VIPStore. This is a good starting point for retail store to launch its operations in China because there is brand awareness and people are likely to warm up to it.

China has also enjoyed a steady and remarkable growth of the apparel industry at 10% per year since the turn of the 21st century and due to the increased economy growth one can only expect the retail market to continue growing. Some of the factors that have contributed to the massive growth of the consumption rate and the retail industry is the increase in urbanization, government policies, inflation pressures and the bulge in the middle class that has been experienced for some time now. A study done by consulting firm A.T. Kearney, found that China is the most lucrative emerging market for fashion and apparel industry. This has been attributed to the country’s large population and the increase in disposable income by the middle class and this may go for the next 5 or more years.

According to Zhang et al., (2009) china has the largest labor market in the world, as of the year 2006 the Chinese labor market was about 780 million people and majority of whom had very basic education (about 80%).This strong pool of labor force that is relatively cheap compared to the USA can increase the profit of any multinational that expands to pitch tent in China. In my view this are some of the reasons that should be able to entice Macy’s Inc. to move into the Chinese market.

The Yuan exchange rate

The Chinese currency the Yuan has received lots of attention from many international players and they have been claims that the Chinese governments intervenes to keep constantly low against the US dollar. The Chinese government has been accused of devaluing its currency so that its exports can cost cheaply abroad driving up the sales. The exchange rate of the Yuan a year 6.244. According to Scott (2011) the Yuan is massively undervalued at about 37.5% and this makes the Chinese exports abroad and thus the country enjoys massive trade surplus.

There is a great demand for Chinese goods all over the world and thus you would expect the value of the Yuan to go up but the people’s bank of China has kept a close on the exchange to keep the Yuan constantly low. The Yuan has been undervalued because the economy of China did not grow as fast projected and there was a decline in industrial production and exports also fell.

Another reason for devaluing the currency is that it is a strategy to attract foreign investors to expand their operations into china. This helps China to increase their foreign reserves and they also help to reduce unemployment. Many multinational corporations move into China because they are attracted by cheap labor and a cheap currency and this in turn lowers the production cost. This lowered cost is passed on to consumers in the form of cheap prices while shareholder enjoy improved dividends.

Exchange rate risk exposure

There are three types of exchange rate risks that Marcy’s will be exposed if they expand into the chines market: translation exposure, transaction exposure and economic exposure.

According to Bhola (2008) translation exposure is also referred to as accounting exposure. It occurs when a parent company is forced or obliged to merge and compile its financial report together with that of subsidiaries that maybe operation abroad using a foreign currency. Assets of subs diaries valued in foreign currency must be converted into domestic currency and it the process gains or losses are made due to fluctuations in the exchange rate and this brings risk of exposure to these changes and uncertainties caused by the exchange rate. The translation exposure brings a challenge where one is not sure whether to value assets according to the exchange when the assets were bought or to base it on the current exchange rate.

Economic exposure is another risk that is occasioned by the exchange rate risk. This is a risk that occurs when exchange rate fluctuates, it is associated with cost and demand for goods and revenue. Economic exposure mainly affects business operations and that is why it is also referred to as operating exposure. For instance, if a foreign currency is devalued it lowers the cost of doing business in that foreign country but it also results in lower sales and hence lower profit margins (Cuckee, 2009).

Transaction exposure is the kind of risk that happens when a company makes transactions in a foreign currency (Cuckee,2009) For instance when Macy’s Inc. set up shop in China it opens it itself up to transaction risk because the Yuan is foreign to the retail stores.

There has been a slowdown in the growth of the Chinese economy and this trend is likely to continue. Exports will fall and foreign reserves will go down because of the reduction in foreign direct exchange. This means that mulitnatinationals operating in China will be exposed to various risks prompted by fluctuation in the exchange rate. This exposures can be managed by a number of measures that can be taken by these MNCs.

To reduce the impact of economic exposure a company may take some production measures such as changing the source of supplies and materials. The devaluation of the currency makes the cost of production to go down in the country where does has been done .For instance US companies can diversify their source of supplies by buying from the Chinese economy. Another production decision can be to shift the place the place of production even though that may affect sales. Production to be done in the country with devalued currency because the cost of production will be lower and thus the profit margin will be protected.

Marketing strategy is another way through which companies can beat the exchange rate risks. Marketing strategy can work through geographical diversification where products are marketed in different geographical regions and countries where if the currency is devalued in one country ,they can be still be sold in another country. Market segmentation can also be a great strategy where the MNS tailor makes products for a given target market: high-end and the low-end markets.

Due to the fluctuations in the exchange rate I would suggest that the best way for Macy’s Inc. to shield itself from this volatility is to adopt the forward contracts hedging technique. A forward contract can be defined as an agreement that states that the foreign exchange will be bought or sold at a given stipulated rate in the future. Forward contracts is one of the most popular techniques because it insulates a MNC operating in a given country from exchange rate fluctuations because it lock a company to a particular exchange rate and regardless of the prevailing circumstances that rate will remain. Although they only count about to a period of about 12 months but they play a great role in shielding a corporate from exposure and offsetting future cash flows.

The amount to be transacted, date of transaction and value are determined beforehand but there is no exchange taking place until the actual date. As a rule, with forward contracts the currencies that have a higher interest rate exchange at a discount to a currency of lower interest. The forward contract is good for corporations because it provides discounts on a month-month basis though the cover against foreign exchange rate exposures can last for a long time (a period of about 5 years).

Risk assessment survey

The 21st century is a time for global business and multinationals and with the remarkable growth that China has experience over the past couple of years every MNC wants to have a piece of the Chinese cake. But moving into a new country there are differences that could be cultural, political or language and currency. According to Hofstede (1993) there are differences from one country to another as far business is concerned from one country to another and these differences are magnified when one expands into a foreign market

There are many cultural differences between China and the West most of them are purely cultural in nature. Hofstede (1980) defined as a programming of the mind that distinguishes one group of people from another.

Hofstede explained that there are four culturally-based dimensions: power distance, masculinity/femininity, and individualism/collectivism and uncertainty avoidance and these dimensions are experienced differently in different cultures and they have potential of impacting business processes.

Comparing the cultural dimension scores of china to some western countries such as the United States you come to a conclusion about the stark differences that exist in the two cultures. Beginning with power distance which has to do with power and how people especially the least or lowest of the society accept how it is distributed. Power distance explains how the lowest members of the society accept the unequal distribution of power. That means they can’t challenge or question inequalities or abuse of power. There are no aspirations to climb up the ladder but most people have accepted to remain in their rank

According to Hofstede (1991) that China is higher in power distance compared to most western countries. United States is at 40 while China ranks at 80 in power distance. This also shows that political system in china is more centralized compared to the USA that is much decentralized.

The individualism/collectivism has to do with how people relate with each other. Whether they have an overwhelming sense of ‘we’ or ‘I’. Societies that are individualistic in nature have are only concerned about their immediate family members while societies that have a high sense of collectivism tend to think about the society and be loyal to the community and in return they are also supported. China ranks highly in collectivism and low on individualism compared to the United States

Another dimension is masculinity and femininity. Masculinity has to do with competition and wanting to outdo others and stand out of the crowd while femininity is more interested in liking what you are doing without any ambitions to stand out and be the best that rest, According to Hofstede (1991) The USA is more masculine than China and in the same way the Chinese are culturally more feminine oriented.

Uncertainty avoidance has to do with how people perceive the unknown future they are those who would like to plunge in and take risks but others would advise for caution. Societies have learnt to deal with the future differently, some would like to control and influence it while others would want to let it be and come as it may .China ranks lower than the USA and indeed many western countries as it relates to the uncertainty avoidance score. The Chinese are not great risk takers and perhaps that explains why most of their businesses are small and family based.

According to Hofstede (1991) described above the entry of Macy’s into the Chinese is likely to be made by these responses. The Chinese will not be quick to jump on the bandwagon and shift the allegiance from their retailers to the new entrant. It may take a while before the sales can pick up for Macy’s to begin making profit.

Conflicts may also emerge due to the differences in culture, For instance the Chinese really value relationships and they may use indirect ways of avoiding conflicts but the American directors may want to face every situation and issue in a confrontational manner and that may lead to escalation of conflicts. The might also be a difficult working environment because American directors may want their employees to be task oriented while the Chinese might want to develop good interpersonal relationships first before embarking on tasks.

References

Bhola, N. (2008). Foreign Exchange Rate Exposures.

Cuckee.com (2009). Types of exchange rate risk exposures.

Hofstede, G. (1980), “Motivation, Leadership and Organization: do American Theories Apply

Abroad?” Organizational Dynamics, Summer, pp. 42-46–,

Hofstede. G. (1991) Cultures and Organizations. New York: McGraw-Hill

Zhang, C.L., Zeng, D.Z., Mako, W.P. and Seward, J. (2009) Promoting Enterprise-Led Innovation

in China. The International Bank for Reconstruction and Development / The World Bank.