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Marketing in the Chinese Mainland

MKT2221

Lecture 1

•Instructor: Prof. Geng Cui

•Department: Marketing and International Business

•Office: SEK101/10

•Office Hour: Wed 11:30-12:00, 2:30-3:30,4;00-5:30, Th 2:00-3:30

•Email: gcui@ln.edu.hk

Lecture 1

Marketing in the Chinese MainlandWhy shall we focus on China?

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From Transition to Development

• Unique history and unmatched dynamism • Once a wealthy country until 1820 and opium wars

• Pains of colonialism and wars (WWII and civil war)

• Failure of experiment with communism (1949-1978)

• Path to opening and reforms

• One of the fast growing economies

• Population surpassed 1.38 billion people in 2016

• Now the world’s second-largest economy

• Amid Brexit and withdrawal of US, China has become a staunch supporter of free trade, globalization and multilateralism!

“Merchants and others come here in great numbers… because it affords a profitable market.”

--- Marco Polo, the Travels (1295)

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From Transition to Development

• Unrivaled complexity• GDP is only about 1/2 size of U.S, population is about 4

times

• Diverse regional economies that range from poverty to prosperity

• About 20% of world’s luxury goods are consumed by mainland Chines

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The Distance Travelled

• Unusual and tumultuous development• Revolution—socialism—Maoist radicalism—gradualist

economic reform—rapid economic growth.

• Economic and political ideologies have changed completely.

• China has been the focus of the world recently� 2001 WTO membership, � 2008 Beijing Olympic Games� 2010 World Expo in Shanghai� 2017 G20 Summit in Hangzhou� …

Back to the past: Opening of China

�Deng Xiao Ping came back to power in1978�The beginning of reforms

�Rural areas, then urban areas and SOEs�The opening of industries to foreign investors

�Maxim’s BJ Airline Food 1980�The Influx of foreign direct investment (FDI)

�Over 500K foreign invested enterprises (FIEs) operating in China today

�China has been the largest recipient of FDI in the developing world and now the largest OFDI from developing countries.

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Example of Opportunities:e.g., the Energy Sector

• 26 of 31 provinces used to have rolling black-outs• Approximately 140 new power plants are under

construction• Construction, environmental, equipment

• Use of coal for total power generation was currently 75%, estimated to go up to 85% over the next seven years• Coal mining equipment

• Initiated a large increase in nuclear power generation, 2 nuclear facilities a year for 15 years

GDP Growth, 1980-2010

Copyright © 2004 by Dragonomics Ltd. All rights reserved.

Avg 1980-2003:8.3%

TiananmenAvg growth 1987-91: 6.2%

Asian crisisAvg growth 1997-2001 : 6.3%

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GDP Growth

Global Trade

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Back to the past: Opening of China

• Deng Xiao Ping came back to power in1978

• The beginning of reforms– Rural areas, then urban areas and SOEs

• The opening of industries to foreign investors

• The Influx of foreign direct investment (FDI)

Milestones of China’s Economic Reform and Foreign Investment Policy (1977-2000)

1979

China re-established its formal diplomatic relationship with the U.S. and passed its first law on Chinese-foreign joint enterprise

1992

Deng visited Shenzhen and pushed reforms further and faster. China and US signed the IPR MOU. Retailing industry opened.

1980

Special Economic Zones (SEZ) established in Shenzhen, Zhuhai,

Shantou, and Xiamen

1984

Fourteen open cities announced.

1989

Tiananmen Square bloodshed. China’s MFN status has since become an annual debate.

1996

Service industry opened: banking, insurance, and trading companies. 1997

Deng died in February. Hong Kong handover to China. Hang Seng index reached record high.Asian Financial Crisis

1993

Jiang Zemin became president and continued the reform. First copyright

law passed.

1986

China passed law on foreign capital enterprise.

1977

Deng came to power and began reform, first in the countryside.

1988

Austerity program began after 10 years of heated growth.

1981

Gang of Four sentenced. Reformers consolidated power.

1987

Anti Bourgeois Liberalization. Hu Yaobang dismissed.

1990

Pudong New Zone opened in Shanghai. Martial law lifted.

1983

Anti Bourgeois Spiritual Pollution.

Open Door

Experimentation

Austerity

Re-alignment

1977

1981

1986

1982

1987

1991

1997

1995

Tariff reduction for 5000 items. Preferential tax treatment ended.

Rationalization

1998

President Jiang visited the U.S. China began bid for WTO membership.

1999

Fiftieth Anniversary of PRC.Reform began in housing, healthcare, social welfare, etc..

2000

WTO schedule in force.Macau reverted to China.

2001

PNTR passed in U.S. Congress. WTO

1998

2001

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Becoming a Normal Country

• Before 1978, economy under socialism were utterly distinctive• Outlier among developing countries: large industries and investment but low

income (due to the large population)

• Big and isolated

• Uniquely shaped by its own history and economic system

• After 1978, getting closer to normal pattern• Open and easier to analyze

• Growth is rapid and persistent

• Investment rates are very high

• The contribution of manufacturing to GDP and to growth is very high

• The increase in China’s participation in the world economy is dramatic

• A word factory, but poor environment

• Severe distortions, need “normal” institutions!

The dilemma of China

• 2nd largest economy, but not a developed country

• An ancient civilization, but a relatively backward society

• Rapid economic growth, begin to slow down

• Free-wheeling capitalism, but with a communist party in control

• Great disparity and increasingly unfair

• Great diversity from post-industrialist metropolis to remote mountain villages

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At the beginning of reform

• Poor infrastructure• Outdated technologies• Poor-performance state-owned enterprises (SOEs)• Low income and demand for foreign products• Bureaucratic interferences• Poor protection of intellectual property rights (IPR)

Now-a-day

• China has truly emerged as a big consumer market

• Made-in-China is evolving

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Significant diversity and Differences

• There are tremendous regional differences and market segmentation due to the local economic, political and cultural factors.

• Difference between rural and city markets

• Different behaviors of old and young generations of consumers.

Sweet Deals and Success Stories

• A plethora of opportunities in various industries attracted by:– High growth rate– A large population– Backward technologies– Unmet consumer demand– Preferential land use, cheap labor and raw materials, and tax incentives,

etc.

• Motorola, Coca-Cola, General Motors, Volkswagen, and nearly all of the Fortune 500 companies

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Failed Casualties

� Everything is possible in China, nothing is easy –McDonalds’ Theorem. – Early entry despite the risks– Rapid expansion and overstretched– Failure to recognize competition– IPR issues– Late payment or non-payment– Contract sanctity– Lack of effective dispute resolution mechanisms– Inconsistent (unfair) application of law

Reasons of Failing

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Challenges of doing business in China

• Inefficient distribution: higher cost• Fast changing consumption patterns• Hyper-competition, e.g., pricing• Over or short supply• Corruption, lack of transparency• Huge and slow bureaucracy with multiple layers

Play by China’s Market Rules

• Expect to respect the “Chinese market,” a market economy with Chinese characteristics

• Domestic laws

• Market conditions change rapidly and often irrationally due to an immature market economy.

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Ten forces forging China’s future

• The great rebalancing

• Infrastructure advances

• The green challenge

• Manufacturing’s makeover

• Rise of the upper middle class

• E-tailing extraordinaire

• Innovation’s new spark

• Financier to the world?

• Investor confidence

• Cultivating human capital

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The China Opportunity

1: Better serve middle-class consumers

2: Digitize to enable new business processes

3: Innovate and move up the value chain

4: Drive operational transformation

5: Go global and strengthen competitiveness

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• https://www.youtube.com/watch?v=eA64uAN-iU0

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People Say

• “China is both a "developed economy and a developing economy - and it is both of those things at scale”

• “China will become the most important player in the world regarding these highly value-added sectors”

• “You have to visit. You have to spend time on the ground”

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Summary of the Video• Rapid growth

• Rapid urbanization

• Cheap labor and huge migration

• Hardworking, aspiring, & confident

• High volume of trade

• Domestic market: goods & brands

• The biggest market but no democracy

• Hong Kong, the freest economy but not democratic

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Leading Discussion

See end of course outline and course webpage!

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Group Project• Chose one product (goods & services), one market/ segment, one local market

to enter• Company/product/brand new (original or extended) to China or local market• From the perspective of a Hong Kong or foreign firm• 1. Country and Market Research

– Environment analysis (socio-cultural, etc.)– Market research: trend, demand and forecast– Identify one market/segment (i.e., location and people) and develop target

population profile (businesses or consumers)• 2. Marketing Strategies and Plan

– Develop objectives and goals (social benefits and impact)– Marketing strategies and planning– Entry strategies– Marketing mix strategies– Implementation with timetable and action plans, and contingency– Sustainable and financially self-sufficient

Examples of Topics

�Examples and sample from previous terms:�Set up a retail store or franchise China (Health works,

Hong Fu Tang, Hui Lau Shan, VS, Kee Wah)�Introducing a product/service new to Chinese

Consumers (Airblade, Arte, Lux Travel)�A diving club in Shanghai (my favorite)�Targeting the nouveau riche (Gold flakes vodka or

Beck’s non-alcoholic drinks)�Social enterprise in China (Dinner in the Dark)�Clean energy and green sources in China (Carpool)

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Add/drop in the first week!

FORM THE GROUP

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