Challenges That Multinational Corporations Are Facing in the Chinese Market - Case Study Example

Over the last few decades, globalization has accelerated at a rapid pace and many multinational corporations have attempted to expand their business globally to capture a larger market share and boost up its revenue. China with over 1.31 billion population and around 9.6 million square kilometer has become an attractive land for many multinational corporations. For example, Siemens in 1982 had set up a representative office in Beijing; Coca Cola operates a wholly owned enterprise in China. Foreign investors had launched over 40000 new Companies in China in 2003. However, there are many challenges which a multinational corporation faces while operating in China such as human resource management, cultural differences, negotiation problems, political and governmental problems etc. which had affected the smooth functioning of Multinational Corporations in China. China’s rapid economic growth in the recent past had presented various opportunities and challenges for Multinational Corporations. As the number of Multinational Corporations had increased rapidly in China, challenges and competition level had also emerged at an increasing rate. Multinational Corporations Management needs to constantly focus on developing new practices and strategies in order to sustain their business in China and taste success at a faster rate. Challenges in the Chinese market can indeed help Multinational Corporations to strengthen their position in the China economy. This assignment is a complete discussion on the challenges faced by Multinational Corporation while operating in China. Problems like attracting and retaining managerial staffs and how multinational corporation deals with such issues have been studied in details. A complete analysis has been done of the political and legal requirements to operate in China. Cultural difference problems have been discussed in details (Ahlstrom, Foley, Young & Chan, 2005). In brief the assignment highlights the challenges for Multinational Corporation to operate in China and also provides recommendations to deal with the same to ensure smooth running of the business in an international environment. The view of Multinational Corporations have changed greatly ever since Chinese economy opened Foreign Direct Investments, larger giants took these as an opportunity and companies like Coca Cola, Siemens, 3M, Volkswagen explored the Chinese market. These corporations enjoyed in their initial undertakings as they were given relaxation in the tax structure and had to pay half the tax rates paid by the local players and no duties on the capital goods imported by them. Even in the 1990’s Multinational Corporations enjoyed and was welcomed by Chinese governments with open arms. However even since when China joined the World Trade Organization both Chinese government and Chinese people have changed their perception about MNC’s drastically (Gao & Tian, 2004). MNC projects are now scrutinized with higher vigilance to see their national interest. Taxes had been equalized between the MNC’s and the local players and Chinese companies had been able to deliver products of the quality delivered by MNC’s at a lower price. It is because of this challenges that Toshiba fell from its position of China’s leading laptop company to 3rd position .There had been many challenges which the Multinational Corporation has to face to operate in China. The same has been discussed as under: Mistakes in China are often costlier than in any other country as Chinese people gets involved in the discussion at a rapid pace. Consumers fill the billboards and chat rooms with their comments and opinions in order to show their distress in any mistake made by MNC’s which affect them. Huge expectations from MNC products and services offered quickly shapes into disappointments and disapprovals. It is to be noted that it has an effect on both social prestige and moral integrity (Tsang, 2004). Thus, a losing face has a lasting shadow effect on the MNC’s current status and its future operations in China. Global behavior standards should be observed to mitigate this risk to a considerable extent. When operating in China it is important to have a complete knowledge of the Chinese laws and regulations. Many MNC’s fail to do so and incur huge loses. For example Samsung Corp. incurred huge loses as it fouled to understand Chinese regulations as a local distributor used the title “No.1” in its In-store promotional material which was not amused by the Chinese government (Fryxell, Butler & Choi, 2004). Further it is to be noted that phrases like “No.1”, “best” etc is strictly prohibited in Chinese advertising. Over the past few years Chinese Government had punished over 30 Multinational corporations for violating the countries environmental laws and regulations. It is believed that domestic companies are more likely to violate Chinese Governmental laws and regulations and Multinational Corporation instead of violating the laws should try to set examples for the domestic companies in following the laws and regulations. Thus it is of prime importance to make compliance with the Chinese rules and regulations, it is always advisable to the MNC’s to have a local knowledgeable advisor to guide the organization in the local compliance of any such stringent laws. Multinational Corporations are facing serious challenges in China due the negative impact of the economic slump on their head office attitudes. Most of the head offices of MNC’s are located far away from China and have linguistic problems in communicating in Chinese language, further managers employed by MNC’s in China have very little experience of the geography, culture and information about China which creates huge problems in the smooth flow of the business operations. Economic forces of both micro and macro level seriously affects the day to day running of the business. With demands of MNC’s products and services falling in competition to the local players MNC’s are facing a severe challenge to operate successfully in the Chinese market. Chinese inflation has risen sharply in the recent past which had increased the cost of living and also increased the cost of production thus lowering sales and profits. Human resource management has become of the most serious challenges in China for Multinational Corporations. MNC’s in the past followed a standardization of human resource management which operated on coherence strategy and coordinated the business practices to achieve efficiency. However the same was engraved with difficulties as international dimensions became more and popular. Diversity and complexity of cross-nation and cross-culture creates problem for Multinational Corporation when they apply international standardization human resource management as different people round the globe differ in their culture and behavior towards a common operation of an organization (Weisert, 2001). To overcome this problem MNC’s begun to localize employment in the operating country. Human resource plays the most important role in the long term development and sustainability of an organization. While China with over ¾ of the World’s population, labor supply is found at ease however, Multinational Corporations are seeking huge difficulty in recruiting and retaining qualified staff in China mainly due to factors such as differences in social environment, short of talent, compensation and benefits etc. thus, we find that human resource management can be rate as one the most difficult challenges for Multinational Corporations operating in China (Walsh & Zhu, 2007). Apart from Human Resource Management, cultural difference is another big challenge for Multinational Corporations operating in China. Culture plays an important role as it influences the international operation of business in China. People in different nations differ greatly in their culture, tradition and attitude towards a business. Multinational Corporations in order to operate smoothly in China needs to completely and thoroughly understand the Chinese business culture. China has been dominated by three traditions namely Confucianism, Taoism and Buddhism over a thousand of years and these traditions or philosophy are the roots of Chinese culture and plays an important role in business behavior and decision making process of the Chinese people (Fang, 2006). Cultural differences is indeed a huge challenge for Multinational Corporations operating in China since the Chinese culture is very unique and different from other western countries. Guanxi is another term widely used in Chinese business culture which actually means relationship between or among individuals for creating obligations on a continuous basis for exchange of favors. Guanxi in the recent past had become very popular and is widely used by Chinese people in relation with their business operation in China (Ghauri & Fang, 2001). Thus, Multinational Corporations in order to taste success in the Chinese market has to learn the concept of Guanxi and apply the same in its business operations in order to remove the cultural differences to a considerable extent and make the Chinese people comfortable in their workplace to boost up business and generate higher revenue from the same. Application of double standards can invite huge problems for Multinational Corporations operating in China. Local standards can in no means be ignored over global standards and concerns. For example both Colgate- Palmolive Co and The Procter & Gamble Co were criticized to a considerable extent for applying double standards in Chinese market by selling toothpaste containing Triclosan which is an antibacterial component and may cause cancer under certain circumstances. Colgate brands trust and equity dropped from 88 percent to 9 percent in a week times for applying such double standard which ignored local standard to a considerable extent (Dunfee & Warrant, 2001). Thus Multinational Corporations must take into consideration the local standards and take sensibilities and views of Chinese customers when operating and developing standard in China. Multinational Corporations in order to successfully operate in the Chinese market should apply the mantra of think local and act global. Thinking local in a sense means to develop business models as per the local market and Multinational Corporations should try to approach Chinese market with respect for local culture and norms (Dessler, 2006). Recruitment of local managers shall be helpful to achieve the same as local managers instinctively know the local requirements and norms of the local government in a better way. Multinational Corporations should try to keep not only their hands and feet in China but also their head in China in order to operate successfully. However, Multinational Corporations should also act globally by keeping their business behavior in line with the global standards and requirements. During the early phase Multinational Corporations enjoyed the strategy of profit stripping but after the Chinese Government entered into an agreement with The World Trade Organization there was a complete change of the mindset of the Chinese people and government towards the strategies adopted by the Multinational Corporations in China. Multinational Corporations in China had come under direct scrutiny of the Chinese Government for their profit recognition practices (Chiu, 2005). As per the Chinese Tax Authorities more than half of the MNC’s which claim losing money on their Chinese operations use Transfer pricing mechanism to drain profit out of the Chinese without actually paying any taxes on them. Multinational Corporations treat Chinese marketplace more as a lab as new technologies are tested in China at a lower cost. However, the same is to be noted that in the recent past the Chinese Government had framed new laws and policies for the same where norms of Transfer Pricing Mechanism and technology testing in China had became more stringent and demands higher spending thereby increasing the cost of production in the company and making the operation of Multinational Corporations a challenging task in the Chinese market (Chen & Wilson, 2003). Multinational Corporations are facing a tough competition from the local counterparts and other small foreign based companies who are setting up their manufacturing units in China and providing similar services and products as offered by the larger MNC’s. Recently Nestle, the world’s leading nutrition and Wellness Company had to shut down one of the three ice cream factory in China due to tough competition in the ice cream market from the local competitors. Multinationals often adopt a one size fits all approach which no longer satisfy the requirements of Chinese markets owing to rising competition in the Chinese environment (Gao, 2006). Technological innovation is one such field where the local counterparts had successfully covered a larger market base than the Multinational Corporations and posing serious threats on the survival strategy of many Multinationals operating in the Chinese environment and workplace. To sum them there are number of challenges that Multinational Corporations are facing in the Chinese market in order to operate successfully and book profits for the corporations. Major problems such as Cultural differences, emerging competition, Human Resource Management, economic problems, governmental issues had already been discussed in the above paragraphs. There has been a complete change in the mindset of Chinese people toward the Multinational Corporations which had negatively impacted the smooth flow of business by MNC’s in China. Multinational Corporations in order to achieve success in China needs to seriously look upon its existing policies and strategies and develop new set of codes and norms in line with the local requirements and also try to infuse global standards in their behavior towards the Chinese people. Multinational Corporations should try to change their head office attitude towards the Chinese people and inculcate Chinese cultural needs and requirements in their workplace to gain in confidence of the same. Multinational Corporations can succeed in the long term by grabbing the still existing opportunities in the Chinese market and overcoming the challenges that are now so widespread in China economy. Multinational Corporations had to show acute awareness and sensitivity towards the local laws and culture and demonstrate that they truly understand the needs and requirements of the local consumers. They must demonstrate that they understand their exemplar roles and set benchmarks for others to fight against the rising level of competition in Chinese economy. References Ahlstrom, D, Foley, S, Young, M. & Chan, E.S. 2005. Human Resource Strategies in Post-WTO China. Thunderbird International Business Review, 47-3, 263–285 Chen, S.H. & Wilson, M. 2003. 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