Globalization and Market Access, Big Players in the Chinese Market - Coursework Example

Running Head: Globalization and Market Access Globalization and Market Access Name Course Lecture Date Introduction Globalization is a reference to the closer integration of global economies across the economic, technological and cultural dimensions. However, other analysts describe globalization as the global spread of capitalism. In essence, it allows the most powerful nations and their companies to operate across the world with no limitation by national boundaries. Globalization involves a global exchange of knowledge, ideas, labour, products and services. In recent decades, the internet and other communication technologies have accelerated the closer integration of global communities. In addition advances in transport technology also make it easier for people to travel across the world. Globalization is also associated by two socio-political forces of the 1980s. The collapse of global communism and the fall of the Berlin wall meant that people formally under controlled governments were free to integrate with the rest of the world (Munck, 2002). Furthermore, Third world countries stopped relying on the idea that they could import as little as possible and substitute exports with local alternatives (Abeyratne, 2004). With the failure of import substitution countries that had suffered from this economic structure started to open up their economies to international trade. It is claimed that globalization is a scheme that increases the opportunity for large multinationals to exploit opportunities in foreign markets. Others see globalization as an imposition of capitalist trade philosophies that favour big multinational business over smaller rivals (Aslam and Azhar, 2013). In contrast, the supporters of globalization contend that closer integration of global economies has led to economic progress for all even for the small companies. According to Petras and Veltmeyer (2001), since the early 1990s per capita income and manufacturing output has risen in every country. On the other hand, nations who have opened up to trade have become more prosperous and wages have increased in these countries significantly. However, many notable scholars link globalization to the rising power of multinationals which have been the main beneficiaries of globalization as they have been able to obtain cheap labour and gain unprecented access to markets. This is more so for privileged multinationals from rich countries which get the support of their governments in exploiting opportunities in foreign countries. Globalization is consolidating Market Access for big players only According to Bennett (2003), the two pro-globalization organizations; the World Economic Forum and the World Trade Organization cater for the welfare of big multinational players and enable them gain greater market access. Critics of globalization criticize the misconception that globalization is beneficial for global welfare. They argue that political and intentional decisions at the highest echelons of power were made to advance the interest of transnational companies and enable them establish global supply chains (Bennett (2003). Multinationals have been able to increase profits by seeking the cheapest sources of labour across the globe. This explains the large scale transfer of manufacturing and other operations by western multinationals to Asian countries. Rising Multinational power According to Aisbett (2007), globalization and free trade has enabled multinationals destroy small businesses which do not have the capacity to compete. Multinationals have been known to offer substandard products cheaply undercutting local producers and lowering standards of living in the local economy. Worse, multinational base their production where labour is cheapest and export their products to other markets leading to loss of employment in the destination economy. In countries where production is based, multinationals are known to automate production and offer peanut wages further worsening the unemployment situation. Petras and Veltmeyer (2001) argue that, multinationals are aiming to create a one-world economic order where they dominate buying and selling. Multinational power is enhanced by the deliberate production of substandard goods which have short lifetime. These products have to be replaced shortly after they are bought making the consumer a slave of the producing business. According to Weber et al (2007), quality, low-cost production is discouraged as this decreases the reliance on multinational production. Furthermore, the perception that foreign products are superior leads consumers to mistrust smaller firms (Popa, 2012). Deceived by multinational trade organizations and agreement, consumers allow multinationals into their local economies. Instead, of reaping the benefits of free trade, local labour is exploited at slave wages and small players in the business sector locally and internationally destroyed. Multinational corporations are able to mass produce and thus offer products at cheaper prices. They often flood local markets with mass produced goods which hurts small local businesses (Abeyratne, 2004). Furthermore, they are able to source cheaply in free trade zones in some countries and due to economies of scale. Chinese steel manufacturers and solar panel manufacturers have been in the news in recent times amid acquisition they were dumping cheap steel and solar panels in the European and the US market. Moreover, large Chinese multinationals sometimes receive government subsidies enabling them offer manufactures prices at very cheap prices sometimes below the market prices (Nolan, 2005). In some, markets where these Chinese manufacturers operate, they drive smaller players out of the market therefore consolidating their position in these markets. Policies on market entry have been shown to favour big multinationals over small players which find it impossible to comply with entry rules (Teng, 2004). In China and many East Asian countries, market entry can only be gained by merging or acquiring local businesses some of which are state owned. The amount of FDI investment needed to acquire or merge with local businesses whose scale is also huge is far above the reach of small players. Therefore, only multinationals that can afford massive foreign investments in foreign countries are able to exploit opportunities created by market liberalization in foreign investment destinations. China’s Outboard Foreign Direct Investment China’s outboard FDI can be used as a good example how some privileged Chinese multinational are taking advantage of market liberalization all over the world. Analysis of Chinese outboard investments cannot be made without mention of the Lenovo Group Limited; one of China’s biggest technological giants. In 2004, the Lenovo group acquired the PC division of American PC manufacturer IBM (Rui andYip, 2008). This deal had the effect of consolidating Lenovo’s share of the PC market and currently Lenovo ranks first in the sale of PC’s around the globe. Furthermore, the deal with IBM opened up PC markets in the North America where Lenovo only had a small presence. Recently, Lenovo has been involved in multi-billion mergers and acquisition further consolidating its global market share. Other Chinese firms including Sany Heavy Industry Co., Ltd, Huawei Technologies Co., Ltd and the Haier group Co. Were also able to consolidate market access through mergers and acquisitions in the US market (Finkelstein and Cooper, 2012).Furthermore, the technological firms are able to establish after-sale service operations in destination countries forcing former small service partners from business. Most Chinese outboard FDI is dominated by big Chinese state-owned multinationals who have the financial muscles to finance multi-billion investments. Recently, China CNOOC (National Offshore Oil Corporation) bought the US operation of Nexen Energy for $3.2 billion (Roberts, 2014). Chesapeake Energy based in Oklahoma City is also operating a joint venture with China’s Sinopec, consolidating the latter’s share of the US energy market. Sinochem International owns a substantial stake in Wolfcamp Shale of West Texas. Another giant Chinese multinational Shuanghui took over Smithfield a US pork processor for an estimated $7.1 billion therefore consolidating its access to the US market (Roberts, 2014). This preview American businesses mergers and acquisition with Chinese multinationals show that market opportunities arising out of globalization remain beyond the reach of small firms. Unfortunately, these big players make huge profits from operations abroad which expand their financial muscle. With huger financial clout, these big players are able to threaten smaller rivals at home and in some cases end up buying them out further consolidating their market share. China’s FDI policy favours big Players China considers inward FDI investment as critical to its efforts to sustain high levels of economic growth (Sally and Sen, 2005). However, China is very careful to ensure that most of the profits made by FDI’s remain in the Chinese economy. Since, the 1980’s China policy on market entry requires foreign entrants to form joint ventures or mergers with local companies (Sally and Sen, 2005). However, this policy position is not unique to China as similar mechanisms of market entry are widely preferred by governments in East Asia. In China, foreign businesses can operate as Sino-foreign joint ventures, Cooperative businesses, Joint exploitation, Foreign-funded share-holding companies and rarely exclusively foreign-owned enterprises. All these form of businesses favour big players that are in a position to negotiate and acquire stakes and co-operation with Chinese establishment in various economic sectors. Big Players in the Chinese Market The market consolidation effect of merger and acquisition deals can be shown some of the high profile antimonopoly review conducted by the Chinese Antimonopoly body (MOFCOM). MOFCOM aims to protect small players from mergers and acquisitions that have the potential to consolidate market access for merging companies and lead to market monopoly (Lin and Zhao, 2012). However, MOFCOM has been criticized for only blocking one acquisition and only approving 20 acquisition on conditional clearance in its entire lifetime (Humber and Suzuki, 2013). The blocked acquisition involved soft drinks giant Coca-Cola intended takeover of Huiyuan Juices in 2009. In 2013, MOFCOM accepted the conditional acquisition of Gavilion as US grain trader by Japanese Grain giant Marubeni. Both Gavilion and Marubeni have substantial operations in the Chinese grain business (Humber and Suzuki, 2013). Marubeni’s takeover of Gavilion doubled the former’s grain handling capacity to 55 million metric tons clearly showing the market consolidating power of acquisition Humber and Suzuki, 2013). It also gave Marubeni access to an additional 140 grain loading sites and access to Brazilian, Australian, Ukaranian and American grain sources. Consequently, this consolidation of two major grain suppliers was a big blow for smaller competitors across the globe. Fortunately, MOFCOM moved in to prevent Marubeni from gaining effective contol over the Chinese Soybean import market as a result of the deal. MOFCOM agreed to approve the merger, if Marubeni and Gavilion promised to conduct their Soybean export business in China separately and independently (Humber and Suzuki, 2013). However, this is just one of the few instances the regulator has moved to prevent two big players from consolidating market access and pushing out less privledged players in the market. In most cases, smaller business are not so lucky and have to contend with the strength of merged local industry giants which merge with equally strong multinational operators. Big Players Consolidate Market Share in retail Industry The Chinese retail industry was one of the sectors to be first opened up for foreign investors. It provided access for major retailers to open their operations in China amid very strict regulation (Hendrickson, 2001). However, after China’s accession to the WTO the retail market restrictions have been removed allowing new foreign retailers to operate in China. Acquisition and mergers with local businesses provided ways for the big retailers like Carrefour, Best Buy, IKEA, Tesco to enter the Chinese market. Mergers with local businesses have enabled the retailers compete with Chinese rivals and consolidate the market share of the local retailers they join up with (Teng, 2004). Following the 2001 Chinese entry into the WTO, many mergers of Chinese retailers with big international players has occurred (Teng, 2004). For example Five Star Appliance was acquired by American electronic retailer Best Buy giving the latter access to the Chinese market. With the financial might of Best Buy the organization formerly known as Five Star appliances gained more financial clout to compete with other small players. Another high profile acquisition was that of Legou which Tesco bought and including rights to operate in China under the Legou brand name. Recently, Tesco announced that it was entering into a joint venture with a Chinese state owned enterprise to operate its retail chain in China Through these local connection and the leverage of local brands multinational retailers have gained significant market access into the Chinese retail market where foreign retailers account to more than 18 per cent of the market. It is estimated there are over 2,800 international retailers in China showing the obvious competition for customers with small players. According to Siebers (2011), mergers and acquisition remain a very attractive option for foreign retailers as they can be able to rapidly expand in foreign nations. For example, an international retailer who merges with a local business with over 200 stores establishes an immediate presence in locations they were not operating. If for example, the international retailer had 7 stores in one city and the local one 10, both businesses would have 17 stores in the same town. This way the merged business can crowd out other smaller retailers. Furthermore, expansion in scale enables the merged businesses take advantage of economies of scale which may mean that they are able to offer products at cheaper prices therefore driving smaller businesses out of the market. Notable Mergers and Acquisition In April 2001, China’s biggest meat processor the Shuanghui group was acquired by Rotary Vortex limited which is partly owned by Goldman Sachs (Athreye and Kapur, 2009). The Group was sold for 2.01 billion yuan ($257.9 million. In the same year, The China National Bluestar (group) Corp bought the sulphide and organic silicon businesses of the Luo Sulphadiazine Company of France. The deal included distribution channels, production equipment and patents. The deal enabled the Chinese company become the third largest producer of organic silicone; it produces an estimated 420,000 tonnes of organic silicone every year (Athreye and Kapur, 2009). The market consolidation strategy is obvious as China National Bluestar (Group) Corp had acquired the world’s second largest manufacturer of animal nutrition supplements for $518,7 million. Conclusion This paper discredits the misplaced notion that globalization is a force that avails opportunities for all. Instead it argues that globalization systematically and intentionally enables a fеw рrivilеgеd рlаyеrs to соnsоlidаte their shares of glоbаl mаrkеts. Globalization allows multinational organizations to flood local markets with low-cost substandard goods that drive local manufacturers out of business. Chinese outboard FDI and Inboard FDI shows evidence of how privileged multinational using mergers and acquisitions consolidate and sometimes monopolize markets. Chinese acquisitions and mergers in the US include multi-billion deals that small players cannot afford. However, Chinese emerging multinationals are able to afford these mergers and acquisitions as they have government support and revenue earned in other international operations to aid them. On the other hand, access to the Chinese markets by international entities is mainly restricted to mergers and acquisitions. Unfortunately, as in the former case only big players can afford to acquire Chinese businesses in order to take advantage of the market opportunities available in China. Evidence of market consolidation through mergers and acquisition is shown by the Chinese antimonopoly body’s blocking of Coca-cola merger with Huyuan Juices which could have squeezed out smaller players from the Chinese market. Marubeni’s takeover of Gavilion doubles the former’s grain handling capacity to 55 million metric tons, and is also clear evidence of the market consolidating power of acquisitions. The report goes on to analyze how international retailers have rapidly expanded in China through acquisitions and mergers with local Chinese businesses. Furthermore, the essay brings into light Chinese and international businesses that have become the highest ranking in their industry segment through mergers and acquisitions. For example, Lenovo, the Shuanghui group and China National Bluestar (Group) Corp owe their dominant position in global markets to markets consolidation initiatives enabled by liberalization of global markets. References Abeyratne, S. (2004). Economic roots of political conflict: The case of Sri Lanka. The World Economy, 27(8), 1295-1314. Aisbett, E. (2007). Why are the Critics so Convinced that Globalization is Bad for the Poor?. In Globalization and poverty (pp. 33-86). University of Chicago Press. Aslam, M. H., & Azhar, S. M. (2013). Globalisation and development: challenges for developing countries. 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