Pest Analysis for Thorntons Expanding Business in China and India Essay

Company Overview Thorntons, a more than 100 years old UK brand, is now the largest British chocolate manufacturer and retailer in this country. This chocolate specialist mainly targets at premium chocolate market, retailing mostly through both its own shops and franchise. To diversify Thorntons’ business into Chinese and Indian high-end chocolate market, Foreign Direct Investment (FDI) is recommended for a better control of brand image.

Besides, Thorntons is recommended to import UK made highly premium chocolate to retail by its subsidiaries in these two countries. Therefore, this report will evaluate the recommendation through three criteria: market attractiveness, international trading possibility, and FDI feasibility, from three aspects of politics, economics, and socio-culture environment in these two host countries. Further, each factors mentioned below will be scored in the two Recommendation sections (refered to Appendix 1 and 2), with “+5” stands for “very good for entering” and “-5” stands for “very bad for entering”. 2. Analysis for China 2. 1 Economic Environment 2. 1. 1 Chinese Macroeconomic Environment Key words: economic restructuring, increasing purchasing power; appreciation RMB and fluctuating exchange rate To begin with, the recent economic restructuring of China suggests that this country would gradually release its GDP reliance on exporting, and transfer it to the domestic consumption market, leading to a booming future domestic demand in this country.

In addition to that, according to the World Bank (2010), the rapidly developing of Chinese economy has enhanced the purchasing power per capita exponentially. Both factors together could indicate an expanding of the high-end market (The China Observer, 2011), and, therefore, a bigger market for Thorntons as a premium chocolate brand. However, the exchange rate between CNY and GBP is an obvious drawback for FDI. Firstly, the whole depreciating trend of CNY to GBP rate, which has decreased from 10. 24895 to 9. 4642 (Figure 1) significantly during this year (XE, 2012), may lead to a higher operating cost. Additionally, the frequently fluctuated exchange rate between these two countries would bring Thorntons a high risk in the cost of investment financing. 3 2. 1. 2 China Chocolate Industry Key words: potential, per capita is tiny, high-end market dominated The high consumption growth rate of 10-15 percent per year defines the Chinese chocolate market as a relatively potential one, compared with the global market’s growth of less than 10 percent (Financial Times, 2011).

On the other hand, apart from the hopeful future, the current chocolate consumption per capita in China is an extremely low number of 50 grams, differs dramatically form 10 kilograms in UK (china. org. cn, 2008). This probably declares a relatively long payback period for Thorntons’ initial investment. Furthermore, even Chinese chocolate consumption is mainly concentrated on highend market, but four chocolate brands, Mars, Cadbury, Nestle and Ferrero, have occupied 40 percent of this segmentation (Euromonitor International, 2006), suggesting a relatively high entry barrier of Thorntons. . 1. 3 Infrastructure Recent years, government draws significant attention to transportation, as well as the logistics development. A 35000 KM network high standard highway proposed and would be finished in 2020 (Nogales, 2004). Owing to the rising product and service demand, China’s spending on logistics added to RMB 3. 8 trillion, which took 18 percentage of the total GDP in 2006 (KPMG, 2008) (Appendix 3). The fast growing infrastructure provides complete support for retailers and insures their well business performance. . 1. 4 Bank system Nonetheless, the inefficient and defective Chinese bank system, which is dominated by several stated own banks, could be a big problem. Although in 2002 foreign banks 4 are allowed to enter Chinese market, their services are highly restricted, especially on foreign exchange related products. Therefore, if Thorntons wants to invest in Chinese market, it must consider the costs of translations between foreign banks and China’s stated-owned bank. 2. 1 Political Environment 2. 2. Political System and Social Stability Due to the special single political party system in China, the communist party has a more concentrated power to oversee creations of all economic policies, lots of which are largely targeted for its domestic benefits and its population’s interest in general. Thus, it can be a challenge for foreign bodies to participate in the Chinese domestic market competition as Chinese government is extremely strict on enforcing its regulations in the market, and leaving almost no wiggle room.

Apart from the drawbacks, this political system guarantees the social security and stability well, creating a hotbed for investors from all over the world. 2. 2. 2 Government Interventions and Protectionism Key words: less transparent border admission, red tapes, protectionism; improved trading performance Although, as the world’s largest exporter, China’s Import-Export procedures are assessed as fairly efficient (Lawrence et al. , 2012), yet the border administration responsible for the procedure remains subject to irregular payments and corruption.

In addition to that, recently, access to Chinese markets appears to be more difficult now than in previous years, the border administration is somewhat less transparent and efficient, and transport services and physical security do not keep up with the overall development of the country (ibid). 5 From the perspective of government protective policy, a vast majority of the Chinese business regulations have a strong tendency to favor its own companies, including a handful of state-owned corporations.

And for lots of foreign companies who faced with regulations that are often impossible to meet and a climate of overwhelming protectionism, many are now openly considering whether to leave the world’s biggest market (The Telegraph, 2010). By contrast, it seems the Chinese government is making an effort to improve its trading performance. During Doha World Trade Talks in 2012, UK and China walked into a successful conclusion on promoting free trade between the two countries (British Embassy Beijing, 2012).

In this way, the tariff for finished chocolate which has a current 9% duty can be predicted to reduce further (Broadman, 2007). To some extent, the difficult situation for Thorntons can be relief. 2. 2. 3 FDI Stimulus Key words: WTO encourage FDI, FDI mainly in manufacturing Since China joined WTO in 2001, restrictions on inward FDI which are contrary to WTO commitments are removed and foreign owned companies are encouraged to usher in advanced technology and increase export volume (Long, 2009).

However, it cannot benefit Thorntons greatly who wants to invest in China mainly as a market seeker, because Chinese government gives substantial attentions towards manufacturing industry FDIs, rather than the retailing sector FDIs (ibid). Thus, chocolate industry sponsored by foreign investment may not be entitled to benefit from preferential FDI policies (ibid). 2. 2. 4 Intellectual Property Rights (IPR) In recent decades, China has made significant improvements in IPR laws, which helps to safeguard the know-how of Thorntons.

However, this structure has some shortages, such as lack of rules in cutting edge technology and non-transparency on the legal 6 enforcement (Zhao et al. , 2003). Furthermore, the implementation of new IPR laws has had no statistically significant impact on increased FDI inflows. According to Lin (2009),The most effective two variables that determine FDI inflows into China, between 1983 and 2007, are how much the state-owned enterprises’ revenue weights GDP and what Deng Xiaoping’s speech is about, rather than the improvement in IPR.

To this extent, the effect of IPR on Thorntons’ decision about whether enter Chinese market is limited. 2. 3 Socia-culture 2. 3. 1 Cross-culture Management Barriers Key words: culture difference, communication blocks; Manageability in Chinese culture The culture difference between UK and China results both threats and opportunities for this FDI project. To get a better view of the UK and Chinese culture difference, a five-dimension model, Hofstede’s Model (Figure 2), is employed to measure five basic drivers behind the culture in both countries.

Five dimensions concerns: Power distance (PDI), Individualism (IDV), Masculinity / Femininity (MAS), Uncertainty avoidance (UAI), and Long term orientation (LTO). Culture Difference Analysis 118 China and UK 80 89 66 66 25 20 30 35 25 PDI IDV MAS China UAI LTO United Kingdom 7 Different culture creates barriers for management activities in the host country, China. Thus three out of five factors, namely PDI, IDV, and LTO, vary dramatically in these two cultures, indicating that the UK and Chinese cultures are highly different, and therefore conflicts could occur because of different norms between UK employers and Chinese employee.

Besides, the original motivation mechanism applied in UK would also fail. Furthermore, communication blocks become severe and may add costs to the daily operation of businesses, resulting from the fact that English has not been widely used in China yet. Contrarily, although culture difference means difficulties for management, these three distinctive properties of Chinese culture could reduce them and even result in competitive advantages of a FDI company.

First, attributed to the Confucian ideology of obeying, 80 score in PDI means that the inequality between employers and employees is fairly acceptable to the Chinese people. Thus the Chinese employees are relatively easy to be governed. In addition, the 20 score in IDV and 118 score in LTO both implicate that Chinese employees are highly collectivist and long term oriented, demonstrating that they are relatively loyal to their employer company, are passionate about the company’s long-term profits rather than themselves’. . 3. 2 Consumers’ Behaviors Key words: elusive local consumer behaviors; xenocentric preference Thorntons would encounter difficulties if it cannot fully understand Chinese market as a foreign company. The first cultural concern of selling chocolate in China is that there has not been a tradition of eating chocolate. Further, China is such a big country that the market structure, the consumers’ behaviors, and the distribution method can all differ even in two nearby provinces.

However, a foreign chocolate brand could gain more competitive advantages in China compared with domestic chocolate firms. To explain this unique phenomenon, according to Li (n. d. ), there has been a stereotype among Chinese consumers that a foreign brand name has to be of good quality, expensive, and all those who purchased these products were regarded as rich. 8 2. 3. 3 Guanxi Guanxi is a Chinese word defined as relationship, but it means more when people use it in business related issues. As mentioned in the Hofstede’s Model, Chinese people are extremely Long-term oriented.

Therefore they usually would not choose the most efficient way of doing business, but, instead, would give priority to establishing a long-term benefits relationship with the business partners. As a result, whether Thorntons can build good relationships in China, both with local partners and even the governments, becomes a crucial factor when evaluating this FDI proposal. 2. 4 Recommendation on China market Based on the Appendix 1, generally, Thorntons is recommended to enter China. First, this market is proved to be attractive enough in all of the three parts above, with a totally high score of +7.

Thus in a secure political system, both the high potential economic environment and the friendly consumer behavior suggest a profitable market to tap into. Second, both politics and economics part balance a weakly positive score to support a slightly liberated trading environment. Finally, although the FDI feasibility is undermined both mainly because of no supporting FDI stimulus and big culture gap, the need for a better control of brand image encourage Thorntons to enter as through FDI. 9 3. PEST Analysis for India 3. 1 Political Environment: 3. 1. Political System and Social Stability Key words: Economic Reform, Complex political and social structure, Instability Since the economic reforms in the early 1990s, Indian government has actively liberated foreign investments continuing in promoting itself to be a more competitive and efficient marketplace during this democratization. (referenceforbusiness, 2012) However, the fractious nature of India’s coalition system remains to be a major concern of foreign investors like Thornton’s. Due to the heavy presence of regional oppositions, the central administration is forced to slow down the procedure of liberalization. Gupta, 2010) Moreover, a change made in government layout could easily put the previous administration’s effort in vain (Gupta, 2010). With high frequency conflicts in political, economic and those between different races and religions caused by its complex social structure, India has an extremely low rank (Figure 3) and high cost (Appendix 1) on terrorism. Thus these factors all suggest an unfriendly and unpredictable political environment and threaten foreign direct investors (Wu, 2007). 10 3. 1. Government Interventions and Protectionism Key words: High tariff, strict Labor Law; The most considerable barrier for Thorntons is that India is one of the countries with highest tariff rate of 12. 6 percent, in which case Thornton’s would face cost pressures (Kanth, 2008). Moreover, with a high corporation tax rate of 35 percent for local companies, foreign corporations suffer 8 percent higher than domestic ones do (Gupta, 2010). However, India impresses in the non-tariff trading barriers. Customs-related services cost is lower than the world average, for example, the cost to import of India is $1070 per container compared with $1668. in 2011 (Figure 4). Moreover, recently, though entrance is relative easy, the exit barriers of FDI are still not as flexible. The recent labor law threatens FDI by restricted layoffs of workers. In addition to that, the protectionism of labor unions also causes big troubles by extorting enormous sum of money from companies (Gupta, 2010). 3. 1. 3 FDI Stimulus Key words: FDI policy for single brand 11 Despite a traditional protectionism of the retailing sector, the government of India continues in amending the existing regime of FDI policy to improve liberalization in the retail sector.

In Thorntons’ case here we only focus on single-brand retailing. The recently issued FDI policy Press Note No. 4 ( Press Information Officer, Press Information Bureau, 2012)gave permission to 100% foreign owned single-brand retailing, and liberalized restrictions on the entering requirements of non-resident brands. (Gibsondunn, 2012) This provides an opportunity for Thorntons to take better control of its high-end image by having full ownership of its India operations. 3. 1. Corruption India’s rank in transparency continues in dropping from 2009 in the Transparency International’s Corruption Perceptions Index (CPI) for Selected Countries, and ranked 95th in 159 countries in 2011 (Lawrence, 2012). Critically speaking, although corruption could mean challenge to the country’s economic growth and increases in cost of multinational firms (Euromonitor, 2011), it could also positively mean a flexible way in doing business to some extent (Hopkin and Rogriguez, 2007).

This may be helpful for foreign investors, “struggling with extensive federal and state regulation, infamously slow and rampant bureaucracy, administrative controls and burdensome paper works” (Hopkin and Rogriguez, 2007). 3. 1. 5 Intellectual Property Rights (IPR) The final indispensable factor, Intellectual Property Rights and Regulations of India brings opportunities to do FDI. Unlike the case of China, India has already wellestablished its IPRs protections at all levels in statutory, administrative as well as judicial (Yahoo, 2008). . 2 Economic Environment 3. 2. 1 Indian Macroeconomic Environment 12 Key words: stable economic environment, good retailing market; volatile foreign exchange rate With a GDP growth rate maintaining at approximately 6 percent in the past few decades (MFGI, 2010), India has been gradually transitioning towards a more stable market-based economy since the economic reforms in the major fields such as investment, trade, financial sector in 1991, creating a more favorable climate for the foreign investors (OECE, 2009).

The stable economic environment and effective economic system have strengthened the confidence of foreign investors and increased the opportunities for them to invest. Moreover, the retailing market in India is estimated to be US$ 450 billion and one of the top five emerging retail markets in the world (CCI, 2012). This large and promising retail hub will provide Thorntons more chances to expand its international investment.

Nevertheless, there are certain problems acting as roadblocks to stop the foreign investors from venturing in India. India’s foreign exchange rate has always been volatility. For example, the Rupee has been fluctuating against UK sterling on heavy outflows since last year (Figure 5) mainly due to the side-effect of the crisis in Europe as well as the high and stubborn inflation rate (Cn. advfn. com, 2012). Hence, the risk brought by the exchange rate fluctuation may not be a positive sign for Thorntons to invest. 3 3. 2. 2 India Chocolate Industry Key words: highly potential chocolate market, emerging high-end chocolate market; unorganized distribution routes Although the current annual chocolate consumption is only 300gm per capita, which is only 5 percent of UK, the urban chocolate confectionery consumption growth rate is more than 35 percent this year (Merinews, 2012). The fast-booming market size has made India’s chocolate industry more attractive to the foreign investors.

In addition to the potential of the whole Indian chocolate market, the premium chocolate segmentation is just emerging, where other famous chocolate brands like Ferrio and Lotte are just gradually beginning to move its attention towards the potential Luxury Chocolate market in India (KPMG, 2010). Therefore, Thorntons should tap into India’s market quickly to gain more opportunities in the high-end chocolate segmentation.

Furthermore, independent and unorganized retailers have accounted three forth (Figure 6) of this under developed confectionery market in India (Datamonitor, 2010), in which case, therefore, Thorntons would more easily build an impressive brand image and gain competitive advantages with a well-established distribution system. 3. 2. 3 Infrastructure 14 It might be a great challenge for Thornton to invest into India’s market, while India’s unsatisfactory infrastructure is a major reason that will reduce the attractiveness for long-term foreign investment.

India’s roading remains one of the worst in the world, while power cut has becoming a common thing (Rishabh Gupta, 2010). Being a retailer, Thorntons would require a massive use of transportation and power. For example, Due to India’s high temperature, the storage of the chocolate usually requires the usage of fridge, the frequently power cut will bring a huge problem for Thorntons to maintain its chocolate’s quality. 3. 3 Social-culture 3. 3. 1 Cross-culture management barriers Key words: culture difference;

Manageability in Indian culture To analyze the problems and the opportunities that may occur in Indian market, the Hofstede’s Five Dimensions model is again employed. It shows India and UK have similar index in MAS and UAI, while significant disparity from the dimensions of PDI, IDV, and LTO (Figure 7). India has a higher score 89 in IDV than 48 of UK, indicating an adverse factor that top British managers and India employees from different background are unequal in norms; the former focuses on individual achievements, while the latter put priority on group performance.

Besides, misunderstandings and inefficiencies might be instigated by the discrepant beliefs between Indian and British. 15 Culture Difference Analysis India and UK 89 77 66 48 35 56 40 35 25 61 PDI IDV India MAS UAI LTO United Kingdom Contrarily, similar to the case of China, large score difference in IDV and LTO provides Thorntons an opportunity in Indian market. Low level of 48 in IDV and high level of 61 in LTO reflect that Indian employees are more willing to work within group and keep loyalty for the organization in a long term, in which case the stability of Thorntons human resource could be ensured to support its development. . 3. 2 Communication convenience 267444 Population of Total English Speakers (Thousand) 125226 88690 76177 79000 59600 46272 29398 28101 25246 Total English Speakers(000) 16 Communication language is another considerable element. As a historical colony of Britain, Indian, by now, is the second largest English-spoken nation (Figure 8), nearly 10 percent of which population is English speakers (The Times of India, 2005). Through fluent communications within organization, misunderstanding and inefficiency bringing by discrepant culture background could be reduced to some extent. . 3. 3 Consumers’ Behaviors Key words: satisfiable preference In contemporary India, people generally regard western brands as premium and high quality (The Times of India, 2007). This brings Thorntons, a high-end segmented UK brand, a good opportunity to enter this market. Further, with a steadily growing consumption rate of 30-40 per cent per annum (Pinto, 2010), the India high-end market can be a fertile soil for Thorntons. However, the large initial investment should be taken into account since the premium chocolate segment is still small to the whole chocolate industry. . 4 Recommendation Based on the evaluation in Appendix 2, India is also suitable for Thorntons to enter. Initially, the India is highly attractive with a high score of +14 mainly because of its economically potential market. Second, besides, though both the bad economics and politics environment for import-export activities threat Thorntons’ trading business, they can hardly offset the benefits that this attractive market may offer. Finally, all the economic, political, and cultural factors balance a delicate result to support this FDI proposal. (3288 Words) 17

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