Free Sample: Goods entry into the Chinese market paper example for writing essay

Goods entry into the Chinese market - Essay Example

Oroton was founded in 1938 in Sydney and built their success on luxury products with a relaxed style and high quality. Today, Oroton sells a wide range of products, from various clothing to jewellery and accessories such as wallets and even ties and umbrellas. We selected Oroton due to an interest in whether or not an Australian fashion label would succeed overseas in a market with other larger global brands.

As Oroton has already successfully expanded into Hong Kong, Malaysia, New Zealand and Singapore (The OrotonGroup Annual Report, 2012) it makes sense that it would continue its expansion into additional foreign markets to continue this success. China has been chosen as the next market to enter for three key reasons. Firstly, neighbouring to Hong Kong means some of the liability of foreignness will have already been overcome, secondly due to the increased buying power of the emergent middle class and finally because of the strong market growth of the fashion industry. 2. 0 Analysis of Orotons Resources and Capabilities

The Oroton brand is one of the primary value adding components of the company. This is because of the image that they have built up over the last seventy years of business, and the loyalty that their customers have developed towards the brand. Through social media and fashion recognition Oroton have been able to expand their brand awareness both domestically and internationally. The brand itself is inimitable as there is only one Oroton brand, and the style of the products and the underlying quality underneath should not be underestimated as being one of the key items in Orotons success.

The distinctive metallic mesh is the soul of the brand; this special design was born in 1951 and has become a symbol of elegance, luxury and sophistication (OrotonGroup Annual Report, 2011). Whilst styles can be copied, the style whilst combined with brand recognition adds a great deal of value. Another key component of value adding is the staff within Oroton. From high quality designers to driven sales staff within the stores the staff play a key component in driving the success of the brand. Oroton encourage staff to contribute their ideas to the group and view change and challenges as an opportunity to grow.

“We want to create a company where one person can and does make a difference” (OrotonGroup, 2012). This attitude which is embedded in the organizational culture of Oroton, and the staff who promote it add strong value to the group. Ezquerro (2011) explains that the domestic management of Oroton within Australia over four years from 2006 to 2010 cut back on staff, reducing from one hundred and fifty down to fifty in a focus to cut costs. This was combined with further operational analysis on how they could increase their profit.

These hard management decisions provided profit where other companies were struggled. This shows that domestically the management were adding value that other companies were not, and can be considered as strong competitive advantage. There Oroton group also strong finances, enabling them to have a twenty million bank facility to support future growth plans (OrotonGroup Annual Report, 2011). Whilst this adds value to the company, it is neither rare nor inimitable. Oroton plans to use this capital to develop future products in the future. 3. 0 Analysis of China’s External Environment

Chart 1 below shows the GDP of China has moved from 1,640 billion in 2004 to 7,298 billion in 2012 (adapted from The World Bank Group 2012). This clearly shows the fast paced growth of the China economy. Chart 2 (adapted from National Bureau of Statistics of China 2012) indicates the average GDP growth rate has shifted from 2. 1% to 2. 5% from 2011 to 2012. Chart 1 Chart 2 Despite a small dip in the second quarter of 2012 the China GDP growth rate is beginning to recover. Also despite a small drop in the demand of luxury goods recently retail sales have grown steadily.

Consultancy firm McKinsey & Co predicted that by 2015, China will be the largest luxury goods market in the world (China Daily, 2012). Tariffs have been a main factor affecting the development of China’s luxury market. After joining the WTO in 2001 China committed to reduce tariffs. Despite this people still prefer to buy luxury goods overseas because the existing tariffs create higher prices. A survey of 20 luxury brands sold in China shows prices are 45% higher than in Hong Kong and 51% higher than in U. S (Lan, 2011).

After 2001 tariffs for jewellery were 20%-35%, clothing 14%-20%, watches 11%-23%, and bags 14%-25% (WTO accession China tariff schedule 2003). Despite an announcement on June 15th 2012 from Yao Jian in the Ministry of Commerce that a further cut would occur on import tariffs the Ministry of Finance has said this has not been planned as yet. (Yu and Wang 2011) China’s emerging middle class consumers are based from their relatively high-income level, which is around $12,500 per year. In addition, this group of consumers account for 10% of the disposable income in China’s urban areas (Farrel, Gersch and Stephenson 2006).

Although high tariff will have little effect on leading consumer groups, who can afford the higher prices it may reduce the consumption of the middle-class. This however creates an important market niche for Oroton, to introduce a high quality series of goods that is priced cheaper than other products that can be afforded by the middle-class. As China is a high-context culture (Lewicki, 2003) people prefer to focus on the collective instead of the individual. In luxury goods this creates a strong sense of in-group behaviour by owning the same brand.

This also shows their individual economic strength and social status. Additionally with the changes in policy and rapid economy growth, Chinas consumers have become more open minded to foreign influences. This has affected the younger generations, who spend more than prior generations Technological developments have also helped the economy. Specifically, more credit cards have provided the opportunity for increased spending. This has also made shopping more convenient through paying online; this in turn promotes the development of the online stores.

Research shows that at the end of March of 2008, there are more than 104. 73 million credit cards in circulation in China (Shanghai Daily, 2008). Research by MasterCard (2008) also shows that credit cards used on luxury goods purchases has increased by 50%. 3. 1 Analysis of China’s Fashion Industry The current rivalry among luxury brands could be considered high. The top three fashion brands in the China are Louis Vuitton, Chanel and Dior. Over 80% interest for Dior is specifically related to beauty. However, for Chanel, beauty represents less than 50%; fashion and accessories is around 40%.

For Louis Vuitton 94% relates to fashion and accessories (Luxury society 2012). Other brands such as Gucci and Armani also share Chinas market. These brands can be considered “ultra-luxury” to Orotons “luxury” so whilst competition is high, it’s factored at the top of the pyramid. The threat of new entrants is low due to some existing barriers. Firstly there is a high capital investment as most luxury goods require high quality manufacturing techniques and many brands need to be designed with limited editions by specific designers. Secondly is brand awareness.

Because of Chinas culture, very few consumers will buy an unknown brand with high price. Thus, it is important to a new entrant to gain the recognition and fame when entry into a new market. This requires a great deal of advertising. The last barrier is the difficulty of distribution. In Chinas luxury market, the main mode to distribute is within stores located in shopping malls. Luxury brands need to establish their own store which is an expensive process. The bargaining power of suppliers is low, because most luxury goods are imported.

However, with more luxury brands recognizing the advantage of low cost labour and materials they have shifted the manufacturing to China. This has led to a slight increase, though the competition between companies to be a producer of luxury goods creates a healthy relationship between these local suppliers as a luxury brand that did not want to import could shift between local producers. There is no doubt that consumers of luxury goods have strong purchasing power. As mentioned before the power of brand image will drive high sales.

Loss of status among the public could have a large impact upon the sales of a brand, so the consumer becomes a double edged sword. Keep their interest in the brand and you have a strong purchasing side, lose them and sales could suffer dramatically. In China the threat of substitutes comes from horizontal competition and can be defined as low. This is because most people regard luxury goods as a status symbol. Consumers want to show that they own this brand. Because a brand is something that people aspire to own, once your brand has become highly sort after it becomes hard for a competitor to try and substitute their products over yours.