Final Country Entry Business Report- Jose Echevarria (1)

International Business 401

Spring 2016

Country Entry Analysis Report: China

Jose Echevarria

Professor Nehrt

1

Jīngshén Jiànkāng(精神健康)

“Promoting Healthy Spirits Every Second of Everyday in the Middle country”

Table of Contents

Mission Statement, Vision Statement and Business Concept……………………… Page 3

Industry Analysis……………………………………………………………………… Page 8

Country Analysis……………………………………………………………................. Page 16

International Marketing……………………………………………………………….. Page 29

International Management…………………………………………………………….. Page 39

International Financial Analysis……………………………………………………... Page 47

Final Recommendation………………………………………………………………. Page 53

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Mission Statement, Vision Statement, and Business Concept Report

Executive Summary

The purpose of this report is to give shape to my product idea that I wish to make

successful in China. The Traditional Chinese Medicine market is largest in its country of origin.

Innovative technologies allow for more creative ways to develop unique forms of the products in

this sector. Using information about the Chinese market and what I have come to learn about the

popularity of Traditional Chinese medicines, I justify my points with facts found in my research.

I also state my sales goals for the first year. Many may argue that the TCM market is

oversaturated and that people have already established their loyalty. Also, buying traditional

Chinese medicine from a foreign company may be unattractive to the Chinese consumer.

However, China is modernizing in many ways and that paves the way for acceptance of

innovative products. The increased receptivity of foreign goods in cities like Shanghai may make

this product a popular one among health conscious consumers of TCMs as well.

Mission Statement

We strive to provide easy and convenient ways to compliment daily health habits through

our carefully developed nutrition and health product. The goal is to provide an alternative to

nutrient consumption for people that that keep themselves active throughout the day. We will

deliver products that satisfy various aspects of daily health and nutrition. Utilizing the latest

innovative technology available we will demonstrate that natural medicines can be applied in

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newer and more efficient ways. Our values include knowledge, health and aligning our

organization with consumer concerns.

Vision Statement

“Our vision is to bring the greatest healthy alternatives to our customers for every second

of everyday”

We wish to help customers live joyous lives with the first step being physical health. We

know it is unlikely to literally provide customers with health every second of everyday however

we use this as our ultimate goals to excite customers and motivate our team.

Nutrient Health Patch

The product idea is a relatively small, circular (2.5cm) sticky patch that delivers

medicines into the bloodstream for a variety of health purposes. Such purposes include

cardiovascular health, immune strength, and vitality and memory retention. The product sticks to

the shoulder and through a porous permeable membrane the contents are able to be absorbed by

the skin and into the bloodstream.

Value to Customers

Our product can be worn throughout the day in order to compliment healthy habits. For

customers that are constantly active, our products will give them a chance at maintaining good

health even when they do not have the time to properly consume nutrients. The product will

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work best on the more active individuals because perspiration further increases nutrient

absorption due to the opening of the pores.

Advantage Over Competitors

Some of the top competitors in the TCM industry are Infinitus, CR Sanjiu and Yunnan

Baiyao (www.portal.euromonitor.com). Infinitus, CR Sanjiu and other companies use top-notch

manufacturing technology to develop products into capsules and other forms. No other product

in the Chinese market is as convenient as our patch could potentially be. There is no data

available of products that provide the benefits of TCM for customers through the means that we

offer. Our product delivers the medicine through the bloodstream throughout the course of a day

rather than trying to digest the product all at once. The problem with digesting the product is that

it does not get fully used before the body removes it as waste. By distributing the product slowly

throughout the course of a day, customers are getting the full value of their money. Each patch

comes with a standardized dosage of medicines.

Target Consumers

The market of choice for this product is China, which is also the largest market of TCM

products. China’s growing middle-class (and disposable income) makes it an attractive choice

for foreign investors. We will focus on Tianjin and Shanghai because of their populations being

among the top three in China. Due to the affects of the One Child Policy, China’s late lifers

population is among the largest demographic (250 million citizens over the age of 60). Naturally,

the older aging population increases the demand for health products. Spending in health products

increased by 55% from 2009 to 2014 and it is estimated that it will grow by 50% from 2015 to

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2020. Distributing as much of our products through online sales would also be ideal in China,

since over 60% (about 600 million) of the population has Internet access. Online shopping is also

the preferred form of shopping. Overall, the target customers we are looking at are Chinese

people over the age of 60 with middle income or above.

Psychographics

According to Hofstede’s dimensions China has deeply ingrained cultural norms that must

be understood before one does business with them.

Figure 1

For starters China has a high power distance ranking of 80 compared to the United

States, which makes it an excepted norm for a company’s leaders to be considered superior in

status and respect than the lower ranked. Overall the world mean for power distance is 86 which

actually makes China more moderate in that aspect.

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The population of people over the age of 60 in China prefers Traditional Chinese

medicine to foreign manufactured medicines partly due to the cost. Western medicines have been

proven to cure ailments quicker however, Traditional Chinese medicines are believed to be

healthier in the long run in order to cure diseases over a period of time from consistent usage.

TCMs also have far less side effects compared to western medicines. The preferences of the

Chinese consumers align with their long-term orientation score mentioned in the Hofstede

analysis.

In the Masculinity category, China scored a 66, which makes it similar to the United

States in this dimension. Like the United States they are driven by success, competition and

achievements. The masculinity aspect demonstrates that there is potential for consumers to use

our product because of the busy lifestyles.

Uncertainty Avoidance is rather low in China, which ranks at 40. Chinese people are

not afraid of ambiguity and in cities like Shanghai this means that they are open to foreign

consumer goods. China’s retirement age is 60 but luckily, China’s elderly are very active

throughout the day. Much of the reason is because Grandparents often raise their grandchildren

instead of the parents and also because they exercise in local parks along with other elderly

people. The daily congregation of elderly folks and the grandparents willingness to raise

grandchildren exemplify the collectivist culture in China because Chinese consumers often rely

on their peers to make purchasing decisions and work as a group to solve problems. Indulgence

is not scored highly in China therefore the product must truly convey personal benefit to the

consumers or else they will see no real need in buying it (http://geert-hofstede.com/china.html).

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Estimated Sales for first year:

We have made my calculations using the size of the traditional dietary supplement

market which is was CNY42,900,000,000 (euromonitor.com). I then divided by our sales price,

which is CNY192. Finally, I got the number of units, which is 2,23,437,500, and multiply by the

lowest market share of 0.1%, which comes out to 223,438 units to be sold in the first year. This

is not a bad goal to reach for the first year however given our lack of recognition we may have to

distribute intensively.

Industry Analysis Report

Executive Summary

Consumers are becoming increasingly health conscious and thus look to natural

traditional medicines in order to complement their lifestyles. On a world wide basis there seems

to be more potential for the Traditional Chinese medicine industry. It is certainly an attractive

industry globally with the increasingly health conscious population around the world in both

developed countries for their complementary benefits to a good diet and for underdeveloped

nations because they are inexpensive. In China the industry is challenging due in part to large

competition however, with access to technology and coveted innovation an international

company may stand out and capture a substantial amount of the market share.

Industry

TCM (Traditional Chinese Medicine) falls in the consumer health industry which is a

generalized category including over the counter drugs, vitamins and supplements, weight

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management products and sports nutrition. Traditional Chinese medicine mostly overlaps with

over the counter and vitamins and supplements. Traditional Chinese Medicine is most popular in

China where competition is close to perfect. This means that many niches are already taken.

However, most of the companies lack the technological infrastructure that western companies

have to create innovative products. TCM companies provide consumers with long trusted and

culturally accepted products that are accessible and affordable. These products are used to

complement healthy habits and used as an alternative to western medicines. Such products

include teas made of different leaves and roots, diuretics, and encapsulated vitamins made from

natural herbs.

The Numbers

The global market for Traditional Medicines was valued at $30 billion (2015). The total

revenues for the entire consumer health industry was $178 billion that same year (2011). About

49% of the TCM market revenue came from Asia Pacific, mainly China. In 2015 the TCM

industry in China recorded sales revenue of $11 billion or CNY66 billion.

1Figure 2.01Euromonitor International (2011, Feb 16). A Global Overview of Herbal/Traditional Products Retrieved Feb 22 2016, From Euromonitor Passport GMID database

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Figure 2.1

As shown in Figure 2.0 Globally Herbal/Traditional Products are growing at a rate

approaching 2% annually. Conversely the OTC drug category’s growth is decreasing annually.

Of all the categories OTC and Herbal/Traditional medicines are most similar. This indicates that

Traditional Medicines popularity is likely being increasingly favored over traditional over the

counter drugs that may cause side-effects. According to Figure 2.1 the TCM industry in China is

expected to grow by almost 42% from 2015-2020. This would mean that the industry is expected

to grow from almost $11 billion to $15 billion by 2020. It is a fair amount of growth considering

that China already has a third of the global market share for the Global industry. The TCM

industry has been growing by about $1 billion each year since 2009 and will continue this trend

through 2020 and perhaps beyond.

2

10

Figure 2.2

TCM Industry GrowthHistoric

2009 2010 2011 2012 2013 20145,326.00 5,984.50 6,730.90 7,606.80 8,788.60 9,743.10

Forecasted2015 2016 2017 2018 2019 2020

10,785.9011,641.9

012,525.2

013,430.5

014,345.6

015,266.9

0

Porter’s 5 Forces

Threat of New Entrants

Globally the industry and domestically the industry is not difficult to get into. The reason

is that the products are not created from rare resources. For this reason, a lot of the domestic

companies in China are small businesses. However, some threats do exist

3from foreign companies who have access to better technology and manufacturing standards.

Unfortunately, domestic companies in China do not yet possess managerial standards for

developing traditional Chinese medicines where as many western companies along with South

Korea have the technology necessary. Japan and South Korea notably have populations that are

very interested in purchasing TCM products as well. Another barrier to entry are China’s

regulations on foreign companies seeking to operate in the country. Foreign companies need

permission from the government in order to operate.

3 Euromonitor International (2015, Nov. 17) Herbal/Traditional Products in China. Retrieved Feb 22 2016, From Euromonitor Passport GMID database

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Potential Substitutes

There are a few ways that consumers of health products can replace the benefits offered

by specific TCM products. One way is for consumers to buy the product they are looking for in

different forms such as capsules or granulated ingredients. Another way is for consumers to opt

for western style over-the-counter medicines. Finally seeking treatment from physicians is by far

the best yet most expensive option. Many Elderly Chinese consumers hesitate to visit physicians

due to the cost and so they instead choose TCM products, which can be beneficial in the long run

due to their natural properties. Western Style medicines are a good substitute for immediate

results however, they are perceived negatively because of their toxic chemical properties and

side effects. It is still possible that among young people they can be a good substitute however,

the elderly favor TCM products.

Supplier Power

There are currently 51 different TCM companies listed in the database meaning that

supplier power is high due to the fact that there are many manufacturers to choose from. 60% of

sales of TCM products are from retailers (mainly health and beauty shops) with direct sales at

27% and Internet sales at 12%. Chinese consumers are not typically picky when it comes to

common forms of Chinese medicine however niche products by popular brands are favored over

imitation products. Infinitus is currently the dominant company in the market with 11% market

share. Thus with this data one can assume that suppliers have a lot of power considering the high

demand for many products. Tea is not only considered a from of TCM it is also generally

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popular as a refreshment. The cost of raw materials for TCM products varies on the specific

substance they are extracted from. Some can be very cheap and others are hard to produce and

expensive. “China’s vast territory and various natural conditions have given birth to a variety of

traditional medicine resource” (An Analysis on the International Competitiveness of China’s

Traditional Medicine Industry). In recent years China has raised the pricing roof to allow

companies to have more price control. In other words there are areas that may be beneficial when

it comes to the costs of manufacturing.

Buyer Power

Buyer power is low in the TCM industry because there are many companies for suppliers

to choose from. Many companies make similar products that can be replaced on the shelves by

companies who offer their products at lower prices to the retailers. Chinese consumers make few

exceptions for which brands to remain loyal to. Infinitus holds the most loyalty but it is partly

due to the fact that they sell products unique to their offerings such as their brand of tonic

beverages; great for digestion. TCM products are not a complete necessity for consumers

because they can be replaced however; they offer a cheap alternative for consumers in forms,

which they trust. Therefore, it is in manufacturers’ best interests to have some of these products

available in their stores. It is also crucial that competitors offer supply at low enough prices for

manufacturers to obtain raw materials to make attractive profit margins for each sale.

Competitor Analysis

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The TCM market is highly competitive due to the amount of domestic companies

actively participating in the industry. The increasing competition is taking away market share

from the top competitors meaning that a firm entering the market can ideally capture a good

portion of the market share given the technology and Marketing budget. To confirm this

assertion from the visible data of company shares I used the Herfingdahl Hirschman Index

formula (s1^2 + s^2 +… si^2) to see the markets competitive level. The total score was 152.65

out of a possible 10,000 which translates to an extremely competitive market. The concentration

ratio for the top 4 companies in China was 17.3% which also reflects a highly competitive

market. Infinitus was the company with the most market share which has approximately 11% in

2015. Second place, CR Sanjiu only held 3% of the market.

The top 4 competitors in the TCM market are Infinitus, CR Sanjiu, Yunnan Baiyao and

Nim Jiom Medicine. Infinitus sells a special brand of Tonic beverages which are good for

digestion and have helped it maintain the largest market share. They have also cooperated with

the bank of china in order to create a credit card to promote their customer4s’ experience. For the

most part what makes these brands successful lies within their technological advantage over

other firms. The top four companies are able to create the most innovative products thanks to

their higher budgets for Research and development and advertising. Seven of the top ten

companies in China are domestic which means consumers trust brands that have Chinese

heritage more. Infinitus’ market share has fallen by .3% in 2015 from the previous year. It has a

compound annual growth rate of 1% over the last 5 years. CR Sanjiu the second largest company

in the market has a compound annual growth rate of 1% as well over the last 5 years. However,

CR Sanjiu has also fallen in market share in the past year. This shows that the rising competition

4 Investopedia (unkown date) CFA Level 1 Retrieved Feb 25 2016, From Investopedia website

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n the market is taking away the market share fro the top competitors. Unfortunately, information

on the exact budgets and financial statements overall are hard to find. This could be because

China’s transparency laws are different than most western countries who are required to release

income statements annually. Chinese companies are only required to do so for the government to

monitor activity. The only competitor’s financial information I was able to find was Hebalife

shown in that table below. Hebalife uses 19% of their revenue for costs of goods sold and 81%

towards sales and other expenses. Hebalife may not be a good competitor to model after since

they distribute using Multi Level management which is illegal in China. This factor can impact

how much is invested in different aspects of our marketing mix.

Sustainability of Competitive Advantage

The competitive advantages that our firm holds are in our superior technology and

superior managerial skills which allow us to create innovative products and better manage

operations. “Only by combining the specialties and advantages of traditional Chinese medicine,

establishing internationally-accepted standards and producing modern Chinese medicine will

traditional Chinese medicine really step into the world” 5(An Analysis on the International

Competitiveness of China’s Traditional Medicine Industry). This is a rare advantage because

many of the domestic firms which make up the market simply do not have access to the

technology many western countries do. Given that we are aiming to create a nutrient arm patch

that requires a good amount of research and development only the top competitors would have 5 International Journal of Business Management (2010, July 7) An Analysis on the International Competitiveness of China’s Traditional Medicine Industry Based on the SWOT Model Retrieved Feb 24 2016, From International Journal of Business and Management.

.

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the capability to take counteractive measures. The technology used to create the arm patch can

also be extended into creating other medicinal products that can be absorbed through the skin.

There are also no current product such as the one we wish to offer. As previously mentioned

many TCM companies are small and therefore lack the management skills available to western

firms. Our advantage in this aspect comes from our ability to structure a system of operation.

Country Analysis

Executive Summary:

This Country analysis was created to inform the reader of some factors to weigh into the

decision of whether China is an attractive country to enter into for our product. Overall there are

some positive and negative attributes found about China in this analysis. China has a large

potential for our targeted demographic which consists of the majority of the country’s

population. The economy continues to grow at an exceptional rate and the incomes of the overall

population is expected to rise; a sign of good news for companies selling consumers goods.

There are some concerns regarding the manipulation of the local currency in exchange rates and

in the enforcement of laws and regulations. China is the most attractive destination for Foreign

Direct Investment however it can be biased in favor of its’ domestic companies. We may also

encounter problems in the acquisition of talent as workers with technical know how are scarce

and it as become increasingly difficult to acquire visas for international workers. There are

promising aspects found in this information however getting around the challenges presented

will require logistical reasoning.

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Country Demographics:

A large population in China is a sign of great opportunity for making profit. The

demographic data on China shows that it is a country with promising potential for our6 industry

based on the density of our target market among other factors. China is the world’s most

populated country (rivaled by India) with 1.4 billion citizens; 45 times the world average of 31

million and dwarfing the world median of 5.4 million. The population growth rate was a

mere .45% compared to the world average of 1.12% annually (2016), China’ growth was ranked

162 out of 233 countries in 2015. The growth rate is expected to increase since the one child

policy ban had been lifted. Strong Arm will be Targeting both male and females between the

ages of 25 and 64 which accounts for 59% of the population. Of that population approximately

51% are male and 49% are female. The population aged 55-64 account for 11% of the total

population and will be exiting our targeted demographic in 10 years only to be replaced by 13%

of the population currently aged 15-24. This is good news since it means our target demographic

will be growing an additional 2% in 10 years. In 5 years the age group 19-24 will enter the target

market bringing in approximately 100 million people. Simultaneously 80 million people in the

age group 59-64 will leave the target market. This information is used to justify further why this

is a good target market for us.

6 “China Country Commercial Guide” Export.gov 8 Oct. 2015 Web. 9 Mar. 20162“China” Central Intelligence Agency Updated: 25 Feb. 2016 Retrieved 9 Mar. 2016https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

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Figure 3.1

China is not short of educated individuals with 96.4% of the population being literate as

of 2015. The school life expectancy is averaged at 13 years spanning from primary to tertiary

education. High access to education is often correlated with better income which is good news

for companies selling consumer goods. This could be promising for our organization since higher

education is correlated with higher income which may make skimming pricing strategy

plausible.

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The Economy: Size and Trends

Although it is said that China’s growth is slowing down it is still growing at a high rate

and its7 inflation rates have decreased making it a favorable option economically for our product.

Generally, inflation being low can mean that our costs will not grow by a large amount however,

our product price will also not be able to go higher either. The GDP measured at Purchasing

Power Parity was ranked number 1 in the world coming in at almost $19 trillion (international

dollars) in 2015. This is more than 30 times the world’s average of $574.4 Billion. China’s real

GDP Growth Rate as of 2015 was 6.8% which shows a 5-year low since it’s highest growth rate

in 2010 of 10.6%. Although China’s Real GDP is not growing as fast it has been since

industrializing it still continues to grow at a rate almost double that of the world average which is

3.1%. In 2020 China will grow at a rate of 5.7% which is still higher than the predicted average

for that year of 3.7%. This is a good sign for economical reasons since China will still be

growing at a rate exceeding most nations around the world. Already consumers in China are

increasingly able to purchase goods with disposable income the constant growth above the world

average is good news for our product in this aspect.

Real GDP Growth Rate %Historic 2010 2011 2012 2013 2014 2015

10.6 9.5 7.7 7.7 7.3 6.8

7"China." China. The World Bank, n.d. Web. 09 Mar. 2016. <http://data.worldbank.org/country/china>.4 Euromonitor International (2015). Economy, Finance, and Trade: China. Retrieved Mar. 9. 2016 from Euromonitor International GMID database5 Figure 3.2 depicts the GDP historic and forecasted growth rates with a common year of 2015

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Forecasted 2015 2016 2017 2018 2019 20206.8 6.5 6.1 6.1 6 5.7

Figure 3.2

Inflation is also low with the inflation rate in 2015 being 1.5%. This is the lowest

inflation has been in the past 5 years and while inflation is predicted to grow at 1.5% once again

in 2016 it will likely start to increase again from 2017 forward. However, the inflation rate will

remain below the world average for the next 5 years, peaking at 2.5% in 2020. This could mean

that costs will not rise substantially and that neither will our prices. Low inflation also means that

the local currency keeps more of its value which can affect exchange rates. If the CNY keeps its

value it will take more U.S dollars to purchase the currency.

China

2010 2011 2012 2013 2014 20153.2 5.6 2.6 2.6 2 1.4

2015 2016 2017 2018 2019 20201.4 1.6 1.7 1.9 2.2 2.5

Figure 3.3

20World

2010 2011 2012 2013 20144.1 5.9 4.1 4.4 3.6

2015 2016 2017 2018 20192.6 3.4 3.8 3.8 3.6

Finally, China’s average GDP PPP per capita is $13,772 for 2015 which falls slightly

below the world average of $15,393 however, it is important to note that the results may be

skewed because of China’s large rural population. They are only beginning to move people out

of rural areas and into urban mega cities such as Beijing, Tianjin and Guangzhou where they will

be able to earn a better living. The overall data presented shows promising opportunities

economically in China.

Income Distribution:

China’s disposable income is set to grow by 92% between 2015 and 2030 which shows

promising opportunities for companies involved in the sale of consumer goods such as traditional

Chinese medicine. Customers will be able to pay higher prices for more quality products. 8

Constant LCU GDP(Real) in CNY mn. Disposable Income CAGR 2010-2015

2015 Per person (CNY)

D1 14% 4282

D2 13% 8564

D3 13% 12,234

D4 13% 15,598

D5 12% 18,963

D6 13% 23,245

D7 12% 28,750

D8 12% 36,091

D9 12% 48,937

D10 11% 109,192

87 Euromonitor International (2015). Economy, Finance, and Trade: China. Retrieved Mar. 9. 2016 from Euromonitor International GMID database8 Figure 3.4 show disposable income per decile historically

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Figure 3.4

Constant LCU GDP(Real) in CNY mn. Disposable Income

CAGR 2015-2020 2020 Per Person (CNY)

D1 8% 6,293

D2 7.25% 12,166

D3 6.52% 16,781

D4 6.52% 21,396

D5 6.87% 26,430

D6 6.80% 32,303

D7 6.52% 39,436

D8 6.70% 49,923

D9 6.52% 67,125

D10 6.28% 147,255

Figure 3.5

We would like to focus our efforts on deciles 6-10 because their household disposable

income is above the median of approximately $10,000. If we rely on the average, then we would

target only deciles 8-10 however the median is better reflective of the current situation since the

10th decile accounts for 36% of disposable income. The future seems promising however, since

the growth of disposable incomes will spread across all deciles by 2020.

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99 Euromonitor International (2015). Economy, Finance, and Trade: China. Retrieved Mar. 9. 2016 from Euromonitor International GMID database10 Figure 3.5 shows disposable income per decile in forecasted format11 Figure 3.6 Shows the forecasted growth of income throughout each decile from 2015 to 2030

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Figure 3.6

Currency

China uses a fixed currency regime in order to manipulate exchange rates. They often

like to devalue their currency in order to maintain exporting power. Only by making their exports

attractively priced can they continue to grow their economy at the current rate. With the recent

slowdown in growth the government once again manipulated exchange rates to make exports an

attractive buy. Historically, the Yuan (sometimes Renminbi) has never been strong against the

dollar in terms of value however this is not necessarily a bad thing since China relies on its

exports to boosts its economy. Historically we see a slight appreciation in the Yuan’s value

however it is forecasted to depreciate once again in 2020. The Yuan is expected to be continually

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devalued for this exact reason. This means that it could possibly take less U.S dollars to purchase

Chinese currency altogether considered a favorable situation.

Historical 2010 2011 2012 2013 2014 2015

Exchange Rates Against US Dollar - CNY per

US$ 6.8 6.5 6.3 6.2 6.1 6.2

Forecasted 2015 2016 2017 2018 2019 2020

Exchange Rates Against US Dollar - CNY per

US$ 6.1 6.2 6.5 6.4 6.3 6.2

Figure 3.7

According to GMID the Yuan will continue on the same path as far as exchange rates for

the next 5 years. These exchange rates were more attractive than the ones forecasted on

Bloomberg for Bid/Ask prices. Bid/Ask was forecasted by Bloomberg to reach approximately

7.5 as the exchange rate. We would be buying at the ask price if we are buying the currency.

Bloomberg Forecast: CNY

Figure 3.8

The normal forecasted rates are more attractive than the Bloomberg ask prices therefore we will

not rely on Bloomberg numbers. Instead we will wait and try to lock in a fixed rate at a cheaper

price. Further the normal exchange rates seem to be a better option for repatriating profits.

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Forward Rates 2016 2017 2018 2019 2020 2021Bid 6.512 6.731 7.012 7.232 7.334 7.434Ask

6.519 6.754 7.038 7.269 7.412 7.554

Political/Regulatory/Legal Issues

China is currently undergoing efforts to crack down on corruption and is overall a stable

country to conduct business in. The laws are different than most western countries however,

many international firms have been successful in the Chinese market and there are certainly

opportunities for our firm as well. Currently, China is governed by four branches (Legislative

branch [National People’s congress], executive branch [ state council], judicial branch [supreme

people’s court, supreme people’s procuratorate,] and military branch [People’s liberation army

and central military commission]) of which most members in power are of the communist party;

the government has not greatly affected U.S companies in negative ways. The president is Xi

Jinping who has served since 2012 and has promoted the Asian Infrastructure Investment Bank.

Currently, there is no major threat or likely chance of a political shift in China therefore our

business will not likely be affected by these factors. Currently the second most likely regimeshift

would be by the liberal party in China. The liberal party has growing unrest regarding not being

able to elect their own officials in some provinces as well as with the growing wealth gap.

Should the liberal party become the dominant party most aspects of the government would

remain the same. Inflation may rise between 3.3% and 3.8% if the shift should happen within the

time span of 2015 through 2020. due to this shift in regime This would be somewhat favorable

because we would be able to raise our prices however our costs may also increase since we are

buying raw materials within China. There are as well, disputes over the south China sea

territories of which different sides (many U.S allies) state a claim of ownership. In the long-term

this has potential to cause issues. Corruption is being driven out by the government however, it is

still common. China has laws forbidding the formation of monopolies which is a good sign for

competitive markets however, it has been known to favor certain companies it deems too

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important. The statutory tax rate is 25% for Corporate income tax with 7.74% being taxable

profit. As far as tax treaties the United States and China have formed an agreement for the

avoidance of double taxation and prevention of tax evasion with respect to taxes on income10.

Overall, there are no significant political barriers that can not be worked around in China. There

are however some regulatory inconsistencies as far as enforcement of violations goes which is

caused by a lack of transparency by the government.

Trade Issues:

A number of trade issues could possible make operating in China a difficult task. Since

joining the World Tarde Organization China has increased their compliance effort according to

WTO standards. There are however still some trade barriers that must be considered before our

company can enter the market. China has a number of requirements for importing thus creating

an import trade barrier. Companies importing goods must meet a specified quota along with

providing specific documentation such as an invoice, shipping list, customers declaration, import

license and many more. Another trade barrier which China is often criticized for is the

manipulation of currency devaluation in order to continue its trend of maintaining high exports

and investment. This sort of trade barrier causes a ripple effect in the world economy especially

because it is not naturally occurring. China has recently had a stock market crash and so the

Renminbi is expected to be further devaluated. Certain items are forbidden from entering the

country such as arms, ammunition, old/used garments and any items coming from disease

stricken countries. This will likely not be an issue for our company since we are not importing

any items on the list. China is the world’s largest exporter which helps it drive its growth and

1012 “China” Political Risk Yearbook 2016

http://epub.prsgroup.com.libraryproxy.quinnipiac.edu/index.php/customer/pry

26

investment plans. Currently China’s exports make up about 20% of GDP while its imports are

only about 10%. Historically China’s biggest trading partners have been Hong Kong, The United

States, Japan and South Korea. China has 11 free trade agreements to help it import and export

with cheaper. It has established free trade agreements with individual nation such as Switzerland,

Peru, Chile, Costa Rica, Hong Kong and Macau among others. The free trade agreements exploit

many opportunities for outsourcing materials if needed.

Investment Issues:

China is a great country for foreign Direct investment especially since the government

openly welcomes FDI initiatives surpassing the United States in 2014 as the leading destination

for foreign company investment. There is however a suspected bias since they seem to favor

their domestic companies over foreign ones. There are industrial policies which protect and

promote state owned and domestic companies along with restrictions on how much a foreign

firm can claim ownership for in many industries. There are also weak intellectual property

protections and what is perceived as an unreliable legal system due to corruption. China is

ranked 83 (out of 168) in 2015 (transparency.org). This puts the country in the middle which

means it still has a significant amount of corruption threatening foreign business. Starting a

business in China is quite difficult and is ranked 136 on doingbusiness.org which means it can be

quite tedious to start a business due to the registration processes being lengthy and the varying

certifications.

Other Labor Issues:

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Although, there have been many reasons stated as to why China is an attractive country to

go into labor is still a challenging subject. It can be quite difficult for American firms to find the

local talent needed for performing required task. Furthermore, the Chinese government has made

it more difficult for foreign companies to obtain visas for their employees in their home countries

to transfer to China. Aside from direct issues facing labor China is also deemed unattractive to

foreign talent due to its poor track record of pollution causing workers to not want to put their

health at risk. These factors together make it difficult for foreign firms to hire local talent thus

making them reluctant to fire unsatisfactory workers for fear of not being able to find

replacements soon enough if at all.

As for labor unrest civilians are typically not allowed to publicly strike against a

corporation however, it is not indicative of the true dissatisfaction of the workforce. Asides from

a lack of freedom of association and the right to protest China meets international labor standards

in its official documentations although, it is important to refer back to the presence of

inconsistencies in enforcement.

International Marketing Analysis

Executive Summary

This report serves the purpose of elaborating on Jingshen Jiankang’s overall marketing

strategy and approach put together by researching aspects of the four P’s of marketing. In this

report the Product is further highlighted to hopefully convey a more in debt description. The

promotion strategy we will likely use given the culture and conditions in China is also elaborated

on simply to address how we will reach out to our customers. The pricing structure is revealed in

28

order to justify our selling price of RMB 192 with some factors such as Value added tax and

mark-up highlighted. Lastly, Place explains our distribution strategy fitting the Chinese culture

along with ways to motivate our channel members by providing the proper forms of support for

further improving relationships and performance. Overall, this report contributes to helping me

make a final recommendation for whether to enter or not into the Chinese market with our

product the Jingshen Jiangkang nutrient arm patch.

Product

Description

Healthy Spirit’s newly introduced flagship product will be the nutrient arm patch that will

distribute vitamins and minerals throughout the body subcutaneously. A user’s perspiration will

help distribute the nutrients more affectively. The product is easy to use and can be worn all day.

It encourages users to bring along a form of nutrition with them during their workout routines in

the form of ingredients trusted by the Chinese people for thousands of years. The patch will be in

a square shape at 2.5cmX2.5cm and will allow transdermal absorption of the nutrients. It will

have a drug reservoir sandwiched between an occlusive back layer to prevent anything getting in

and a permeable layer on the opposite side which allows the product to be absorbed through the

skin. This same layer will also be infused with an adhesive substance on in order to secure the

product stays attached to the skin.

Regulatory Issues

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There are currently two issues that I find our product faces in order to operate smoothly

in the country. The first is that it must be approved by the Chinese and drug administration which

can be a lengthy process at first when introducing new medicinal products. Given that the the

ingredients will be familiar to other products on the market it is likely that parts of this process

can be expedited. Generally, the China food and drug administration’s approval process is much

shorter than in the United States although they used the FDA’s process as a template for

developing their own. Another regulatory issue is the inconsistency in the enforcement of

regulations. China is known to favor their domestic companies over foreign ones which may

pose a lot of risk if our competition is constantly favored.

Justifying the Brand Name

The brand in China will be known as Jingshen Jiankang which translates to Healthy Spirit

in English. I feel that this name symbolizes a strong vision. Most cultures despite religion believe

in the spirit and many also believe that it can be a driving force. We believe that by delivering

health supplements to the active consumers they will experience greater health and vitality

ultimately lifting their spirits consequently improving their moods and biological health.

Culturally many Chinese brands choose to name themselves names as such because it has more

meaning than what is made obvious. This may be a cause of the high context culture existing in

China. It is a way for our company to apply a polycentric way of implementing our product to

please the local consumers with things they are familiar with.

Branding Strategy

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Our company will utilize a localized branding strategy that will be recognized throughout

the country. We will predominately localize to Tianjin and Shanghai since they have the most

welcoming regulations for foreign businesses. Our slogan in China will be “Jiangkang, meitian

de mei yi miao” or “Healthy, Every second of everyday” translated into Mandarin which will be

recognized by the majority of the literate population. However, even though Mandarin is the

official language many Chinese people do not speak or read it. Therefore, it is important that our

customer service initiatives be localized to fit the targeted audiences. Another more important

reason to localize is that contrary to what many believe China has a lot of diversity. What one

experiences in the north they may not see in the south. Food, accents, languages and aesthetics

may vary even slightly. Although, Chinese consumers have good perceptions regarding

imported/foreign goods, they like to purchase them in a localized manner. Brands such as Coca-

Cola change their display and packaging in order to appeal to the local consumers. It is important

for our company to make the same adjustments after all, our product is a modification of Chinese

medicine and it would be beneficial for our image to show respect to the culture.

Promotion

Promotional Approach

The initial promotional avenues that my company will take are television and online

advertisements. Television ads are currently the most wide-reaching form of advertisement in

China. However, with the large growth in online retailing set to surpass conventional store visits,

online advertisement will soon be the most popular form of reaching out to customers. We will

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also take into consideration radio ads, publications and sponsorships. Using a local celebrity as

an endorser may prove to be affective and is a widely used strategy. Unlike many companies in

the U.S endorsers do not always match with the brand values or in any way relate to the

endorser’s career directly. However, taking this knowledge with us into the Chinese market

could prove to be beneficial.

Figure 4.1:Cultural Dimensions

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Above is an example of an advertisement I created which falls in line with cultural value

that I have found. The ad features Chinese citizens side by side holding up their shoulders with

the Jingshen Jiankang patches showing proudly. The first two cultural dimensions are from

Hofstede’s cultural values list. The first cultural dimension is masculinity (66 out of 100) which

shows a high sense of competition, success and drive from achievement. This is demonstrated in

the ad by the persons depicted being happy and striving for the best health possible using our

product. The second cultural dimension is long-term orientation which is represented by the very

nature of Traditional Chinese medicine that unlike western medicine works slower and is

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beneficial in the long-run. This value is hinted at with the people depicted ranging from young to

old age. China scored 118 in long-term orientation meaning that they have a large focus on

perseverance and persistence. The next two dimensions were taken from the Schwartz value

survey in the forms of questions. The first was V89 which asked how alike are you to a person

that says tradition is important to them. There were eight ways to reply however 40% of

respondents said that the supposed person was “like them”. For this purpose, I included an image

of Son Wukong, a legendary Chinese figure who represents great strength ad who is a main

character of the famous tale “Journey to the West”. The last and final dimension was determined

from another statement in the survey that said “Science and technology are making our lives

healthier and easier” which 29% of respondents agreed with and yielded the most responses.

This is demonstrated in the ad by the people wearing the Jingshen Jiankang arm patches and

trusting them to bring great benefits to their lives.

Price

Pricing Strategy

Our product will be released into the market at a skimming price because we would like it

to be perceived as a high quality product. This decision is also in part due to the Value Added tax

of 17% which also affects our pricing.

Retail Selling Price

The retail selling price of Jingshen Jiankang patches will be RMB192. This price was determined

when observing the higher end of prices of similar products such as those of Herbalife.

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Figure 4.2

Online retail is one of the largest growing sectors with as over 100 million consumers and

still growing. China’s overall retail market is also growing as well. It costs our company

RMB24.80 to make each product and since our profit margin will be 81% we will sell them to

retailers for RMB149 (VAT added). They will sell the product for RMB192 when applying the

25% mark up on Traditional Chinese Medicine. 25% is the mark up I was able to find in my

research however, when further investigating the topic I found that in a worst case scenario the

maximum mark up would be 30% as the Chinese government capped it to be so. The price as

structured reflects the value added tax of 17% on Pharmaceutical products as well. The final

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retail price amounts to RMB192 however it may be better to sell for RMB188 since the

number .88 has the same psychological affect on consumers as do odd-even numbers .95 or .99

on American consumers.

Place

Distribution Structure

The distribution strategy the company will employ for this product is direct sales to

retailers who will then sell the product at a mark up price. Our Marketing channel will include

eligible retailers including online shops. China’s infrastructure is increasingly growing and so are

the many options consumers get to buy from. Currently retailers such as Sun Art Retail (13%

market share) and RT Mart are of the largest chains in China. Wal-Mart also holds a place as a

top retail chain as well. Shopping malls in China dwarf the sizes available in the United States as

well and they include many shops that sell traditional medicine products. However, many of the

shopping malls including in major Chinese cities such as Tianjin and Beijing are being

abandoned since Online Shopping is growing in popularity. Many retailers are reporting losses in

in-store sales because of the large growth in e-commerce. Alibaba is the largest online seller

however, they sell in bulk and mainly for businesses. T-Mall is the alternative to Alibaba which

sells to individual consumers.

Motivating Channel Members

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Doing business in China requires for relationships to be built between seller and customer

in general, therefore our motivation strategy must take the same approach between our company

and channel members. We must first find out the needs of our channel member and perhaps their

current perceptions of our strategy. If we use an outside party to determine this information we

may be able to obtain more objective information especially since the culture often dictates

workers to not voice their criticisms. Out of all of the strategies that can be used for channel

motivation I believe that Partnerships and Strategic Alliances fits best for doing business in a

country where long-term relationships among businesses are preferred. Our company will

provide channel members with technical know-how and skills to develop a human understanding

of our product. We will also provide visual aids such as mid-sized cardboard kiosk and displays.

In order to ensure a long lasting relationship with our channel members we will perform audits

periodically to assess their performance and if it can be improved with our help.

Country of Origin Effect

For the most part Chinese consumers have a good perception of American imports as

they are considered to be of higher quality than many domestic products however, they prefer

that these products be sold in a localized manner. Furthermore, products inspired by Chinese

tradition should especially be sold in ways typically utilized in China. In order to achieve success

in selling in ways Chinese consumers prefer we must build a relationship with local partners in

order to create Chinese suitable packaging in preferred sizes and instructions in Mandarin. Even

the font and pictures (if used) must be done in a style appealing to Chinese consumers .As stated,

Chinese consumers enjoy imported goods and in many cases prefer them however, my company

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would be among the few foreign firms selling a Traditional Chinese medicine therefore the brand

must be adopted and thought of as a true Chinese brand even though it has American origins.

Black Market/Dumping

In China there is a large black market culture for counterfeit goods so popular that it even

has its own name “Shanzhai” which translates to “Mountain Fortress” for its contextual hint that

the participants are like bandits hiding in a fortress getting away with their rebellious acts against

industry monopolies. It is a market that is mainly popular for offering essential consumer goods

as well as high tech gadgetry for far below retail prices of authentic products. Asides from the

black market however, China is also accused of dumping especially recently by the EU for

selling steel at prices cheaper than what it takes to manufacture and ship. While the black market

is certainly a concern for our company the dumping will likely not affect us. In order to counter

the black market in case of counterfeit products we must be able to give our customers

knowledge of how to differentiate along with warning them that counterfeit products may

contain harmful ingredients as there have been cases where traditional medicine products have

contained mercury.

International Management

Staffing Plan

Jingshen Jiankang’s staff will be consisted of myself acting as general manager of our

operations in China as well as a Vice president of Marketing another Vice President for sales and

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lastly an assistant. As for our field work we will likely have a few representatives for our

company. Currently, a total of six employees for our company is sufficient for our operations. I

believe that a polycentric approach will work best in China since locals typically prefer to buy

products in ways and from people they are used to. It also allows for our representatives to build

better relationships if they are fluent in the language and may build rapport with our clients.

Technically my employment means that the staffing plan is partly ethnocentric as I will be the

only U.S based worker however, I will be a crucial player in communicating with our home base

in the United States. It is said that about 75% U.S expatriates fail in their duties largely for

personal reasons including emotional and family related issues. For this reason, it is best to leave

the ethnocentric staffing implementation at a minimum and only when necessary. A global

strategy may be too complex and serve no obvious advantage since our product is very much

focused on Chinese consumers. By using a polycentric localized strategy, we will be able to

better establish a trusting relationship with our customers by showing we genuinely care about

their culture and truly believe in what we sell. This attitude and values can be best conveyed if

our sales force and representatives are themselves Chinese and believe in our product enough to

get customers enthused.

Business Ethics

We will be utilizing a relativist approach for our business ethics policies because Chinese

culture differs greatly from western culture. Another reason for not using a western based code

of business ethics is because in many cases Chinese people take it offensive. The age old

criticisms over China’s corrupt past anger businessman in China because they also have ethics

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yet are doubted by western businesses who seek to impose their country’s ethical practices.

Instead letting the relativist style of imposing ethics conveys trust in our staff that they know the

country better and can better apply ethical practices that suit their culture. The Chinese do not

want paternalism from the West. A quote from a Business scholar states “Instead, Rothlin said,

they want acknowledgement that they can offer something, that they can actually become a

driver in the field of ethics. Because the Chinese are emerging as an economic powerhouse, any

ethical rules they integrate into their business practices will have an impact on the whole world

(Miriam Schulman, Santa Clara University). According to the rest of the article I just quoted it is

best to leave any code of ethics for the Chinese staff to create and employ. Anything that is

considered completely unacceptable by U.S standards will be addressed however, developing a

code of ethics with our local staff at the forefront seems to be the best approach. Some of the

unacceptable practices would be bribery and falsified financial and general information.

Preventive measures will include periodical audits and regular personal development time with

employees.

Communication

Communication is among the most important aspects of any business’ operations whether

it is between staff or in exchange with customers therefore a solid analysis of possible barriers is

to be conducted and understood. As stated before and known to many in International Business

Western cultures and those of the far east differ in many ways almost polar opposites in business.

40

Figure 1 illustrates some of these difference by stacking the six Hofstede cultural dimensions

next to each other for the United States and China. Some of the differences will be found in

Power Distance, Uncertainty Avoidance and Collectivism vs Individualism. Another difference

worth mentioning is the degree of indulgence as well. For starters power distance is the degree

by which employees will feel comfortable in approaching a higher level official about an issue.

Even when directly asked for criticism employees in high power distance cultures such as China

and Japan will likely not contribute. Uncertainty Avoidance is low in China therefore companies

tend to like to take risk however in other aspects employees like for their directions to be

specifically laid out for them in order to not make any mistakes. Communicating with potential

employees during interviews may also be difficult since in collectivist cultures people are more

group oriented and will likely tell of things they accomplished as part of a group rather than what

they can offer the firm as an individual. This can make it hard for our company to determine if a

person demonstrates the necessary competencies as an individual. Furthermore, the high degree

of collectivism means that we will have to have a more team oriented facility than there would

be in a western country. Lastly, the level of indulgence (restrained) is low in China which means

that certain things such as break or personal development time may be hard to convey.

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Figure 5.1: Hofstede’s Dimensions

It is worth mentioning as well that China is generally a high context culture meaning that

they are not always so direct with what they mean to say. In many cases especially in business a

simple “yes” in a negotiation may actually be a “no” hidden in disguise simply to “save face” or

to buy more time for a real decision.

In China the people are considered to be polychromic because their schedules revolve

around building and sustaining relationships before doing business. It is not uncommon for

westerners to confuse this for rudeness since monochromic cultures like to get down to business

at a specifically scheduled price and expect for the other party to give their undivided attention.

In China however, time is considered fluid and flexible and a pro of this time orientation is that

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Chinese workers tend to be good at multi-tasking. By understanding how a polychronic culture

like China works it saves us the time of becoming frustrated with partners in an otherwise

misunderstood situation and gives us the opportunity to focus on building a long-term

negotiation.

Management

Many of the challenges that management will face will be caused by the differences in

communication mentioned in the previous section. Since power distance is high in China it is

important to implement a strategy that allows workers to feel free to give feedback in a way that

they would not feel they are overstepping their authority. We must develop a culture where

feedback must be freely given and received that fits into the collectivists roles Chinese

employees are so used to. All employees will be required to fill out an exchange journal

highlighting their progress along with challenges they may be facing. During personal

development time they will fill out journals that detail areas of improvement and goals they

would like to achieve in the future. I will meet with each team member at a scheduled time to go

over their improvement and make suggestions for the future. Since Chinese employees tend to

value building relationships above work this will allow me as a manager and my employees to

build a stronger more trusting relationship. Workers will be informed that the honest feedback

they give concerning themselves and the company as a whole will help to improve the team’s

performance. The emphasis on the betterment of the team will be a driving motivation for our

employees. Since long-term orientation is a high dimension in China our employees will be

focused on long-term results therefore the exchange journals and personal development time will

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allow them to reflect on their performance and see for themselves in a tangible form what they

have contributed to the team.

Compensation

According to Forbes latest article about expat salaries in China, the overall pay is

growing since expats in China are in high demand. China can be a difficult country to attract

expats because of its high pollution levels and the fact that it can be a shocking culture for first

time movers. Particularly, expats with a spouse and children tend to avoid China for the

differences in culture and possible health risks. Nevertheless, expatriates in China are in high

demand with a current average salary for a manager in the highest position being upwards of

CNY2 million in Shanghai and Beijing. This salary represents a substantial salary especially in a

country like china that has a much lower cost of living than the United States. However, the cost

of living assumes that the expat lives and buys goods and services that are the same as the

average Chinese person. Realistically if an expat were to try to emulate their western lifestyle in

China it would be even more expensive than in their home country. Products such as wine and

cheese will especially be more expensive. An expat is also better off nor driving because petrol is

expensive and conducting a vehicle is dangerous especially for non-Chinese drivers who are not

used to the lack of traffic laws and driving etiquette.

We have decided to compensate our staff with the average salaries found on

payscale.com. According to the website the average Assistant is paid CNY8,800 monthly which

translates to CNY106,000 annually. An average VP of Marketing/Sales with 7 or more years of

experience is around CNY 700,000. These salaries are expressed in the chart below in both

monthly and annual amounts.

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Figure 5.2

Salary CNY/Month

Salary USD/ Month

Total in CNY

Total in USD

Managing Director CNY166,666 USD 25,964

CNY 2,000,000

USD 311,580

VP Sales CNY58333 USD 9,087CNY 700,000

USD 109,052

VP Marketing CNY58,333 USD 9,087

CNY 700,000

USD 109,052

Assistant CNY8800 USD 1370CNY 105,600

USD 16,451

Sales Rep 1 CNY18,000 USD 2,804CNY 216,000

USD 33,650

Sales Rep 2 CNY 18000 USD 2,804CNY 216,000

USD 33,650

Sales Rep 3 CNY 18000 USD 2,804CNY 216,000

USD 33,650

Benefits

There was not substantial information for determining what benefits should be

implemented within the company. However, health insurance for expats in typically expensive

and can help them save $200 a month if covered by the company. Since I will be the only expat

on the team my health insurance will be covered in this matter. Additionally, we will provide the

local staff with the same benefits because health care is only offered to about half of the

population and usually in major cities. Asides from saving employees $200 a month on health

insurance we will also provide them with year end bonuses. Over 80% of employers in China

45

had given their employees bonuses in 2015. Shanghai (where we operate) gave the highest year-

end bonuses at RMB8500.

Labor Issues

The two main concerns that are brought to our attention are China’s lack of right for

workers to protests and the lack of skilled workers. Typically, companies will look

internationally for skilled workers however, China is not an attractive company for expats hence

the reason for the willingness to pay them high salaries for taking the jobs. Our company will be

hiring locally and since we are starting off with a small team we are not foreseeing too many

issues stemming from these factors. These factors will likely not affect our facility however in

the production facilities workers tend to not have a say and the government regulates who they

may use as representatives to support any case.

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International Finance

Transaction Exposure

Jingshen Jiankang will be sourcing all of its raw materials from within China their

intercompany transaction exposure will not be a problem for us to deal with. Normally a

company would need to utilize forward, future or options contract to hedge this type of economic

exposure. As far as intercompany exposure we will need to hedge such a risk by using a forward

contract to lock in a rate that is favorable. . However, given that hedging translations exposure

tends to increase transaction exposure a forward rate is likely to be used more often than not

Translation Exposure

Our company will be exposed to translation exposure to a certain degree. Naturally we

will have financial statements for both the United States and China in both country’s currencies.

Fluctuations in the exchange rates will affect the information that our financial statements

generate. We can hedge this exposure using forward, future or options contracts if needed. We

have decided to establish ourselves as a self-sustaining foreign entity, independent from the our

parent company based in the U.S. This means that our cash flows will be separate from the U.S.

All monetary assets will translate at current exchange rates and the average of the exchange rates

for the period will be used to translate financial performance on income statements.

Economic Exposure

Economic exposure tends to be the most worrisome of the exposures because of it’s

long-term effects on a firm’s assets and operating cash flows. Economic exposure is difficult to

predict however, our company can analyze the current trend and use it for making decisions in

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the future. Economic exposure can have a devastating effect on a company’s performance

luckily, China uses a fixed currency regime meaning they are able to devalue the currency in

order to keep exchange rates stable. Currently our sensitivity analysis indicates that exchange

rates will not have a powerful affect on our performance. If in case exchange rates were to

become unfavorable then we would likely use a fixed contract to hedge this risk.

Initial Investment and P&L Justification

The capital budgeting assessment for the first year’s monthly cash flows indicate that

initial investments needed for funding are $ 715,000. However, given that the parents company

will not approve any initial loan less than $750,000 this is what we will go with.

P&L Assumptions

This section will reference our Financial sheet. Our unit sales growth is 2% as indicated

in the industry analysis regarding the compound annual growth rate of the TCM industry.Sales

price inflation is 1.6% and was applied to compensation, rent, and general administrative

expenses. This inflation rate was found using my sources on GMID databases. Our unit sales was

determined by deriving our targeted market share goal of .1% for the first year using the total

industry sales. By doing this we came up with a first year sales goal of 223,438 units which

equated to CNY 42,900,096.

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Our per unit sales price of CNY192 was determined using the pricing structure on the

international marketing analysis. Our cost of goods sold was determined using the only available

financial information of a company called Herbalife that is based in China. Unfortunately, data

was scarce however a 19% COGS seemed favorable and makes sense due to the low costs of

many raw materials. Our advertising expense represents 5% of our revenue since no substantial

information could be found to benchmark. Based on China’s annual lending rate we determined

our interest expense. Our corporate tax rates are determined by what the government mandates

which turned out to be 25%. Staff compensation comprised of salaries along with benefits such

as health care assistance and year end bonuses. Since we calculated that we would need 150

square meters of space for our facilities 6 employees the rent and utilities came out to be

CNY396,000 for a facility of this size in Shanghai. Utilities was derived by adding 10% to the

total rent expense. Additional general and administrative expense was generated from the

consideration of what will be need to accommodate employees in the office with resources. The

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total of CNY76,108 represents the costs of 6 21.5 inch iMac computers, 100 pens, 6 staplers,

1200 paper clips, 12 bags of coffee, 6 computer desks, 6 trash bins, 2500 sheets of copy paper

and a small refrigerator.

Break Even Analysis

The break even analysis is absolutely crucial for our firm to understand when our branch

will be able to cover all operating expenses. Our pro-forma unit sales far surpass our break even

point in unit sales with buffers hovering around 90%. Our discount rate is positive meaning that

repatriating money to the home country may save us more money. Our discounted cash will peak

in the second year (2018) however and then begin to decrease from there on out. Given these

assumptions this data predicts that well will be able to reach a positive NPV. However, the

yearly cash flow information suggests that we will actually begin to decline in 2019 although

still maintaining a positive NPV.

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Net Present Value and Sensitivity Analysis

As shown in the image of the sensitivity analysis below the 6 year NPV is positive at

$10,325,340. Although the previous data shows that our company will be able to break even and

achieve positive discounted cash flows we will begin to decline in the third year which means a

longer observation of the trends may be considered. According to the table the per unit sales

price has the biggest impact on the Net Present Value. Almost $2,000,000 (1/5th) of the value is

lost when a scenario of a price change of -20% is implemented. The opposite is true when a 20%

price increase is implemented. Exchange rates had the least affect on our NPV as a cause of

China’s fixed currency regime which keeps the Yuan depreciated and attractive for foreign

investors.

In a worst case scenario our per unit sales price would be forced to go down along with

our unit sales while our Cost of goods sold increased. In a scenario where we dropped the unit

sales price and unit sales by 20% and increased COGS as a percentage of revenue by 20% our

Net Present Value significantly decreased to $4,903,256. In a best case scenario, we increase the

unit sales price and unit sales by 20 % while decreasing cost of goods sold by 20% making our

NPV $17,236247. However, our discounted cash flows would continue to decrease after the peak

reach in 2018.

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52

Final Recommendation

After considering all important analysis details for this report I have to come to the

conclusion that I would recommend committing the financial and operational resources needed

to launch Jingshen Jiankang into the Traditional Chinese Medicine market. Jingshen Jiankang

aims to deliver the traditional Chinese medicinal products that Chinese people love in a brand

new way and innovative way. Shanghai is a great city to start in because it has a population of

over 14 million citizens. The target market overall is large as well consisting of 100 million

people. Income per decile is also spreading meaning that more and more citizens will be able to

purchase our products. The Chinese outlook on foreign goods is also positive since they are

considered to be of higher quality. This reason and the added desire by consumers to purchase

foreign goods presented in a way Chinese consumers are used to work to our advantage. The

cultural dimensions have demonstrated that consumers will be willing to try our product because

of low uncertainty avoidance. Furthermore, the consumer’s long-term orientation aligns with our

goal of long-term health benefits provided by TCM products. Our promotional advertisement

will include print advertisement and a variety of media mix such as television and internet ads.

We have localized our name and our displays are integrated to meet China’s aesthetics. We also

align with the governments push towards promoting healthier lifestyles for citizens. Currently

the government is stable and there seems to be no sign of threat from an opposing party that

would significantly change or affect businesses in our industry. One large concern is the amount

of TCM companies among which market share is allocated. The current number of companies is

52 however many companies fail annually for being too small and not having enough funding. In

our situation we have access to substantial investment and superior management. Furthermore,

our management strategy will integrate practices acceptable in the U.S while respecting Chinese

53

ethical standards. Our benefits for employees will include health care assistance and year-end

bonuses. The level of education is increasing in China meaning that in the coming years

expertise in our field will rise showing promising futures for human resourcing. Lastly our

financial analysis shows promising results with a positive NPV for 5 years beginning at launch.

There was not a projection large enough to determine if we would reach a negative discounted

cash flow however the numbers remained positive through 2020. I believe that given our

advantages compared to our competition that we can achieve a strong market share for our

nutrient arm patches in the TCM industry.

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Works Cited/References

MVC Report

"Consumer Lifestyles in China." N.p., n.d. Web. 12 Feb. 2016.

"Herbal/Traditional Products in China." N.p., n.d. Web. 12 Feb. 2016.

"What about China?" China. N.p., n.d. Web. 12 Feb. 2016.

Industry Analysis

CFA Level 1. Rep. Investopedia, n.d. Web. 25 Feb. 2016.

A Global Overview of Herbal/Traditional Products. Rep. Euromonitor Passport GMID Database,

16 Feb. 2011. Web. 21 Feb. 2016.

Herbal/Traditional Products in China. Rep. Euromonitor Passport GMID Database, 17 Nov.

2015. Web. 22 Feb. 2016.

Liu, Ying, Cong Xu, and Yishou Zhang. "An Analysis on the International Competitiveness of

China’s Traditional Medicine Industry Based on the SWOT Model." Ccsenet.org. International

Journal of Business and Management, 7 July 2010. Web. 25 Feb. 2016

Country Analysis

http://www.transparency.org/

Political Risk Yearbook

Euromonitor.com

World factbook

International Marketing

Mark up

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https://books.google.com/books?

id=C4a6BQAAQBAJ&pg=PA50&lpg=PA50&dq=mark+up+prices+on+traditional+chinese+me

dicine&source=bl&ots=5-

Qj5gSkHH&sig=IkrcFKi7KqkDLIRCMrpnoUMHMRE&hl=en&sa=X&ved=0ahUKEwjG3Mb

wsZvMAhVLPz4KHbpNBs44ChDoAQgkMAI#v=onepage&q=except%20traditional&f=false

WVS

http://www.worldvaluessurvey.org/WVSOnline.jsp

International Management

Expatriate Info

http://www.expatarrivals.com/china/accommodation-in-china

Business Ethics in China

https://www.scu.edu/ethics/focus-areas/business-ethics/resources/business-ethics-in-china/

Hofstede Dimensions

https://geert-hofstede.com/china.html

Salary Info

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https://www.glassdoor.com/Salaries/shanghai-assistant-manager-salary-

SRCH_IL.0,8_IM999_KO9,26.htm

Salary Explorer Site

http://www.salaryexplorer.com/salary-survey.php?loc=44&loctype=1&jobtype=1&job=36

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