Pre-feasibility report Expansion to India, Hong Kong and Taiwan

Pre-feasibility report: Expansion to India, Hong Kong and Taiwan

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Table of Contents

TOC o “1-3” h z u HYPERLINK l “_Toc388059058” Introduction PAGEREF _Toc388059058 h 3

HYPERLINK l “_Toc388059059” Background: Assessing the Emerging Markets PAGEREF _Toc388059059 h 3

HYPERLINK l “_Toc388059060” The Drivers of Entry Success PAGEREF _Toc388059060 h 5

HYPERLINK l “_Toc388059061” Entry modes PAGEREF _Toc388059061 h 5

HYPERLINK l “_Toc388059062” Firm Size PAGEREF _Toc388059062 h 5

HYPERLINK l “_Toc388059063” Economic distance PAGEREF _Toc388059063 h 6

HYPERLINK l “_Toc388059064” Openness and market size PAGEREF _Toc388059064 h 6

HYPERLINK l “_Toc388059065” Country risk PAGEREF _Toc388059065 h 6

HYPERLINK l “_Toc388059066” India Case Analysis PAGEREF _Toc388059066 h 6

HYPERLINK l “_Toc388059067” Indian Population PAGEREF _Toc388059067 h 6

HYPERLINK l “_Toc388059068” Indian Economy PAGEREF _Toc388059068 h 7

HYPERLINK l “_Toc388059069” Indian Growth Potential PAGEREF _Toc388059069 h 7

HYPERLINK l “_Toc388059070” India risk factors PAGEREF _Toc388059070 h 8

HYPERLINK l “_Toc388059071” Taiwan Case Analysis PAGEREF _Toc388059071 h 9

HYPERLINK l “_Toc388059072” Taiwanese Population PAGEREF _Toc388059072 h 9

HYPERLINK l “_Toc388059073” Taiwanese GDP per Capita PAGEREF _Toc388059073 h 10

HYPERLINK l “_Toc388059074” Taiwanese Economy PAGEREF _Toc388059074 h 10

HYPERLINK l “_Toc388059075” Taiwanese Risk factors PAGEREF _Toc388059075 h 11

HYPERLINK l “_Toc388059076” Hong Kong Case Analysis PAGEREF _Toc388059076 h 11

HYPERLINK l “_Toc388059077” Hong Kong Population PAGEREF _Toc388059077 h 11

HYPERLINK l “_Toc388059078” Growth potential PAGEREF _Toc388059078 h 12

HYPERLINK l “_Toc388059079” Hong Kong Risk Factors PAGEREF _Toc388059079 h 12

HYPERLINK l “_Toc388059080” Findings, Recommendations and Conclusion PAGEREF _Toc388059080 h 13

HYPERLINK l “_Toc388059081” Works Cited PAGEREF _Toc388059081 h 15

IntroductionExpanding to emerging markets provides tremendous potential for higher profitability. The process however requires that a company assesses and identifies the inherent attractive features of the prospective international markets and partners to determine the opportunities for success. Prior to negotiating and implementing exportation strategies, franchises or strategic alliance partnerships, a range of social, legal, economic and political concerns encountered when entering particular emerging markets have to be considered (Wright and Scott 19). Traditionally, expansion of companies, from developed nations, was to politically-stable, culturally-similar and economically-rich nations. The trend has however changed in recent years with most of these companies seeking expansions in emerging markets. Australian winery HolyCow, which seeks to expand to emerging markets, such as India, Vietnam and Southern China (Hong Kong), provides such a case scenario. This pre-feasibility report examines factors that HolyCow should consider in its expansion strategy, it further identifies the success factors to be considered.

Background: Assessing the Emerging MarketsEvaluating the profitability of emerging markets is significant for HolyCow, since it enables the company to assign an expansion opportunity priority. In the case of China, India and Vietnam, the factors to be taken into account for assessment include the target economy’s growth rate, the population size and GDP per capita.

GDP per capita is essential for classification of the target markets since it depicts the income level of the state, in addition to its political security and economic viability. It is crucial that the GDP per capita be adjusted in relation to the target country’s population’s purchasing power, as this enables accurate comparison with other potential markets.

The size of population is also a significant factor that measures the economic potential of the targeted market. Despite this, HolyCow must carefully analyse the demographics rather than presuppose that an extensively large population is equivalent to its growth potential. For instance, with populations that are approaching 1 billion, India and China are assumed to be among the most promising destinations for expansion. Despite this, a great bulk of the population in the two markets lacks adequate income to acquire western-styled merchandise. In addition, they do not live in the main urban areas where the international companies are mostly situated.

The economic growth rate should also be considered in evaluating the merits of expansion to the targeted countries. While developed markets such as Australia demonstrates single-digit or slow growth rates, most emerging markets maintain high growth rates in respect to GDP per capita and GDP. For instance, the World Bank and International Monetary Fund estimate that the pace of growth of the emerging markets will double that of the developed nations in 2025 (Maxwell). Emerging markets are currently considered as driving the global growth even as the developed economies of Europe, United States, United Kingdom and Japan have stagnated (Oakley). The International Monetary Fund has further projected that developed nations’ GDP will grow by some 2.5 percent yearly over the next three years, although the emerging nation is predicted to grow by over 6.5 percent in the same period (Oakley). On the other hand, while policymakers within the industrialised nations worry about stagnation, those in the emerging world fret about inflation (Livemint). These growth trends are attractive for international business expansion, since they show that development of unexpended demand for Western-styles commodities, such as wine, minimise political risk factors and rising middle-class.

The Drivers of Entry SuccessIn considering the drivers of entry success, the strategy, marketing and international business come into play. The key firm factors affecting entry success or failure include entry timing, mode of entry, firm size. The country factors include cultural distance, economic distance, country openness and country risk.

Entry modesThe entry mode affects how a firm confronts the challenges of entering a host country. Available modes include exports, where HolyCow’s wines would be produced in Australia and solid in Hong Kong, Taiwan and India. License and Franchise, where HolyCow offers an agent in the three target markets to use its proprietary technology in exchange for payment. Next is Alliances, where HolyCow identifies a partner to share resources and activities in the host countries. Next is Joint Venture, where shared ownership of business occurs between HolyCow and a partner firm in host country. Next is Wholy-owned subsidiary, where HolyCow assumes complete ownership of an entity in a host country to manufacture wine.

Firm Size

New trade theories suggested by Krugman (1980) postulate that firm specific advantages determine its successes. Several studies have showed that large firms, with over 500 workers, may have greater success due to greater capital resources to invests, such as through acquisition of smaller firms in host countries (Johnson and Tellis 8-9).

Economic distanceThis refers to the extent of economic disparity between countries. International firms are more likely to succeed in host countries with low economic distance. This is since they have the same market segments and consumes similar goods and services (Johnson and Tellis 10).Cultural distance also affects how partners in alliances or joint ventures interact.

Openness and market sizeOpenness depicts the lack of regulatory obstacles and other entry barriers. Openness makes it easy to enter a target market. It further stimulates demand and increases range of products. Greater market size also offers better investment opportunity (Cheng and Kwan 16)

Country riskCountry risks refer to the uncertainties, such as finances, political and economic factors. Political risks are the laws and regulations. Imposition of tariffs discourages foreign investments as it lowers profitability. Financial and economic risks refer to inflations rates and balance of payment crisis. Markets with high inflations discourage investments, as they increase uncertainties in profitability.

India Case AnalysisIndian PopulationIndia has positioned itself as a major international hub for foreign investment, based on its large human capital, with its population of nearly 700 million people, with 500 million of them aged 25 years and below (PWC 9-10). India is one of the leading emerging markets that have colossal economic potential for foreign investments that seek to leverage the country’s growing consumption of Western-styled commodities, such as wine, by the country’s developing Indian middle class.

Indian EconomyA report by PWC (8-10) projected the Indian retail market to go beyond US$1.3 trillion by 2010, from the 2012 figure of US$500 billion. The country’s modern retail is projected to growth from US$28 billion to some US$ 220 billion across all industries, including the alcohol and beverages (PWC 9-10). Currently, India’s nearly 500 million people aged 25 years and below, has access to more money resulting to high demand for western-styled products, including wine. The Indian retail sector accounts for some 20 percent of the country’s GDP. The cumulative inflow of foreign direct investment in brand retail trading is US$ 69.26 million. The country’s retail sector is expected to grow by 20 percent (PwC 9-11). This presents a great opportunity for HolyCow to retail its wine in India.

Indian Growth PotentialThe country’s growth rate is among the highest globally, triggered generally by the growth on domestic demand. A report by the International Monetary Fund (IMF) projected the country’s growth rate at more than 7.8 percent in the three years following 2012, attributed to the country’s strong consumption and the abundant employment opportunities within the agricultural sector (Accenture 10-11).

A survey by Accenture (10) showed that most foreign investors in India have taken advantage of the labour-cost arbitrage, which has placed the country on the world map as a key exporter of competitive manufacturing and low-cost manufacturing. The international firms have tapped greatly into the large educated workforce, as well as English-speaking pool of workers that has placed India ahead of other emerging markets.

The globalisation strategies of more and more companies from the developing countries are expanding to India to enable local development of products, in addition to short supply chains while at the same time taking advantage of the country’s cost differentials and greatly educated workforce (Deloitte 4-7).

The country is set to transform into one of the world’s five leading consumer markets. According to estimates by the Asian Development Bank, it is estimated that the country’s growing middle class is likely to increase sporadically over the next four decades to be more than 1.2 billion, by 2030, and further to 1.4 billion in 2050 (Accenture 10). Currently, India has nearly 20 percent of the entire world population.

The country has a highly-skilled workforce. The United Nations estimates show that the country’s working population will grow by approximately 240 million people from 2010 to 2030. Compared to other emerging markets, the country’s average age will be 29 years, as compared to 37 years in China (Accenture 16).

These imply that India will in future provide HolyCow with an opportunity to grow, by tapping into the growing middle class population over the next four decades. HolyCow will also benefit from cheap labourforce

India risk factorsAlthough India is an attracting emerging market based on its large population and high opportunities for growth, the market has potential risks. The three major areas relate to selecting and managing local partners in joint venture, human resource-related risks, and the local business practices that are often not aligned with the international firms (Accenture 14-18). Despite the underlying risks, international firms can prepare themselves adequately, form the market entry and select the right partners. They can also set up preventive measures to minimise initial business-related risks (Deloitte 4-7). Additionally, the India’s larger cultural and economic distance means that HolyCow’s high-end wine may fetch little sales.

Taiwan and Hong Kong’s economic growth is however slowing because of the tightened monetary policy. India has also been affected. Worse still, inflationary effects have worsened the Indian economy. A 2012 Deloitte (4-7) risk survey of India established that successful international companies should focus on identifying the clear roles and responsibilities for each joint venture to hedge misunderstanding. Further, they should focus on human resource management and training to reduce cultural divides and to reduce high turnovers while increasing the productivity. Additionally, they should emphasise on finance matter and compliance.

Based on these analyses, the factors that make India attractive include the higher incomes that drive purchase, evolved consumption patterns, adoption of western lifestyle trends, high population that provides market opportunities.

Taiwan Case AnalysisTaiwanese PopulationTaiwan has a population of 23 million people, such as that of Australia. It is recognised by the Australian Government as part of the larger People’s Republic of China (PRC), based on Australia’s one-China policy (DFAT). Even though international firms that in the earlier years entered Taiwan with the key purpose of obtaining resources, acquiring low-cost factors of production, diversification of sources of supply and protecting key supplies, The Taiwanese population’s rising middle income class has resulted in market-seeking behaviour among multinational corporations. This allows HolyCow to tap into the market with its high-end wine products.

Taiwanese GDP per CapitaThe country’s 2013 GDP was estimated at US$489.7 billion. The GDP per capita is estimated at US$20,706, as of 2013. The country’s GDP growth (2.11 percent in 2013 with expected 2.8 rise in 2014), was attributed to increased exports (DFAT).

According to Ernst & Young (4) 2011, the country’s income per head in terms of purchasing power parity reached US$41, 386, compared to the 2007 figure of US$35,000. Ernst & Young (4) projects the figure to rise to more than US$55,251. The high purchasing parity indicates makes it among the world’s top 20 largest economies. This shows that Taiwan has a high purchasing power for HolyCow’s wine, with potential for growth in sales in 2016.

Taiwanese Economy

Since Taiwanese economy is largely export-oriented, the country’s GDP has shifted in sequence with the global economy. For instance, it has slightly contracted, since the 2009 Global Economic Depression, before recovering sharply. In 2011, the country’s GDP was estimated at US$467. Ernst & Young (4) estimates the economy to grow further, expanding by an average 3.8 percent, as a result of the high demand from OECD countries. The economy is also highly competitive. The collective foreign direct investment flow was US$ billion in 2012. It is expected to reach US$29 billion by 2020 Ernst & Young (4). The stable economic growth is key attraction for foreign investments in the country. This indicates that HolyCow has a potential for growth in Taiwan. The growth of export is projected to sustain strength, increasing by 7.6 over the next one decade. This presents HolyCow with an opportunity to export its wines through Taiwan.

Taiwanese Risk factorsIn selection of the country to invest in, Taiwan’s politically and economic stability are major attraction factors. A report by Ernst & Young (4) indicates that foreign investment decisions in Taiwan are greatly influenced by the country’s political stability, which is relatively greater than that of other Asian economies, such as Hong Kong and India. The country however has low exchange rate stability, non-clear tax policies and relatively inconsistent rule of law, which to a greater extent signify uncertainties, giving foreign investors a reason to seek investments elsewhere (Ernst & Young 4-5).

In regards to market entry methods, a report by Ernst & Young (5) shows that most foreign investors prefer joint ventures, partnerships and alliances. Despite the approach, most investors have preferred directly controlling their Taiwanese operations in their home countries.

Taiwanese economy is relatively open to foreign investment, which in 2012 was at US$5.56 billion. It has relatively few restrictions, although foreign investors have often complained about red tapes and slow deregulation and restrictive financial services. Generally, application for foreign investment and approval are straightforward. In 2013, it was ranked at position 16 out of 189 countries where doing business is easy (DFAT).

Hong Kong Case AnalysisHong Kong PopulationHong Kong has a population of 7.2 million and is a major provider of services to China. The city enjoys great autonomy except for matters of foreign affairs and defence. It has a highly educated workforce and middle income economy. These present HolyCow with an opportunity to sell its high-end wines.

Growth potentialIn 2013, Hong Kong’s growth was estimated at 2.9 percent, driven by high domestic demand, with exports to Europe and US remaining weak. In addition, the Hong Kong’s inflation rate reduced by 0.7 percent in 2013. The projected GDP growth is 3 to 5 percent each year. The stable economy is a key attraction factor for expansion by HolyCow.

Hong Kong Risk FactorsThe city’s economic growth has depended on open trade and investment regime, with relatively transparent regulatory and legal system. Free flow of human capital in and out of Hong Kong has speeded up Hong Kong’s development as an international investment destination (Shaukat and Guo 21-24).

Hong Kong has a free and open market that permits unrestricted movement of services, goods and services. For instance, exports to the city are charged zero tariffs with minimal non-tariff and minimum non-tariff barriers. Hong Kong has a highly transparent legal and regulatory system (PKF 4-8).

It is also regarded as an important source of first-rate beverages such as wine globally. According to Australia’s Department of Foreign Affairs and Trade, Hong Kong’s strategy to become a world leader in wine trading and distribution (DFAT) has presented opportunities for Australian wine producers and distributors of wine-related services, including auctioning and storage, to grow.

These analyses show that market entry barriers in Hong are greatly lowered. They also signify great potential for sale of HolyCow and great growth potential.

Findings, Recommendations and ConclusionOverall, the factors that make Hong Kong, Taiwan and India attractive for HolyCow wines include their higher incomes and growing middle class that drive purchase, evolved consumption patterns to prefer western-styled goods, adoption of western lifestyle trends, and high population that provides market opportunities. These imply that the three markets provide HolyCow with an opportunity to grow by tapping into the growing middle class population over the next four decades.

It is established that success of wine sale and growth potential for HolyCow’s winery is significantly lower in India than Hong Kong and Taiwan. First, India has inconsistent policies. It is also culturally and economically more distant to Australia than Taiwan and Hong Kong. Further, China and Hong Kong’s infrastructure are significantly superior to that of India, which makes operations much difficult for new entrants. In addition, both Hong Kong and Taiwan have ready markets from Mainland China. This means that more success would be assured by investing in Hong Kong and Taiwan.

Concerning the firm size and mode of entry, a key finding is that larger firms tend to be more successful entrants as they can seek strategic alliance, franchises and joint ventures more easily. Since HolyCow is a medium-sized company, it is suggested that it should invest in Hong Kong through exportation. Taiwan has poor importation history as most businesses in the country are exporters. This means HolyCow can only enter Taiwan through forming strategic alliances and Joint Ventures to export its wines from China to other countries.

Both Hong Kong and Taiwan are also located in Peoples’ Republic of China, which offer better infrastructure and greater market because of the greater Chinese population. China has gradually transformed into a key play in the global economy (Johnson and Tellis 2-3). Given the rapid economic growth, the country is placed top as one of the greatest nations with purchasing parity (Johnson and Tellis 2-3). China’s tremendous economic renaissance and future prospects signifies that entering the market is critical for the economic substance and success of HolyCow. The country has over the last one decade maintained its repute as being the leading emerging market when it comes to foreign direct investments (FDIs).

Low legal restrictions and openness of Hong Kong first and Taiwan second, also make them better investment choice than India. India has more red tapes.

Despite the underlying risks in the three markets, HolyCow can prepare itself adequately to select the right partners and to establish preventive measures to minimise business-related risks from the beginning.

HolyCow should focus on identifying the clear roles and responsibilities for each joint venture or alliance it seeks in India or Hong Kong. Further, Hong Kong should focus on human resource management and training to reduce cultural divides with India.

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Cheng, Leonard and Yum Kwan. The Location of Foregin Direct Investment in Chinese Regions: A Further Analysis. Hong Kong University of Science and Technology: Hong Koing, 1998.

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Maxwell, John. “Beyond the BRICS: How to succeed in emerging markets (by really trying),” PricewaterhouseCoopers, 2014. 15 May 2014, <http://www.pwc.com/us/en/view/issue-15/succeed-emerging-markets.jhtml>

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