FdA Business and Management Bournemouth University Partner Colleges University Centre Yeovil

International Business: Marks and Spencers Expansion into China Beverley Cox

Unit

Leader: Dave Howell

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Contents Background of Marks and Spencer Main Factors Influencing Marks and Spencer to invest so heavily in China Method of Foreign Direct Investment Used by Marks and Spencer in China i) Wholly Owned ii) Joint Venture iii) Mergers and Acquisitions

9. 11. 13. 16. 17.

Marks and Spencer in Europe Cultural Differences to be Aware of Bibliography Figure Table Appendices

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Background of Marks and Spencer On 2nd October 2008 Marks and Spencer (M&S) opened their first branch in West Nanjing Road, Shanghais premier shopping street, in what was their first step in a strategy to making a major engagement in China, that strategy seeking to open up to 40 stores in China. This Report outlines the expansion options to M&S both in China and Europe with suggestions and reasoning for a future strategy to aid their expansion in both areas. M&S is among the top 6 UK retailers. It operates over 300 stores in the UK and is present abroad, in 29 countries. Its international operations consist mainly of franchises but it also owns a number of stores in Hong Kong. M&S has a turnover of over 7.3 billion (Marks&spencer.co.uk, 2012). M&S operates in the following segments: Clothing M&S offers womenswear; lingerie; menswear; childrenswear and footwear.

Food - M&S has a range of fresh foods; ready meals, special-occasion foods and wine. Home M&S sell designer furniture and have launched their

accessories/furniture store, Lifestore, successfully.

Financial: they launched the &more card which is both a credit card and a loyalty card. Online services: through M&S, you can also order and send flowers via the internet. (Marksandspencer.co.uk, 2012)

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Main Factors Influencing Marks and Spencer to invest so heavily in China China has evolved very rapidly. It is developed in many areas. In order to get an idea of what factors are influencing M&S to invest so heavily in China a detailed SWOT analysis has been carried out (app.1). The SWOT is an important tool which helps organisations analyse the environment in which they operate to aid effective strategic decision making (CIPD, 2010). The SWOT was used to identify the Chinese market currently, what macro environment factors could affect M&S and what their position within China would be. From the analysis, it can be seen that the strengths and opportunities far outweigh the weaknesses and threats. However, what is clear is that China is an emerging market that has excellent growth and an immense population making it a high risk which, if successful will reap huge rewards for M&S as the greater the risk, the greater the return (Goetzmann, 1996). As noted in the SWOT, the Chinese government is working hard to develop infrastructure throughout their vast and divided country in order to connect the Chinese population. Once those roads are in place, the Chinese will overtake the US in the number of cars on the streets, leading to a boom in industry (Trippon, 2009). As a state that exports goods on a large scale that were produced on its own land to foreign countries, China is creating work for their population whilst becoming ever more industrialised which can only mean that the state of the economy will be good unlike other countries that are in recession. An idea of how developed China is becoming or has become can be given by looking at its GDP. The current GDP of China is estimated at $6.988 trillion, compare that to the USA GDP of $15.065 trillion and the UK gdp of $2.233 trillion and it can be seen just how developed China is, making its economy a very close competitor of the USA. This rapid growth potential could be the driving force for M&S investment (Story, 2011).

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Since joining the World Trade Organization (WTO) in 2001, China has become a fearsome competitor on the field of global trade, increasing exports by almost 600% between 2000 and 2008 and growing at annual rates averaging 10%. China has achieved these gains by leveraging its productive capacity, low labour and capital costs, and strong state support for export-driven growth. In recent years, China has also employed increasingly complex trade policies and strategies, both fair and unfair, to advance its economic interests. Such schemes involve ensuring Chinese manufactured goods consisted of China sourced components only thereby eliminating the competition. That said, M&S already use suppliers in China to produce their products which could see them as a desirable addition in China in that they are bias to Chinese produced goods. The seemingly corrupt economy would in turn look after those that abide by the rules and culture of China (Gerwin et al, 2012). Not only is China a member of G20, it is also a member of the APEC trade bloc (AsiaPacific Economic Co-operation) who between the 21 members make up 45% of the worlds trade (BBc.co.uk, 2012).

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Method of Foreign Direct Investment Used by Marks and Spencer in China Foreign direct investment (FDI) refers to the flow of investment in a foreign economy as with M&S in China. FDI is the amount of capital whether long term or short term used to purchase assets in a foreign country. It is through FDI that a company becomes multinational. However a large amount of already multinational companies are the companies that generate a large amount of the FDI flows throughout the world (Buckley, 2009). China is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial Crisis but rebounded in 2010 as can be seen from figure 1:-

Fig.1 (Greyhill Advisors, 2010)

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Historically, FDI which sees companies enter into new economies has been directed at developing nations as companies from advanced economies invest in other markets, with the US capturing most of the FDI inflows. While developed countries still account for the largest share of FDI inflows, data shows that the stock and flow of FDI has increased and is moving towards developing nations, especially in the emerging economies around the world such as China (Economywatch.com, 2010) There are several types of entry into a country for an organisation including:Wholly owned company or subsidiary Joint Venture Merger or Acquisition

i)

Wholly Owned M&S chose to follow the wholly owned company route in order to enter China (Marks&spencer.co.uk, 2012). This form of entry is often seen with large sophisticated organisations whose desire is to make more money abroad. Wholly owned ownership provides the company with control and the ability to more closely coordinate operations within the company worldwide (McFarlin et al, 2010). M&S could have chosen this route for that reason of making more money but perhaps their decision was closely linked to the cheap labour and potential market that China has to offer which are two key components of an attractive country for investment (Piana, 2005).

In order to understand why M&S chose to enter China as a wholly owned company, the other options need to be summarised:ii) Joint Venture Joint ventures are bilateral and involve two companies who are within the same industry but not necessarily from the same country to partner with resulting

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strategic advantages for those companies involved. venture include:-

Typical reasons for joint

A need to access technology that could affect competition Access to distribution channels that may not be available elsewhere One company could not raise the capital on its own

The main advantage of joint venture is the cost. Using a joint venture to enter a country is considerably cheaper than entering as a wholly owned company obviously because capital is shared accordingly. The main disadvantage is that if the two companies are from different companies and therefore cultures, strategic decision making could become impossible. Research shows that joint ventures have a fairly high failure rate. Could this be why? (Graham et al, 2005). M&S however do seem to have an eye on the cultural needs of China. According to their Annual Report, their local warehouse within China produces clothes more suitable to the petite Chinese (Marksandspencer.com, 2012). iii) Merger & Acquisition Mergers and acquisitions are similar to joint ventures except they normally occur between two non competitive companies (vertical) but can occur between two competitive companies (horizontal). An example of such an acquisition is the purchase of UK based CIP Technologies (a high tech company) by Huawei (a telecommunications company based in China). looking to grow. The Chinese company was looking to holster UK research and development whilst the UK company was Therefore, Huawei entered the UK by acquisition of CIP Technologies at the benefit to both companys strategic goals and thereby creating a FDI outflow for China (Ruthven, 2012). M&S could have chosen to enter by merger or acquisition if the outcome would have satisfied its strategic goals. However, the main disadvantages are as with joint ventures - cultural differences and control of decision making (Rugman et al, 2006).

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Marks and Spencer in Europe M&S have their International Business Model readily available and state that it is made up of partly and wholly-owned subsidiaries and franchises. This mix allows us to tailor ownership models that are appropriate for specific markets, enabling us to build strong partnerships and expand the M&S brand into new territories (Marksandspencer.com, 2012). In October 2011 M&S re-opened their now flagship store in Paris, a member of the European Union trade bloc. The store originally closed along with several others due to sliding profits and consumer confidence. Add these factors to the ever increasing strength of sterling against European currencies at that time and disaster was inevitable. However the introduction of the Euro has led to the creation of the European Financial Stability Facility which is a reform aimed at stabilising the currency within the European Union. With that in mind and the obvious willingness of M&S to holster cultural views and needs, it seems that it was the right time for M&S to reenter Paris. Again they entered by way of wholly owned company. The author believes this to be a pretty safe bet for M&S due to the reforms applicable to currency stabilisation and the fact that entering a country as a wholly owned company, as mentioned before, provides greater control (BBC.co.uk, 2012). It seems that the most effective and profitable way to enter a country is by way of wholly owned. That way, M&S can utilise a countrys resources which will be cost effective to the company creating savings and thus increasing profits. Match that with the ability to adhere and adapt to the distinct cultures and leaderships within those economies this can only mean a recipe for success. Does that make investment in Paris a safe bet? Looking at the Annual Report of M&S, confidence is obviously not as strong as their flagship store investment suggests as their anticipated stores within France are all intended to be by way of Franchise (Marksandspencer.com, 2012). It seems that M&S are using the wholly owned process to enter a country and then use simply as an anchor to utilise available benefits or perhaps because of the well documented partnership between the two countries whereby the leaders of both have agreed that they will form an alliance against protectionism (Guardian.co.uk,

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2012) meaning markets would open up and provide opportunities that werent already available and M&S have seen this as an opportunity that could benefit their strategy.

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4.

Cultural Differences to be Aware of Culture:the ideas, customs, and social behaviour of a particular people or society (Oxforddictionaries.com, 2012) Research of M&S involvement with China and Paris has highlighted the definitive need to comprehend the cultural needs of those economies in order to belong. That said, China and France are not at the same level developmentally but are very similar culturally. Both China and France have very masculine cultures whereby they are extremely hierarchical and inequalities are accepted. M&S would need to bear that in mind. The UK culture is that inequalities should be minimised and people should be treated equally regardless of knowledge, status, colour, religion, etc. This is not the case with China and France (Hofstede, 2001). A major difference between China and France is that the Chinese put family and close groups first and not work. This could cause commitment to employment by M&S to be low when employees put their families and close units first, unlike with France and the UK who are much more individualistic states and commit on the basis that they themselves will reap benefits (Geert-hofstede.com, 2012). That said, individualism within states comes with economic growth and as China is emerging fast, their culture will undoubtedly change in line with what is seen within developed countries such as the UK (Nakata, 2009). Hofstede through his 5 dimensional model also found that both China and the UK are masculine countries in that what is said is not always what is actually meant. There is a need with these countries to have the ability to read between the lines and M&S should take this into account. France on the other hand was found to be a feminine country and that what was said was actually what was meant but that the downside

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to being a feminine country meant that the attitudes towards work were lax in that minimal hours were worked and plenty of holiday was taken (Hofstede, 2001). These are just a few considerations that M&S need to take into account whilst investing in China or Europe. Although M&S have already started producing clothing in line with local demand within China, ie. petite sizes, the main point M&S needs to take onboard with regard to investing in any country, not just with China or Europe, is that although countries contain millions of people, those people are all individuals but as a whole their country has a core set of beliefs and assumptions (Lewis, 2006). It is those beliefs and assumptions that need to be taken into account if they wish their strategy to become successful and thereby reap the profits.

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Bi bliography BBC.co.uk, 2012. A Guide to World Trade Blocs. Available from: http://news.bbc.co.uk/1/hi/business/4510792.stm 21 January 2012 BBC.co.uk, 2012. The Company File: M&S To Close European Stores. Available from: http://news.bbc.co.uk/1/hi/business/the_company_file/390379.stm 12 February 2012 Benson, L, 2002. China Since 1949. Pearson Education Ltd, Essex Buckley, P J, 2009. Foreign Direct Investment, China and the World Economy. Palgrave Macmillan. Available from:<http://lib.myilibrary.com?ID=274294> 14 February 2012 Economist.com, 2010. The Rising Power of the Chinese Worker. www.economist.com 2 February 2011 Available from:

Economywatch.com, 2010. Foreign Direct Investment (FDI). Available from: http://www.economywatch.com/foreign-direct-investment/ 31 January 2012 Gaebler, K, 2011. Resources for Entrepreneurs: Doing Business in China Cheap Labour in China. Available from: http://www.gaebler.com/Cheap-Labor-in-China.htm 10 January 2012 Geert-Hofstede.com, 2012. National Culture: China. Available from: http://geerthofstede.com/china.html 1 February 2012 Gerwin, E, McConaghy, R, 2012. Chinas Trade Barrier Playbook: Why America Needs a New Game Plan. Third Way Publishing. USA. Goetzmann, W, 1996. An Introduction to Investment Theory. Available from: http://viking.som.yale.edu/will/finman540/classnotes/notes.html 10 January 2012 Graham, J P, Spalding, R B, 2005. Going Global: Understanding Foreign Direct Investment. Available from: http://www.goingglobal.com/articles/understanding_foreign_direct_investment.htm Greyhill Advisors, 2010. FDI by Country. Available from: http://greyhill.com/fdi-bycountry/ 1 February 2012 Hofstede, G, 2001. 2nd Edition. Cultures Consequences: Comparing Values, Behaviours, Institutions and Organisations Across Nations. Sage Publications Ltd. London Lewis, R, 2006. 3rd Edition. When Cultures Collide. Nicholas Brealey Publishing. London

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Mac.doc.gov, 2012. Business Guides: Intellectual Property Rights. Available from: http://www.mac.doc.gov/China/Docs/BusinessGuides/IntellectualPropertyRights.htm 2 February 2012 McClenahen, J, S, 2012. Industry Week. Made in China: Strategic growth makes this the time to be manufacturing in the People's Republic. Available from: http://www.industryweek.com/articles/made_in_china_1011.aspx 10 January 2012 McFarlin, D, Sweeney, P D, 2010. International Management: Strategic Opportunities and Cultural Challenges. [Taylor & Francis. Available from:<http://lib.myilibrary.com? ID=315089> 14 February 2012 Marksandspencer.com, 2012. Your M&S, International: Wholly Owned. Available from: http://annualreport.marksandspencer.com/financial-review/international.aspx 1 February 2012 Morley Fund Management, 2004. China: Opportunities and Risks for Foreign Companies. Available from: http://www.insightinvestment.com/global/documents/riliterature/367922/china_opps_ risks_foreign_cos.pdf 2 February 2012 Nakata, C, 2009. Beyond Hofstede. Palgrave Macmillan. Available from:<http://lib.myilibrary.com?ID=255657> 15 February 2012 Nytimes.com, 2006. World: Asia. Available from: industrieshttp://www.nytimes.com/2006/06/30/world/asia/30aging.html 5 February 2012 Piana, V, 2005. Foreign Direct Investment. Available from: http://economicswebinstitute.org/glossary/fdi.htm 1 February 2012 Powers, J, 2006. China Trade: The Numbers Game. Available from: http://www.china.gaports.com/LinkClick.aspx?fileticket=gtftYmM9S1U %3d&tabid=75&mid=473 10 January 2012 Rugman, A M, Collinson, S, Hodgetts, Richard M, 2006. International Business. Pearson Education UK. Available from:<http://lib.myilibrary.com?ID=60201> 14 February 2012 Ruthven, H, 2012. Huawei Acquires CIP Technologies. Available from: http://www.mandadeals.co.uk/m-and-a-news/1687988/huawei-acquires-ciptechnologies.thtml 1 February 2012 Story, J, 2011. Invest in China for the Long Haul. Available from: http://www.thenational.ae/thenationalconversation/industryinsights/economics/invest-in-china-for-the-long-haul 21 January 2012

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Trippon, J, 2009. Why Invest in China? - Investment Opportunities in China. Available from: http://investmentchina.net/investment-china-why-invest-in-china.html 21 January 2012

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Figure Table No. Content FDI by Country

1.

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Appendices No. 1. Details SWOT analysis of M&S Investment in China

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