And The Affects On Staples, Inc.
By Chris Lim
OMBA 606-D
FALL 2002
Six Smart, Team 2
China wants to continue being a formidable global contender; therefore, it must continue to analyze and to reconfigure its strengthening economic infrastructure. In the past two decades, China has undergone a major facelift and in the center of this revitalization is the proven reconstruction of its economic infrastructure. Much of China’s success with this revitalization stems from its promotion of the privatization of enterprises, the breakdown of its monopolies to provide fair competition for all entrepreneurs, and the creation of treaties, agreements, etc. that promote foreign business relations. The changes made have taken over twenty years and future changes can take just as long in the 21st century. In the case of Staples Inc., this global business on the fast track will have to either wait to forge into the Chinese market or go in cautiously. There are economic forces, within China’s economic infrastructure, that can impede the operation of a future Staples Store; therefore the corporation should consider the adequacy of transportation, foreign trading, telecommunications and the Internet, and finance.
China wants to continue being a formidable global contender; therefore, it must continue to analyze and to reconfigure its strengthening economic infrastructure. As China’s economy continues to grow, the current forecasts, both optimistic and pessimistic about its economic future, have become a hot topic among discussions about the global economy. This is as it should be. The state is now a big player in the international economy, as mentioned earlier. John Rohwer, author of Asian Rising, and John Naisbett, of Megatrends Asia, forecast that China in half a century or so could be larger economically than “the U.S., the European Union and Japan all together” and by a considerable margin (Copper, 2002, paragraph 22).
China’s economic infrastructure is very complex (Hand, 2002), yet it consists of the basic textbook economic infrastructure. The economic infrastructure consists of “those services provided by public and private utilities which foster production, trade, and consumption” (Sullivan, 1999, p. 475, side note 1). Both public and public utilities and services can include power, telecommunications, water, sewage and sanitation, piped gas, roadways, railways, ports, airports, and most importantly banking. Basically, any state’s economy cannot expand until a sufficient echelon of infrastructure is reached, and any economic growth, that happens, has to provide for infrastructure growth in order for development to live on (Sullivan, 1999, p. 475). In regards to China, it becomes very important to identify the economic infrastructure’s components that would either assist or impede the state’s enterprises that are both domestic and foreign. As a result of this analysis, it is clear how imperative it is that foreign corporations determine whether or not it is practical for them to enter a certain country to conduct business. Hence, it is apparent that China must continue to restructure their economic infrastructure because within its different economic components of there are still obstacles that make the infrastructure complex.
In the past two decades, China has undergone a major facelift and in the center of this revitalization is the proven reconstruction of its economic infrastructure. Much of China’s success with this revitalization stems from its promotion of the privatization of enterprises, the breakdown of its monopolies to provide fair competition for all entrepreneurs, and the creation of treaties, agreements, etc. that promote foreign business relations (China.Org.cn, 2002). The drawback is that the process of economic reconstruction is very time-consuming and very drastic in nature. The changes made have taken over twenty years and future changes can take just as long in the 21st century. In the case of Staples Inc., this global business on the fast track will have to either wait to forge into the Chinese market or go in cautiously. This analysis will look at the effects of all of the pertinent economic components, within China’s economic infrastructure, that can assist or impede the operation of any future Staples Store which includes the following components: telecommunications and the Internet, transportation, banking, and foreign trading. This paper will also include suggestions to the corporation to consider before forging into China.
In examining both the current booming, yet unsettled economic infrastructure in China and the current situation facing Staples, Inc.’s stop on its store expansion plans it became apparent that there would several economic infrastructure components can definitely assist the growth and operations of the office-supply company, if it reaches the ideal levels. And these same components could impede any kind of growth, if these components fail to continue undergoing restructuring. Despite the decrease Staples’ number of retail stores it continues to invite investor attention. Staples, Inc. shares continue to be one of the largest office-supply superstore chains in the U.S. and it has doubled over seven-month span, within the years 2001 – 2002 (Staples, 2002). In regards to China, it has drastically changed its regulations in order to allow foreign investors into the state, however foreign investments still face obstacles in this changing antiquated infrastructure. Hence, the following debate: should Staples consider growing with China or not?
Although China’s economic infrastructure consists of so many basic economic components, there are four primary components that can affect the establishment of a Staples Store in China and they are: transportation, foreign trading, telecommunications and the Internet, and finance. The influence is either positive or negative on store, thus it is crucial to breakdown the analysis of the possible effects.
Currently China’s transportation infrastructure is not only the most rapidly improved, but it happens to be the most complex due to the fact that it consists of lots of old and new roadways, antiquated railways, undeveloped rural dirt roads, ancient waterways (along the major rivers), and booming air traffic and this is important for Staples to be aware of. The state’s roadways, waterways, and airways allow more than 1.2 billion people to travel from village to town to city, across different provinces, etc. (Xinhuanet, 2003). At present, China is seeing a growth in transportation that parallels its growing economy; thus, the state has to continue its reconstruction of the transportation infrastructure.
One mode of transportation that would be very important for Staples is transport on China soils. Both major highway and railroads are heavily trafficked and in need of reconstruction or expansion. However, ongoing projects are in the works by the Chinese. For example, there is the Beijing-Kowloon Railway, which is a single railway line that connects Beijing to Kowloon in Hong Kong, and it opened in 1996. Since then it has been a major source of transportation for many business people to conduct further domestic business, etc. However, the problem that the railway faced is that there has been a dramatic surge in the number of passengers and a jump in the amount of freight; thereby, the construction of a double-track became a necessity. Currently the last section of this newly constructed double-track line of the Beijing-Kowloon Railway (one of the major north-south trunk lines in China) was put into operation this January. China plans to continue numerous highway and railway reconstruction projects, in order to meet the needs of the busier lives in which its billion citizens live, with the consumption of an estimate of 26.9 billion Yuan (equal to 3.25 billion U.S. Dollars) over a one to two-year period (Xinhuanet, 1/11/2003).
Another of China’s primary mode of transportation that can influence Staples is its air travel. China, especially in Hong Kong, has experienced an increase in air traffic, specifically with air cargo, that has exceeded the pre - 9/11/2001 level of air travel (Xinhuanet, 1/08/2003). One result of this increase is the decision made by China to increase air traffic control. On 01/17/2003 China announced its new and strict flight control regulations over general aviation that are meant to prohibit unauthorized air activities, including acts of terrorism, which will go effect May 1, 2003 (Hoovnews, 01/17/2003). And due to the increase in air cargo traffic, China’s airliners, such as Hainan Air Group, have begun to tap into the air cargo line business. The Hainan Air Group, the fourth largest Chinese carrier, is the second carrier to have its own all-cargo airline, in China (Hoovnews, 01/15/2003). Also increased international air traffic prompted the air transport agreement made between Canada and Hong Kong, which will allows the airlines of both parties more flexibility to operate at their own schedules to, from, and beyond each others territories in hopes of improving transportation choices for the air travelers (Cdn-news.com, 01/15/2003). This agreement can ease possible business relations between Staples, Inc. in Canada and China.
China, for hundreds of years, has always depended on its waterways for it primary mode of transportation, however most of its transportation now relies on traveling on land and in air, which may not really benefit Staples either. However, shipping is China's most developed transportation and distribution sector. Chinese shipping companies are ranked among the world's largest and provide services to all of the world's major ports (Gates, July/August, 2001).
China has made huge strides in busting open its foreign trade and this has immensely improved its economic infrastructure, which could support a Staples, Inc. invasion. Over the past three decades treaties and agreements, such as the Sino-US Relations, the World Trade Organization (WTO) accession, etc. have continued to forge new foreign relationships that have fostered so much valuable importing and exporting that has grown China’s economy. “One of the best ways to assess power infrastructure is to examine [a country’s] financing (Sullivan, p. 489). And in China’s current status, China is considerably powerful in the trading game. After consideration of China’s openness to foreign trade, maybe Staples should jump to do business.
Foreign trading has reached a fast pace for growth and China is evolving into a formidable trading nation. It happens that in 2001, China’s total import and export totaled $509.8 billion, which is 4.6 times as much as that in 1989 and 1.57 times as in 1997. This signifies an annual growth of 13.6 percent, which was much more than the 6.1 percent world trade growth and the 9.3 percent GDP growth that occurred over the same period of time. As a result, China’s position in global trade jumped from No.15 in 1989 to No.10 in 1997 and so forth to No.6 in 2001. Even the trade mix is also rapidly growing. Included in this mix are the trade of electronic and mechanical products, which have high technological content and added value, are China’s largest exports for 8 years consecutively. The export of such products has totaled $118.8 billion in 2001, an increase of close to 30 percent and 12.5 percent higher than in 1989 and 1997 and this makes up 45 percent of China’s total exports. This signifies a new and high-tech product growth point of exports because in 2001 China exported $46.5 billion worth of new and high-tech products, 17.5 percent of the export total and 13.5 percentage points higher than that in 1991. As foreign trade expands, more Chinese companies have obtained trading rights to import and export. Today, about 60,000 domestic companies have trading rights, while in 1989 only more than 6,000 companies had such rights. In addition, the number of operating foreign-invested companies has increased from over 10,000 to more than 200,000 (China.org.cn, 11/13/2002).
China’s telecommunications and the Internet infrastructures have sprung in growth and this has helped to boost the efficiency of communication for both domestic and foreign businesses, including the likes of Staples, Inc. It was only ten years ago that most Chinese people had never seen a cellular phone, but today 150 million Chinese people possess their own cellular phone. It was twenty years ago when it used to be difficult for a family to acquire a telephone and today there is an average of 25.9 telephones per 100 persons in the entire country. For China, this signifies an explosion in telecommunications technology, which has provided convenience to the daily life of millions of Chinese people and symbolizes as a primary example of the positive changes in China's infrastructure (Xinhuanet, 10/16/2002).
On the other hand, the development of telecommunication and the Internet happens to be uneven among provinces. Statistically, the number of subscribers per 10,000 persons with pagers, cellular phones, E-mail access, Internet access, urban telephone, rural telephone, and public telephone are greater in basically three municipalities directly under central government control: Beijing, Tianjing and Shanghai; along with a few prominent provinces: Guangdong, Liaoning, Zhejiang, and Fujian, which led all other regions in the number of subscribers of local telephone, internet, and mobile phone services. The development of telecommunication service is much slower in the central and west regions, especially in Tibet, Guizhou, Sichuan, and Gansu. For instance, the number of subscribers per 100 persons of local telephone service was 13.42 in Guangdong, while it was only 2.18 in Guizhou (Lin, 2001). As a result of the lack of nationwide telecommunication Staples will be limited to where it can do business.
The infrastructure of finance could potentially become one of China’s strongest infrastructures, as long as Chinese investors and financial institutions continue to grow richer, despite deflating U.S. dollars and foreign investors continue to buy into China. In the past seven years, China has received more foreign direct investment than any other country in the world except the U.S., and it was in the early 1990s that foreign invested enterprises were allowed to produce and export a wide variety of goods within China and now yields nearly 50 percent of China's exports as well (Chick & Jain, 2001). This demonstrates China’s favorableness to investors.
For instance, an equity strategist from HSBC, one of the largest banking and financial services organizations on the globe, stated that it is expected that China could possibly see returns for this year to be as large as 20 percent (including other Asian economies: Korea & Thailand), despite the global volatility, the downward pressure facing other global economies, and the weakening U.S. dollar. This is in large part due to the excellent valuations in Asia. And it happens to be that a great deal is valued into China, hence it is expected that primarily the investments will be into China. Investors will become more attracted to businesses that vend in China and vend products to Chinese consumers. The HSBC sees that Hong Kong’s Hang Seng will reach 11,000 points by the end of 2003 and anticipates that China-related indices will exceed the performance of the blue chip index. The HSBC also predicts that China will also see a rise in its telecommunications companies, which will heavily rely on domestic sales generating local currency earnings. Therefore, investors will be attracted to cellular phone businesses due to its great potential (Business Report.Com, 01/16/2003).
A second instance to consider is that China has opened itself up into a new prospect for foreign investment and it created a strong foundation ranging into many different sectors of its economy. Now, foreign investments have increasingly flown into China. It was in 2001 that China took in $46.9 billion of foreign investment and this is an increase of 12.8 times more than that in 1989, 3.6 percent more than in 1997 and a mean growth of 24 percent. It is success seen over the past 13 years when an economy like China takes a total of $400 billion of foreign investment and turns up with returns with the use up to 97 percent of its entirety, since the beginning of its economic reconstruction. This signifies that China has been the largest foreign invested country over the past 9 years, in a row. China’s foreign investment utilization system allowed it to optimize on the foreign investments. The foreign-invested companies produced an export that made up 50 percent of all exports in the year 2001, which is an increase of 9.4 percent in 1989, and the mean level of foreign-invested projects has jumped from $970,000 in 1989 and $2.43 million in 1997 to $2.65 million in 2001. Primarily the foreign investors have shifted from manufacturing industry to basic industries and high-tech industry. Especially after China opened its service sectors, commercial retailing, foreign trade, telecommunications, banking and insurance did this become the new attractive areas for new foreign investment. Currently global multi-national companies are actively investing in China, and more than 400 of the top 500 global companies have investment in China and which have established nearly 400 regional offices/centers in China (China.org.cn, 11/13/2002).
Staples has a lot to consider before deciding to venture into China, a state that happens to be economically favorable yet is undergoing a lot of fast changes that can ruin any new entering foreign business, if that business does not plan accordingly. Staples, Inc. already knows that China’s transportation is improving, both on land and in the air, so that transportation may not be a huge issue. Staples, Inc. is aware that China is aware that both foreign trade and foreign investing has improved a great deal, which means that a foreign company like Staples, Inc would be now be more acceptable in China. However, are foreign retailers, like Staples, Inc., which sells office supplies, going to be readily accepted in China? And even though telecommunications and the Internet are booming in China it is only growing in certain areas of China, so will that work against Staples, Inc.? The answers are maybe it won’t readily acceptable in all areas of China and where there is a lack of telecommunication there maybe little to no need for a Staples store there.
One strategy for Staples, Inc., if it decides to go into China is to research into the needs of China’s people for office products and to research into possible strategic locations where its stores will be easily accessible to its potential customers. China needs to seek locating its future stores into where transportation of its goods will be simply accessible. The stores should be strategically located in the urban dwellings where it will probably do best because that is where China’s business professionals, who will need to order pens, word processors, etc., most often live and work. Incidentally, China was deemed the fastest growing computer market on the globe (Copper, 10/01/2002); hence, they should be in those locations where computers will more likely be bought. Staples, should also consider opening stores where people optimally use the most cellular phones and the Internet because these potential customers are more likely to need services from Staples and where there is the Internet there is the possibility for online sales of Staples’ products.
The second strategy is to consider a generic suggestion to all U.S. companies looking into venturing into China for success and that is to look at the history, the recent trends, etc. in which U.S. companies have ventured into China and have either succeeded or failed. There happen to be no magic rules for conducting business in all of Asia, especially in China. So, the best advice is to look at China’s unique business environment, examine its own long-term commitment to researching and comprehending the “commercial, regulatory, legal, political and cultural aspects” of China before entering. One thing for Staples, Inc. to remember is that U.S. companies will always see challenges in conducting business in China, however the possible earnings and success could be great (Chick & Jain, July/August, 2001) and that it is not a U.S. global company until it has gone global into China.
In conclusion, there are lots to gain from Staples, Inc. deciding to grow with China’s economy, but planning and assessment of China’s changes in the infrastructure are very important. Staples should wait to see more progress before venturing into China’s new economy. Despite the state’s economic gains and success in modernization, the economic infrastructure is still undergoing lots of changes and there’s no promise as to whether or not the changes will produce further success for China. Staples, Inc. has no guarantees for success; hence it should wait a few years in order to study for patterns in China’s progress because its success truly began after the turn of the century. Lots of effort should be put into observation and assessment and on the enterprise building itself up from the inside before forging into China, which is an entirely different land and culture from the U.S.