Benefits, Costs and Risks Associated with doing Business in China under the Trump Administration
International business refers to the entire commercial (transactions governmental, private, and sales, logistics, investments, and transportation) which occur between two or more regions or countries beyond their political boundaries. Some of the major international trade blocs include the USA, China, and United Kingdom among others. The US is the largest trading bloc worldwide since it is the biggest trading partner for many countries. It approximately has businesses globally. The country has enjoyed tremendous benefits for the virtue of being the main trade centre for many years under various governments. Its' foreign investment amasses enormous benefits given the favourable exportation and importation conditions. Among the successful foreign companies in the US is the General Motors in China. The business is a joint venture with the Shanghai Motors Limited which was formed in 1997. US-China relations, doubtlessly one of the world's most important bilateral ties are about to get a stress test (Malawer, 2017).Till recently, the US had peaceful or less complicated relationships with other business partners. However, the selection of Donald Trump as president of the US proves to be a threat in these relations, particularly in China, given Trump's utterances against its current business arrangement with the country. The paper will discuss international companies about governance, entry to foreign markets and business practices and decisions due to culture.
During his campaigns, Trump vowed to practice trade protectionism. As such, he pledged to abrogate trade agreements as well as impose unilateral tariffs to America's international business partners. In the case of China, Trump floated the idea of increasing tariffs as high as 45% on Chinese imports to the US. If he carries out this campaign pledge, the Chinese exports to the United States worth $483 billion in the year 2015, could collapse. The move will also affect businesses in China that depend on exporting their goods to the US because it's it main exporter (Miura, et.al, 2016).
Apart from a looming trade war between China and the US, the US economic relations risk suffering a major blow under Trumps presidency. If the US imposes more restrictions on Chinese investors in the US, the same thing is likely to happen to American investors in China. For instance, Chinese Investors have invested in the US, especially in the Textile industry.On the other hand; America's major automobile companies such as Ford, General Motors, and Apple have set business in China. Therefore, if the US makes trading with China difficult, her businesspeople are the ones likely to suffer (Malawer, 2017).
Trump also plans to penalize American entrepreneurs and companies which have invested or plan to invest in foreign countries among them China. The move will affect both the Chinese economy and the investors by interfering with their profit margin. Therefore, most of the American business people in China are likely to withdraw their activities and go back to the US or risk high tax rates when sending money back home.
The regulatory authorities in China are likely to react to the economic tensions which might arise with the US. The causes of this trade war include the expected changes in the US under President Trump regarding foreign trade such as the policy on business regulation, the exchange rates, foreign investment rules like the CFIUS, antitrust laws. Geopolitical factors are also part of the bigger issue. As such, feedback for the above concerns could decrease to Chinas approval for the US alongside its' multinational corporations investing in China, resulting in potential outbound investments to China.
Companies in China risk closure or lack of expansion if the 45% tariff rate is implemented. For example, the automobile companies have optimized on global mechanized footprints and supply chains to manufacture large and profitable vehicles in the US and smaller cars to lower cost markets in China and Mexico. For instance, General Motors China depends on the Chinese market to buy some of its' smaller vehicles which have been manufactured according to their choice and preference. Therefore, if Trump goes ahead with his policy, then it will be difficult for the companies to export their products to the US. With little profits, such businesses will face bankruptcy and less expansion of their market to other regions in the country besides the foreign markets.
Nevertheless, all is not lost for China following Trump's governance. If he goes ahead with the protectionist strategy, China might gain from it. For instance, if most of the American firms in China go back to their country, China will have an opportunity to develop and increase its' manufacturing and technological proficiency with the aim of producing what the American firms manufactured. Given that most of the US companies employ Chinese citizens manufacturing to the level of their predecessor will not be that difficult (Malawer, 2017). By producing same goods as those of the US, their global value will increase making them America's competitors rather than trade partners. The business reputation will result in high exports to other countries especially the developing ones. Further, other countries with not so good trade relations with the US or others looking for new options will automatically wish to invest in the China, hence increasing its significance on international trade. As a result, those with businesses will enjoy lower trade tariffs in the countries their products will be sold.
On the same note, if Trump's administration manages to withdraw from the Trans- Pacific Partnership (TPP), then it will provide an opening for the Chinese country to benefit from the reductions carried on new business tariffs. Additionally, China will have a preferential market access with the TPP members. In general, China shall not be shut down from making massive trade deals making the business environment at home more favourable to anyone wishing o invest in their country.
Trump has incessantly accused China of currency manipulation and is determined to bring manufacturing and its related jobs to the US. He has even pledged to bring Apple back to the US despite the fact that it depends on the China for its production process(Malawer, 2017).Thus, if this happens; there is the risk of many small scale businesses which deal with selling products made in China to lose their source of livelihood. For the Chinese companies depending on the apple model, the cost of production is expected to rise under the new US government.
The negative economic consequences are not restricted to the relationship between China and America. For instance, most of China's exports (35%) include processing trade. This means that the country imports components from various countries then assembles them for exportation. In 2015, the cost of China's imports was $169 billion from countries like Japan, Taiwan, and South Korea. Therefore, if trade between US and China is affected, then the countries which depend on their economies will also be affected given that they are all critical business partners to the two nations.
An evaluation of why GM entered a Joint Venture in China
A joint venture approach (JV) is described as a business agreement with two or a designated number of companies. The parties agree to bring together their assets for the intention of achieving a specific aim. The task may involve a new venture or a business activity (Yan, et.al, 2016). In this type of arrangement, each of the partners is liable for the profits, losses as well as the costs related with the firm Nonetheless, the venture is on its own, apart and separate from other interests of the business. The most common use of the joint venture business technique is when entering a foreign market. An interested business forms a partnership with a local company dealing with its line of production. For instance, a company that wishes to expand its distribution network to a new country needs to enter into a JV agreement to supply products to a given local business to ensure it benefits from an already existing distribution network.
A whole owned subsidiary, on the other hand, is a company whose stock is 100% held by another company (parent company). Therefore, the subsidiary company operates with the permission of the parent company which is not okay for as it limits its chances of growth, innovativeness or expansion. Such a situation is typical when investing in a foreign company. However; it has many disadvantages as opposed to advantages. Hence, it is understandable why the General Motors opted for a joint venture instead of the latter in entering the Chinese market (Shi, et.al, 2014).
The General Motors automobile company entered a joint venture agreement with Shanghai General Motors Company Limited in China in 1997. After the merger, the company was then known as Shanghai General Motors Corporation (SAIC).GM made this decision for many various reasons. For starters, Shanghai Ltd. was among the leading automobile industries in China at the time hence doing business with them would be a sound investment (Yan, et.al, 2016). SAIC had and still has the knowledge of the countries market and experience not forgetting the required connections necessary for such a big foreign business. Thus, it helped GM from the hustle of getting a business permit in a foreign country since it is a long process entirely.
Since Shanghai limited was not in any joint venture with any of GM's competitors, the choice was very convenient for GM (Harwit, 2016). By joining with one of the largest car manufacturer and dealers in China, GM saved itself from a potential competitor given the fact that it would be a new business in a different political, social and economic setting. Furthermore, China's regulations and legislations regarding foreign investment at the time were very unaccommodating. Thus, it was tough for an international automobile firm to do business in the country alone. So, for GM to enter China, its only option was to enter into a JV with any motor corporation.
By going into a JV with Shanghai Ltd, there was the high possibility that GM would benefit immensely. This is because many people would want to buy its products being an affiliate of SAIC, one of the country's top vehicle manufacturers (Shi, et.al,2014). A high number of customers would be as a result of GM expanding throughout China, especially because the market was relatively untouched. That is why when the GM sales declined in the US in 2009, the Chinese market was still high with large growth rates. Consequently, GM decided not to license its' technology to its partner because it saw significant potential for new product development in China.
Had it entered as a wholly owned subsidiary, GM motors would not have had the chance to create a brand name in China as it has today because all the products would be under the Shanghai Ltd brand. Also, GM could not have a say regarding the creativity and innovative levels since it would have the minority shares. Thus, this was appropriate for its business interests because licensing or having a wholly owned subsidiary would not allow them to manufacture new products in the future.
Subsequently, the social, cultural distance between GM USA and GM China was a reason for a JV. The operating environment in China was much different from that of the US, (the general headquarters of the company) regarding the customs, taste, institutions and traditions.Therefore, GM needed a partner more conversant with all this to help it manage the subsidiary, the workforce as well as help it determine the best products for the market.
The technological prowess in China prompted GM to this venture. The primary objective of any business is to come up with innovations suitable for the changing times as well as the choice of the customers ( Yin,et.al,2016).So, GM saw an opportunity for advancement given the fact that the Chinese are experts in this field. A joint venture will ensure that the company had the best workers who would help it in improving its knowledge base and also introduce new operating methods and innovations. As a result, GM produced vehicles exclusively for the Chinese market which proved to be very successful due to high sales.
The joint venture by the two corporations has shown itself to be successful over the years. The success can be attributed to the effective working relationship between SAIC and GM. They have been able to stay relevant o the ever growing market and most importantly, they enjoy full support from the Chinese industry. GM in China is the largest automobile market so far, and all this happened due to its VJ with SAIC. As such, GM China is expected to grow, and it's confident that new and better innovations are on the way. However, it faces serious challenges, for example, the Trump administration and policies against China. There is the risk of retaliation which may force the company to change to a wholly owned subsidiary which will affect the business of the GM. Similarly, any tension between the two parties may influence the business as each will be forced to go separately. Lastly, there is the risk of future competitors such as Ford, Toyota, and Nissan who also want to get a piece of the Chinese market.
The Hofstede Model and Cultural differences in Business
Geert Hofstede researched on the thinking and social action differences by sampling more than fifty employees with different cultures in a multinational business organization situated in more than 70 regions. He identified six cultural dimensions from the research: (Hofstede, et.al, 2015).
Power distance: the level to which a culture accepts the fact that power is distributed unequally in society.
- Individualism: the degree to which the community advocates for collective or individual success
- Masculinity: focuses on the society's attitude in reinforcing the traditional masculine roles, achievement, and power.
- Uncertainty Avoidance Index (UAI): concentrates on the degree of tolerance for ambiguity and uncertainty within the society.
- Long Term Orientation (LTO): focuses on the extent society embraces long-term devotion to traditional forward thinking values.
(Geert Hofstede, 2015), defines culture as the collective programming of the mind distinguishing the members of one category or group of people from another. He along other scholars has carried out various studies with the aim of understanding the cultural values and different cultures among people. The information collected from such studies is significant in enabling us to understand and interact with people from other cultures which may be drastically varying from ours. The research is also the basis in which social and business dealings are held. The six cultural dimensions can be used to analyze how the cultural differences between China and USA can affect business practices about the General Motors China (SAIC). For instance, The General Motors Corporation (US) who conducts a joint venture business with Shanghai Ltd may either be affected positively or negatively by the vast cultural differences between the two countries.
Highly collectivist culture of China
To start with, China has a highly collectivist culture.According to them; the family is the most fundamental unit. As such, the prosperity of the family as a whole is more important than individual success (Hofstede, et.al, 2015). In business, loyalty is emphasized so, the employees in many Chinese firms are very good at teamwork as well as loyal in the business organizations since they work as a family. On the contrary, the American culture takes an individualistic approach. Therefore, the people take care of themselves first and their immediate family members only such as the children. America has an individualism score of 91 which is the highest in the world. The individual index is beneficial to the SAIC given the devotion of the employees.
However, the masculinity index is likely to affect GM China. For instance, China has a high level of masculinity. Therefore, the society reflects a domination of strict standards of competition, assertiveness, achievement, competition and material success, which are associated with male roles almost universally (Hofstede,et.al,2015).As such, GM China is likely to face challenges or opposition in not only hiring female employees but also in giving top positions such as management. Thus, although how good a talented female worker may be, the administration will be forced to give them lesser roles since the Chinese society has not yet embraced women professionalism in all fields of employment. Such a scenario is contrary to the US since it has a low masculinity level, hence allowing women to compete with men professionally. So, GM America has a high number of female employees as well as those who have higher ranks.
On the same note, GM China can be affected due to the power distance perceptions of the Chinese culture. Being a collectivist country, the people believe in that power is for the chosen ones hence the huge variation between the rich, the middle-class and low-class commoners. China has a High Power Distance which means that the people do not aspire to grow for example in business .this status comes with showing much respect to those in higher positions. Thus, the employee relationship between the management will not be conducive to GM China since the employees are afraid to give their opinions which might be useful to the firm. As such, there little or no participation in decision making by the workers will affect the effectiveness and innovativeness of the employees. However, in the US, the power distance is relatively low, and as such, the decision-making process involves both employees and management hence providing for better solutions.
Still, the culture to deal with ambiguous or risky situations among the Chinese people is very different from that of the US (Sanders, 2014). So, the employees or GM's joint venture partner will not be willing to invest or involve themselves in such situations. Instead, Shanghai Ltd. May prefer predictability and following structures which result in precise laws and behaviour. For instance, firing an employee, embracing new manufacturing processes or typically engaging in other entrepreneurial activities may not be easy for GM China. As expected, this is also different from the US organizations which are always ready to take a risk as well as work with new people every day.
Subsequently, the Chinese culture is likely to affect the overall management decisions to be made regarding GM China operations. All the decisions have to be made based on the countries values and customs. Additionally, the marketing strategy may affect or make the business.For instance, the Chinese culture is conservative hence adverts almost naked women are not welcome since they can cause a lot of criticism. Besides, inappropriate adverts can also affect the businesssince they are likely to lose customers (De and M,2013).T
Further, the consumer culture can also affect the business. For example, the people believe in less spending when it comes to material things such as cars, and instead, they opt to use the money for other activities they view as worthwhile. So, GM has to understand the preferences of the Chinese people to produce cars which match their taste and financial capabilities. This will affect the innovativeness of the company given that it may produce vehicles which may not be popular or appreciated by the people.
Fixed Exchange and Floating Rate Regime Systems
A floating rate regime is the exchange rate arrangement maintained between the United States with all its major trading partners such as China.In this scenario, the exchange rate refers to the price freely agreed in regards to demand and supply.For instance, foreigners buy the American dollar when they want to purchase assets or goods and services (Born, et.al, 2013). Similarly, the US citizens sell the American dollar in foreign countries to buy goods and services in foreign countries. So, the exchange rate is determined by the particular rate that clears these markets.
Consequently, when there is a high demand for US goods or assets about the rest of the world, the exchange rate of the dollar appreciates. Such a practice is necessary to maintain an equilibrium or balance between the value of the imported and exported dollar. If the dollar appreciates, it makes the foreign goods cheaper for the American citizens which in turn increase the purchasing power of their income. Secondly; it offsets the changes in aggregate demand which in the first place altered the exchange rate.
In a fixed exchange rate regime, the government agrees to sell or buy any amount of currency at a predetermined rate (Born, et.al, 2013).Such a rate may be linked to one foreign exchange or many foreign currencies. An attempt to influence the interest rates by fiscal policy would prove sustainable because money will continue flowing in and out until the rates return to the worldwide level.However, in reality, there are different transaction costs given that investors demand varying interest premiums in various countries besides them changing over time. So, countries with fixed exchange rates have limited freedom in regards to using monetary and fiscal policies to pursue their national objective without affecting their exchange rates.
Advantages of the Exchange Systems
The fixed rate exchange system is sure to offer much stability for the investors as well as increase international trade. Because the exchange rates stay the same, the exporters and importers can plan their business policies without fearing the effects of a depreciating or an appreciating currency.Moreover, the system makes the producers more disciplined i.e. they are required to maintain the quality of their products and services alongside controlling the cost of their production to stay competitive compared to other international businesses.This merit allows governments to increase the inflation levels and focus more on stimulating economic growth and international trade in the long run. On the same; it is believed that the fixed exchange rate system reduces speculative activity globally.Nonetheless, the statement is considered to be true under the condition that the adopted exchange rates are profitable for both foreign and domestic entrepreneurs.
The chief merit of the floating interest rate system is its flexibility as well as the likelihood of the countryts economy to quickly adjust to the changing market conditions.For instance, if there is a violation of the balance of payment deficit, and then the system allows for currency adjustment in the outflow and inflow of money to the country. The process makes the domestic products automatically competitive (if the currency appreciates) and makes the foreign goods more competitive (if the currency depreciates).Secondly, this system automatically determines the interest rates in a respective country hence allows for the efficient control of the economic balance.
The most important criteria that GM uses to choose between the fixed rate and floating rate regime systems is identifying the operational costs specifically, the exchange rate risks for each system . Identifying the risks is the primary factor which determines how GM conducts its business. To start with, most currencies are usually at a floating rate although there is speculation, loss or gain in earnings when they are transferred from foreign to local currency.GM needs to discover ways to resolve the effects of the exchange rate changes (Towbin, et.al, 2013). Exchange rate risk can also lead to exposures such as financial, transaction, and translation exposures and if not managed correctly, GM can lose its net worth. Hence, the General Motors management reduces the threat by entering into different foreign exchange options and forward contracts which enable the business lock prices.
In a case of anticipated revenues, expenses and other services denominated in foreign currencies, derivative instruments like swaps, options and currency forwards are used. Even so, GM Financial is exposed to the interest rate risk. The rates change with variations in the availability of capital in the market or fiscal policies. If not moderated, the risk can break down GM's finances as well as a result to a decline in its net earnings. Thus, for security purposes, GM transfers its fixed rate investments to trusts and in turn, sells the fixed or floating rate securities (Towbin, et.al, 2013).
Similarly, GM has risk counterparties and has formed some partnership with the respective counterparties to compensate the exposures from the risk. For instance, GM buys raw materials, parts, supplies; energy and freight to manufacture vehicles as well transport them to their final destination. However, in case price fluctuations and speculations in commodities, there will be high volatility resulting in net losses. During times when the fuel prices fluctuate, a company should be able to compensate the risk. In such situations, GM uses various commodity options to stabilize the price exposures.
The US-china relations are on the verge of war if the Trump administration interferes with the country's business, especially in increasing the tariff rates. Nonetheless, there are risks, benefits, and costs which are directly associated with carrying out business in China. General Motors' has a joint venture business with Shanghai Ltd. The reasons for the JV include lower costs in starting the business, convenience, recognition of the Partner Company, better returns, the social, cultural distance between the two countries and china's technological prowess. So far, the business is still solid. Correspondingly, the massive cultural differences between the US and China are likely to affect GM China business practices. Using Geert's dimensions of international workplace cultures, it is evident that differences in the power distance, individualism, masculinity and uncertainty avoidance influence the way GM business is run in China. The floating exchange rate regimes and fixed rates are systems used by companies to in determining the fixed rates about foreign and local currency. For GM, identifying the operational costs of a business is the criteria GM applies to decide on the two systems. Thus, a lot of economic changes are expected under the Trump leadership, and as a result, most businesses need to be ready for anything in the future.
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Shi, W. S., Sun, S. L., Pinkham, B. C., &Peng, M. W. (2014). Domestic alliance network to attract foreign partners: Evidence from international joint ventures in China.T Journal of International Business Studies,T 45(3), 338-362.
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- Date: 8 November 2015