External Environmental Analysis – Ch03

Background Information: China’s E-Commerce Industry

More than two decades ago, a Beijing-based company sold the first item over the internet; it was also the first online sale in China’s history. While e-commerce was getting an incredible adoption in other parts of the world, China’s E-commerce was only beginning to take its first roots among businesses. The country has surpassed several E-commerce pioneers today, as the internet and technology become the pillars of its superiority. For instance, by 2004, China had over 60 million mobile phone users and over 90 million internet users (Kim et al., 2011). This number was second only to the United States. While China may be lucrative for German businesses, doing business in China requires a well-crafted strategy to compete with numerous established and sprouting businesses domestically. Consequently, foreign enterprises have had to rely on environmental analysis to understand the dynamics of Chinese e-commerce before narrowing it down to the specific industry.

Implications on the Plumbing Technology Industry

The rise of e-commerce in China has attracted many brands from different parts of the world, especially those whose products can get sold online to consumers or other businesses. As will be highlighted in the PEST analysis section, political, economic, social, and technological factors have all played a part in this expansion. The growth in online usage in China has specifically gained the attention of businesses entering their expansion phase as a strategy to capture a larger market share. The China Internet Network Information Center (CNNIC); the country’s official Internet data source, has indicated that the number of e-commerce sites and internet population in China has increased tremendously over the years. In 2001, CNNIC published data for the end of 2000, indicating that the number of internet users in China was 22.5 million (Jiang & Prater, 2002). In 2001, this number rose by over 4 million new users within the first quarter. Nearly 70 percent of websites in China got established between 2000 and 2002, and over 95 of these are corporate sites. This growth on the internet in China has provided companies, specifically in the plumbing technology industry, plenty of opportunities for a practical broadcast medium. A firm can use its website to announce its products and services to potential customers. This analysis could be the beginning of new achievements for Viega Holdings, whose E-commerce footprint has not been to its best in China’s market.

Figure 1: China Internet Users (Source: CNNIC, Apr 2020)

Implications on Viega’s Operations

Since its launch, Viega Company has invested in growing its market shares in other countries besides Germany. Arguably, it has not been successful in China’s market despite its unique proposition and strategic entry. The continued growth of E-commerce in China presents an opportunity to reconsider the strategy and make changes where possible. It is the best time for the company to leverage the growth in E-commerce and the changes caused by the global COVID-19 pandemic to raise its sales volume in the market. The analysis could be on different aspects subdivided into several sections by common frameworks. PEST (Political, economic, social, and technological), SWOT (Strengths, weaknesses, opportunities, and threats), competitor analysis, and Porter’s Five Forces Model will be used to give a better understanding of the e-commerce industry and the plumbing technology industry in China. Finally, the findings could provide insight into the improvement of Viega’s footprint in the market.

The Macro-Environment: PEST Framework Analysis

PEST is an acronym for sources of change: political, economic, social, and technological. This framework is a powerful tool used by businesses of all sizes to understand the risk associated with different strategies. It helps companies identify the changes and consequences of the macro-environment on a firm’s expansion and strategic position (Sammut-Bonnici & Galea, 2015). Its significance lies in the fact that there are factors that a firm cannot control but whose analysis could help realign its corporate strategy to shift the environment in its favor. Firms operate as a part of a larger ecosystem, vulnerable to exogenous factors. Strategies seek to understand these factors and evaluate how the business models could evolve to match the ecosystem.

There are other variations of this framework. The PESTEL model adds the environmental and legal factors above the PEST model. Even though both are vital, the PEST model offers better insight. It could be crucial in analyzing the e-commerce industry in China.

Political Factors

Political factors directly affect the growth of E-commerce, hence impacting the efforts of a firm to expand and improve its E-commerce footprint in the market and industry. The political environment in China is influenced by government, public opinion, and consumer advocacy groups. The government needs to have control measures to oversee internet development. The government agencies must work collaboratively to ensure the safety of e-commerce transactions, which could attract and support all types of businesses that transact online. Some countries are examining tax structures to ensure activities do not reduce the tax revenues of local governments and agencies. Political issues may have an impact on e-commerce and its growth. If e-commerce gets impacted negatively, then other markets that rely on e-commerce will be affected. For instance, most plumbing companies in China transact online and rely on sales through online platforms and company websites. If e-commerce gets influenced by political factors, the market becomes unfavorable to such a tech industry.

The general political landscape in the People’s Republic of China (PRC) is exclusively determined by the ruling party (the Communist Party of China, CPC). With over 80 million members, CPC is the largest political party globally (Aljazeera, 2007). Though policies and laws get implemented with minimal impediments, the focus is usually to create true communism by building a harmonious socialist society (Kuhn, 2011). Yet, the CPC has opened its economic borders to the outside world, such that foreign companies can enter and grow in China’s market with few limitations. This practice has made the country attractive to invest in for many companies. Steady growth in the country’s Gross Domestic Product (GDP) and incentives offered to investors are attributable to CPC.

China’s plumbing technology industry has experienced several changes since 1998. Decreasing corporate taxes for high-tech companies significantly improved the productivity of foreign businesses such as Viega, increasing research and development in the domestic market. To increase foreign direct investment, China decreased the corporate tax rate to 15% for overseas firms relative to the 33% charged on the local companies (Shafiq et al., 2021; Cai et al., 2018). According to Shafiq et al., “The average tariff rate had been declined by 9.4% after becoming a WTO member in 2001. As a result of the lower corporate tax rate for the overseas firms than the domestic firms, China became the top destinations for FDI” (p. 12). Consequently, the market is conducive in terms of tax regulations and is conducive politically.

The governance system in China has served its purpose for a period now, and there is no possibility of it changing soon. Viega has to keep an eye on the industry-wide government priorities to predict trends. If the government initiates new favorable legislation for overseas firms, this could be the best chance to expand locally in other regions of China. The risk of having different policies with new governments is minimal in the country. Because CPC is the most dominant political party, it implies that new leaders will possibly carry the same ideologies as the current leadership, which could negate potential risks and threats against the rise and growth of Viega in China’s market. Non-government organizations and activist movements have an impact on the government. Thus, it is necessary for Viega to often collaborate with these groups to contribute better to the community goals and support the firm’s objectives. It must get done legally to avoid breaking policies meant to preserve the economic standings of this exponentially growing nation.

Economic factors

China is encouraging manufacturing and production sectors while targeting expansion of these industries by reliance on foreign markets. Notably, this has reduced the viability of the local market, especially for overseas firms, because of the increase in the number of competitors and cheaper substitutes. Trends indicate that foreign investment has been decreasing year by year. It implies that China’s manufacturing industry has become attractive for large companies having investment abroad rising year by year (Feng et al., 2018). Additionally, China’s network system still lags behind the projected trends, with network speed and popularity still far behind the developed countries such as Germany. Yet, it is necessary for foreign investors, companies such as Viega, to consider the viability of changing their marketing model to suit the ever-decreasing market in China as e-commerce takes over. The income inequality experienced over several years ago is dwindling in China as logistics systems improve. It could present an opportunity for the company to target the previously ignored rural consumers.

During the latest years, China’s logistics has developed far greater than its GDP. Since the country joined World Trade Organization, logistics has been one of the earliest industries to participate in international competition (Shen, 2020). Many foreign companies are taking this advantage to expand and promote their products in the market. Large chains and online retailers have sought to establish their distribution centers in the country, and others have partnered with third-party logistics providers. This trend might get impacted by the outbreak of the COVID-19 pandemic that has brought new kinds of challenges in logistics. As illustrated by the figure below, companies face challenges because of an increase in operating costs, a decrease in the number of orders, difficulties in financing, and others (Liu et al., 2020). Therefore, Viega must stay vigilant of these trends and always have a strategy that generates new opportunities. Demand is gradually picking up, and the industry is starting to see improvements after full economic recovery. Viega must deploy big data, AI, 5G, and other relevant technologies to improve operational efficiency. It may incorporate blockchain technology in its systems to promote product traceability and employee sharing to solve potential short-term workforce shortages.

Figure 3: Key difficulties encountered by logistics enterprises during the outbreak. Source: CFLP. Report on the impact of COVID-19 on road transport enterprises.

Despite the decrease in consumer spending in China, the skill level of the workforce in the market is moderate to high, presenting an opportunity for plumbing technology companies, such as Viena, to leverage it to improve services in the country and use a skilled workforce to create global opportunities. A critical threat in China’s market as far as the plumbing technology industry is concerned is the low consumption levels. Relative to post-industrial, high-income economies, China’s GDP composition is still far different from these economies. It is an insight that companies seeking to improve their footprint in China have to consider and seriously factor in its strategies. According to Springer et al. (2019, consumption’s contribution to China’s GDP is only half of the recommended OECD average. Springer et al. link this to two factors. Low labor value-added that limits household income and consumption and a high savings rate among households. These have had negative implications on consumption but stimulate investment. As Springer et al. asserts:

“Chinese household saving rates are among the highest in the world, a phenomenon which both limits consumer spending and fuels over-investment. Empirical evidence suggests that Chinese households devote a large portion of their income to savings as a way to self-insure against uncertainty in quality and reliability of China’s social services, such as education, health care, and pensions” (p. 1119).

Viega has to consider the implications of this and come up with strategies that entice more demand and reduce the potential impact of changes in inflation rate, exchange rate, and policies.

Other factors could impact Viega company, including but not limited to the inflation rate, exchange rate, economic cycles, and government intervention in the capital goods sector and in particular, construction supplies. The company’s performance is closely correlated with economic cycles in the country, which in turn could be impacted by the exchange rate. The country’s balance of payment has been improving gradually over time but still faces a significant deficit that could cause the implementation of monetary and fiscal policies. These policies, intended to stabilize an economy, could impact Viega positively or negatively depending on their focus on the plumbing technology industry. If the government lowers corporate taxes, continues to stabilize the exchange rate, and maintains a low inflation rate, Viega could see some improvements in the profitability and sustainability of its business model in the country. These changes are imminent, especially during the post-pandemic. It will be a period of numerous social factors that could potentially affect demand and supply equally.

Social Factors

Gender roles are changing in China. Viega could test various concepts to cater to and support these evolving gender roles in society. Additionally, media outlets play a crucial role in influencing public opinion in the country. Because of the presence of traditional media and the rise of social media usage in the country, Viega could use these two to support its promotional activities. Social media networks are growing at a staggering pace, attracting millions of new users across various platforms. For instance, it is noted that in 2017, monthly active users of Sina Weibo exceeded 340 million, an increase of 67% compared to the 2016 same period (Rinka & Pratt, 2018). This digital revolution enables users to connect, communicate and interact with each other. At the same time, it presents a marketing opportunity for companies that transact online. It has led to the emergence of social media influencers, which attract millions of followers in China’s market every day. According to Rinka and Pratt (p. 2), “With a credible image, a celebrity generally influences consumers’ attitudes and purchase intentions more than a non-celebrity spokesperson,” based on expertise, trustworthiness, and attractiveness. By creating and sharing products product advertisements online, Viega could leverage this opportunity to increase its popularity and gain more market share.

Societal norms and hierarchy factors could impact the firm. The society of China is a little bit different from the home market of Viega Holdings, Germany. The firm must focus on building a team that understands these differences and attitudes to serve customers in China. Chinese market favors humane-oriented organizational practices. Businesses must include interpersonal relationships in their business model when operating in China. Collectivism ranks high in China because of the in-group-oriented culture that prefers harmony (Wong, 2006). In China, every business activity is carefully examined and approved by authorities who may or may not have a neutral attitude towards their decision. It is a challenge for foreign companies because they may not replicate every societal norm the same as the domestic companies. Viega can combat this challenge by hiring more Chinese employees to operate in the market and including public feedback in crafting policies and guiding business activities.

Other factors that Viega has to consider include migration issues and leisure interests. Generally, the broader attitude towards migration is not taken positively by most people. It could impact Viega’s ability to rely on international leaders and managers for operations in the country. It has to employ and use locally known and experienced people to support its expansion strategy and improve its footprint. The customers usually give higher preferences to experiential products than traditional value positions in the capital goods sector. The company could use this as an opportunity to build products that offer a better customer experience.

Technological Factors

Companies have followed a leapfrog approach to significantly upgrade their technology infrastructure to improve their footprint in China’s market, specifically by increasing web presence. Despite this progress, some challenges arguably keep Viega far behind in achieving its objective of becoming one of the leaders in the plumbing technology industry. According to Tan and Ouyang (2004), these challenges include:

“The lack of a solid historic foundation of deploying and utilizing internal information systems, the poor integration of business processes with information systems, the existence of environmental barriers including security concerns, insufficient legal protection and laws, the low credibility of both vendors and consumers, and backward delivery and other supporting systems” (p. 3).

This impact is evident with the declining online sales in China compared to other countries. Tan and Ouyang also note that the Chinese wholesale and retail sectors suffer from poor credibility monitoring capacity, backward delivery, and inadequate IT infrastructure. Business-to-consumer transactions are also lower in China than in most other developed countries. For instance, Tan and Ouyang note that the combined online sales for consumers and businesses in China amount to 3.4% of total sales. It is less than half of the global average. Understanding these factors is crucial for the firm because they are popular for every company, and devising means to move past them could offer a competitive advantage.

Viega could analyze the latest technology-based innovations implemented by competitors to identify their progress and assess the industry’s direction. Understanding the strategies of key players in the industry could provide crucial insight in overcoming shutdown pressures. The firm must invest in research and development to keep up with customer expectations, trends in the plumbing industry and innovate to stay ahead of the competition. Finally, empowerment of supply chain patterns is now vital because technology has shortened the product life cycle. Suppliers can quickly develop products than before. It adds pressure on Viega’s marketing department to keep these suppliers happy by promoting a wide range of products, eventually raising the cost of operations. As key players in the industry continue to grapple with these dynamics, the firm must employ its innovative strengths to gain a competitive edge. The firm must also improve online payment information search, ordering, payment, and logistics delivery because internet payment will be the preferred payment method in electronic commerce.

References

Aljazeera. (2007, October 15). Profile: Communist Party of China. Breaking News, World News and Video from Al Jazeera. https://www.aljazeera.com/news/2007/10/15/profile-communist-party-of-china

Bruijl, G. H. (2018). The relevance of Porter’s Five Forces in today’s innovative and changing business environment. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3192207

Cai, J., Chen, Y., & Wang, X. (2018). The impact of corporate taxes on firm innovation: Evidence from the corporate tax collection reform in China. Human Rights Documents Online. https://doi.org/10.1163/2210-7975_hrd-9985-20190054

Chen, Y., Guo, F., Wang, J., Cai, W., Wang, C., & Wang, K. (2020). Provincial and gridded population projection for China under shared socioeconomic pathways from 2010 to 2100. Scientific Data, 7(1). https://doi.org/10.1038/s41597-020-0421-y

Feng, L., Zhang, X., & Zhou, K. (2018). Current problems in China’s manufacturing and countermeasures for industry 4.0. EURASIP Journal on Wireless Communications and Networking, 2018(1). https://doi.org/10.1186/s13638-018-1113-6

Hongfei, Y. (2017). National report on e-commerce development in China. Inclusive and Sustainable Industrial Development Working Paper Series WP17.

Jiang, B., & Prater, E. (2002). Distribution and Logistics Development in China. International Journal of Physical Distribution & Logistics Management, 32(9), 783-798. https://doi.org/10.1108/09600030210452459

Kim, K. H., Leung, L. W., & Leung, C. K. (2011). E-Commerce in China and its risks and opportunities for US companies. International Business & Economics Research Journal (IBER), 5(3). https://doi.org/10.19030/iber.v5i3.3469

Kuhn, R. L. (2011). How china’s leaders think: the inside story of china’s past, current and future leaders, revised edition.

Lee, H., Kim, M., & Park, Y. (2012). An analytic network process approach to operationalization of five forces model. Applied Mathematical Modelling, 36(4), 1783-1795. https://doi.org/10.1016/j.apm.2011.09.012

Li, B., & Yao, R. (2009). Urbanisation and its impact on building energy consumption and efficiency in China. Renewable Energy, 34(9), 1994-1998. https://doi.org/10.1016/j.renene.2009.02.015

Li, Y. (2004). Brand Effect on Consumer Behaviour in China.

Liang, J., Li, B., Wu, Y., & Yao, R. (2007). An investigation of the existing situation and trends in building energy efficiency management in China. Energy and Buildings, 39(10), 1098-1106. https://doi.org/10.1016/j.enbuild.2006.12.002

Liu, W., Liang, Y., Bao, X., Qin, J., & Lim, M. K. (2020). China’s logistics development trends in the post COVID-19 era. International Journal of Logistics Research and Applications, 1-12. https://doi.org/10.1080/13675567.2020.1837760

Long, W., Zhong, T., & Zhang, B. (n.d.). China: the Issue of Residential Air Conditioning.

Mohapatra, S. (2012). IT and porter’s competitive forces model and strategies. Information Systems Theory, 265-281.

Nishimura, T. (2002). “Heat pumps — status and trends” in Asia and the Pacific. International Journal of Refrigeration, 25(4), 405-413. https://doi.org/10.1016/s0140-7007(01)00031-7

P. S. Aithal. (2017). Industry analysis – The first step in business management scholarly research. International Journal of Case Studies in Business, IT, and Education, 1-13. https://doi.org/10.47992/ijcsbe.2581.6942.0021

Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors.

Qixun Siebers, L. (2011). Foreign retailers in China: The first ten years. Journal of Business Strategy, 33(1), 27-38. https://doi.org/10.1108/02756661211193794

Sammut-Bonnici, T., & Galea, D. (2015). PEST analysis. Wiley Encyclopedia of Management, 1-1. https://doi.org/10.1002/9781118785317.weom120113

Santandertrade. (n.d.). China: Reaching the consumer. https://santandertrade.com/. https://santandertrade.com/en/portal/analyse-markets/china/reaching-the-consumers

Scholes, K., Whittington, R., & Johnson, G. (2008). Exploring corporate strategy: Text & cases.

Shafiq, M. N., Hua, L., Bhatti, M. A., & Gillani, S. (2021). Impact of taxation on foreign direct investment: Empirical evidence from Pakistan. Pakistan Journal of Humanities and Social Sciences, 9(1), 10-18. https://doi.org/10.52131/pjhss.2021.0901.0108

Shen, R. (2020). The comparative history and development of e-Commerce in China and the United States. Journal of Mathematical Finance, 10(03), 483-498. https://doi.org/10.4236/jmf.2020.103029

Springer, C., Evans, S., Lin, J., & Roland-Holst, D. (2019). Low carbon growth in China: The role of emissions trading in a transitioning economy. Applied Energy, 235, 1118-1125. https://doi.org/10.1016/j.apenergy.2018.11.046

Su, C., Madani, H., & Palm, B. (2018). Heating solutions for residential buildings in China: Current status and future outlook. Energy Conversion and Management, 177, 493-510. https://doi.org/10.1016/j.enconman.2018.10.005

Tan, Z. &., & Ouyang, W. (2004). Diffusion and Impacts of the Internet and E‐commerce in China. Electronic Markets, 14(1), 25-35. https://doi.org/10.1080/1019678042000175270

Wang, J. (2014). Opportunities and challenges of international e-Commerce in the pilot areas of China. International Journal of Marketing Studies, 6(6). https://doi.org/10.5539/ijms.v6n6p141

Wong, S. (2006). Comparing the Chinese and German capital markets: do informal Institutions jeopardize formal institutional supremacy?

Wu, H., & Xu, Z. (2013). Analyzing how companies respond to competition in an Industry: A Case Study of two B2C e-commerce companies in China.

Xianglian, C., & Hua, L. (2013). Research on e-Commerce logistics system Informationization in chain. Procedia – Social and Behavioral Sciences, 96, 838-843. https://doi.org/10.1016/j.sbspro.2013.08.095

Xu (Rinka), X., & Pratt, S. (2018). Social media influencers as endorsers to promote travel destinations: An application of self-congruence theory to the Chinese Generation Y. Journal of Travel & Tourism Marketing, 35(7), 958-972. https://doi.org/10.1080/10548408.2018.1468851

Yang, Y. Y. (2013). Consumer Protection Policies and Practice of Automobile Industry in China: Explanations and Findings.

Yoshikubo, S., & Adhiutama, A. (2009). Diffusion of Electronic Bidet Toilet in Japan Case Study: TOTO Washlet.

Yu, B., & Liu, H. (2010). A SWOT analysis on the e-Commerce of Chinese foreign trade. 2010 International Conference on Internet Technology and Applications. https://doi.org/10.1109/itapp.2010.5566163

Zhao, J., Wang, S., & Huang, W. V. (2008). A study of B2B E-markEt in China: E-Commerce process perspective. Information & Management, 45(4), 242-248. https://doi.org/10.1016/j.im.2008.01.007

Zhen, Y. (2007). Globalization and the Chinese retailing revolution: Competing in the world’s largest emerging market. Elsevier.

Zhuang, G., Herndon, N. C., & Zhou, J. N. (2003). The transforming structure of competition in China’s retail industry. Journal of Marketing Channels, 11(1), 27-51. https://doi.org/10.1300/j049v11n01_03