Expanding Target to China - Why Target should expand into China and what they will need to know.

Introduction

China is, without a doubt, the fastest growing economy in the world today. Companies from around the world have wanted to tap into China's market to cash in on the tremendous success that it continues to experience. There had been many restrictions for foreign companies who tried to do business in China, limiting the number of foreign companies, and allowing only the big players to come into China. Even then, these big players from around the globe faced more restrictions and rules once they entered China. But things have changed since China joined the World Trade Organization (WTO) in 2001; a new milestone for this country, as well as for other economies. Since then, restrictions for foreign investors and businesses to enter China's market had begun to ease up. By December 11th, 2004, China must remove remaining restrictions on the retail sector in order to comply with the WTO rules. This means it will be much easier for foreign retailers to enter the market, and for current foreign retailers in China to expand (1). Many retailers from all over the world will seize this golden opportunity, and Target should do so too.

Target, a Minnesota based national retail company, has come a long way from being Dayton's department store back in 1961 to being one of the biggest players in United States' retail market, as we know it today. Over the last ten years, Target has experienced a continuous incline in growth year after year. Sales reached over $48 billion this past year, a 10 percent increase from the year prior (2). Just like its revenue, the number of stores across the United States has been on the rise. Currently there are 1313 Target stores operating in 47 states, including 136 SuperTarget stores in 20 states (3). Not surprisingly, Target ranks number four in Triversity's Top 100 Retailers in the United States behind Wal-Mart, Home Depot, and Kroger (4). Globally, Target is ranked number 7 in the top 100 retailers worldwide (5). With this kind of statistics, Target has the potential and the resources to begin expanding into the international market, such as China. Comparing to Metro AG, a German retailer, which ranks a couple spots ahead of Target on the worldwide list, is not that much ahead of Target in terms of sales. And yet, Metro AG is one of the largest foreign retailers in China, along with Wal-Mart and Carrefour (6). Not only should Target continue to expand domestically, but it should also start looking to expand in other markets around the world as well, such as China. This will allow Target to become a multinational company and begin creating a global recognition for itself in the retail sector. Now of course Target cannot dive right into the China Market and expect everything to just work out. Like any other company entering a foreign market, there are challenges and factors that Target must consider and evaluate before doing business in China.

In this report, different reasons why Target should enter China's retail market and the benefits it offers to the company will be presented. China's economic status, political status, and economic status, along with options of entry and other factors that will affect Target's business, will be discussed.

China's Economic Status

China is currently the world's most potential market for consumer goods. Its average annual GDP growth rate of nearly 10 percent for the last 10 years is the strongest among other major economies around the world (7). This is mainly due to the increase in manufacturing investment from foreign companies over the years because China is full of resources and cheap labor. Many products we see today are labeled "Made in China" since China has essentially developed into "a manufacturing centre for the world's consumer goods production" (8). With a population of 1.3 billion people and having more consumers than Europe and the United States put together, it is obvious that China is by far one of the most attractive markets to invest in for foreign companies that are in the retail and consumer sector (8). When combining the strong, continuous growth of the economy with a population of this magnitude, the results are more money in consumers' pockets, meaning more money to spend on goods. According to PricewaterhouseCoopers, "the retail sales of consumer goods in China quadrupled with a span of 10 years" (7). With this kind of statistics, it will be Target's best interest to pursuit an expansion into China's retail market. China's economy and consumer market will continue to grow. The more people there are in a market, the more money will be spent. Everyone will always need food and daily accessories regardless of how much money they have, and those that have more money to spend will spend that extra money on other goods. So by setting up operations there, Target will have a chance to go along with the ride and reap the promising rewards that China's consumer market offers, which is what other foreign retailers are looking for.

China's Political Status

One of the major milestones for China, which made a global impact, is its accession to the World Trade Organization in 2001. This is the main reason why the forecast of China's growing economy remains strong. Since then, China's has begun to ease up restrictions on imports and exports, and also for foreign businesses entering China's market, most significantly the retail sector. By December 11, 2004, all restrictions on foreign retailing in China will be lifted, including restrictions on foreign ownership, number of branches, and geographic locations for where to set up stores (9).

Currently, there are limited foreign investments in China's retail sector. In 2000, the Retail and Wholesale sector only accounts for 2 percent of the total foreign direct investment in China (7). Today, this percentage is not much higher than it was in 2000. This is because prior to China's accession to the WTO, there were many restrictions and regulations for foreign companies entering China. Some of the main restrictions were the annual sales volume requirement, assets requirement, and the minimum registered capital requirement. Before, in order to enter China's retail sector, a foreign company must have annual sales volume of at least US $2 billion, assets of at least US $200 million, and minimum registered capital of at least RMB 50 million, or about US $6.1 million. Also, they were only allowed to enter the market with approval, and in a form of a joint venture with local partners with no more than 49 percent ownership (10). This limited China's retail market to only the big international players such as Wal-Mart, Carrefour, Metro AG, etc, who all have already established a presence in China. But after China starts to comply with WTO rules next month; dramatic changes will take place in China's retail sector.

Once all the restrictions for foreign retail companies are lifted by China, the number of foreign retailers entering China will increase sharply, both small and medium retailers. All a company will need is a good reputation and a minimum registered capital requirement of US $36,000. Other than a joint venture, a wholly foreign-owned enterprise will become an option (10). Also, the foreign players that are currently in the market will be able expand more rapidly under the new rules. This is another reason why Target should enter China's retail market, and soon. The percentage that the retail sector represents in the total direct foreign investment is still low, meaning there is a lot of room to grow. The sooner Target steps in, the more market share will be available for Target to gain. If Target delays its entry, other foreign retailers from all over the world will start to swarm in and the big players that are currently in the market will expand quickly; therefore making it more difficult for Target to create a significant presence. If Target decides not to enter this goldmine, then an incredible opportunity will be missed.

WFOE or Joint Venture

There are two options for Target to start business in China, establishing a wholly foreign-owned enterprise (WFOE) or a joint venture with a local Chinese company. There are advantages and disadvantages for both options, and it will be important to understand each.

Joint ventures were the only way to enter China for any foreign company due to the restrictions set by China prior to joining the WTO. With joint ventures, foreign companies were able enter China's market easier. It really helps to have a local partner that is already familiar with the market and know the laws of doing business in China. Also, with a joint venture, it is much less capital intensive since the local partner will be contributing to the business. The downside of a joint venture is that it is difficult to find the right partner, and it requires a lot time because a good relationship must be formed before any negotiations take place. In China, a good relationship is the key to doing business. Some major causes of joint venture failures have been overestimation of the partner's capabilities, differing expectations, and different management styles (11). These are some of the reasons that limit a foreign company's desire to expand.

WFOE, an option that will be open to foreign retail companies doing or planning to do business in China after next month, would probably be the direction that most foreign retailers will choose. It should be Target's choice as well when entering China. But before a WFOE can be set up, an application must be submitted to MOFCOM's (Ministry of Commerce) provincial-level counterparts. The applications will then be forwarded to MOFOCOM for approval. The approval process takes about three to four months, but approval is only granted if the proposed business will help the development of China's economy (12). Target will have no problem getting approved because it will help create more jobs in China, bring in more sophisticated technology to run its stores and operations, and increase manufacturing production in China since a good portion of the products that will be in Target stores will be made in China.

The disadvantage of setting up a WFOE is that it is much more capital intensive. Foreign companies do not have anyone to share the investment costs with in the country. China only allows money coming from outside of the country when foreign companies want to set up a WFOE (12). However, the advantages that WFOE offers outweigh the disadvantages. A WFOE can enjoy the exclusive management control and operational controls with less interference from the Chinese government (13). A foreign company can bring in sophisticated technology without having to worry about losing its intellectual property or figure out how many shares the technology is worth in a joint venture (14). Because of all this, a WFOE can expand into other areas more freely.

Although WFOE would be a capital intensive option for Target, it will pay off in the long run. Having complete control over its management and operations, less governmental interference, and less limitations to expand will be beneficial for Target.

China's Social Status

There are some other things that it must take into account before Target jumps into China's retail market, one of which is the social landscape of China. Just like in the United States, knowing where the customers are and where to set up stores are important strategies.

The more wealthy cities are concentrated in China's east and south-east coastal provinces. The top ten most prosperous provinces in China are: Shanghai, Guangdong, Beijing, Zhejiang, Tianjin, Liaoning, Fujian, Jiangsu, Shandong, and Chongqing. These areas are obviously where foreign investors want to go because of higher per capita income and consumer spending in those areas. Consumer activities in some major inland cities are slowly on the rise, but are still fairly undeveloped compared to the east (7). But it may be a good idea to start investing in those areas and capture those markets while competition level is still low.

Target should obviously start with investing in a couple of the more prosperous areas, such as Shanghai, Beijing, Tianjin, or Zhejiang. These four provinces have the highest per capita income and household consumption, which means there are more money spent by consumers (8). Besides this, Target should start investing in the major inland cities that are beginning to develop, such as Wuhan, Chengdu, Changsha, and Sichuan. Almost half of China's population lives in the central and northwest provinces (7). Take advantage of the new rules that will lift restrictions on locations and the number of stores, and enjoy the benefit of being able to expand easier by being a wholly foreign-owned enterprise. The developing areas should be Target's concentration. It may be a little more risky, and sales may be lower at first, but it will be beneficial in the long run. The biggest competitors, both domestic and foreign, are mostly located in the prosperous areas (8). It will be more difficult to establish a solid foothold in China's retail market if Target starts off trying to compete with big foreign players such as Wal-Mart and Carrefour, or big domestic players such as Lianhua and Hualian, all of which are much more familiar with the market. So it will be a good idea for Target to tap into the less developed major inland cities and create a niche market while competition is still very low in those areas. This can help them develop a presence in China, and become one of the major foreign players in China's retail market.

U.S. Commercial Service

After understand all the details described previously throughout the report, Target still needs some help entering China's retail market. Target is very successful in the United States, but China is a totally different market. There are different consumers, different languages, and different laws. Target needs to find someone that is familiar with the languages (Chinese and English), the Chinese retail market, and all the rules that foreign business must comply with. It would be the best if Target has some managers that fit these criterions within the corporation because then those people can be assigned to assist in Target's plan to enter China. They will be familiar with China's market and rules, as well as Target's objectives and operations. But if there are no qualified candidates within Target, then this is where the U.S. Commercial Service comes in play to help.

The U.S. Commercial Service offers customized solutions to help US companies enter and expand in the China Market. They have six offices in China: Beijing, Shanghai, Shenyang, Chengdu, Guangzhou, and Hong Kong. There are several services that a US company can purchase, one of which is the Gold Key Service (GKS). This service identifies and arranges appointments with the people that the company will need to meet in order to break into the China market successfully. The U.S. Commercial Service will tailor the service to the company's needs. They can assess the competition, and/or find lawyers, consultants, government officials, agents and distributors, etc (15).

This is a great service that Target should use if they do not have people to use internally. Going into a foreign market, especially China, without being knowledgeable in the country's laws and regulations, competition, consumers, and business environment is very risky. Any company that does this is essentially setting up for failure in the new market. This is why Target needs to find experts that know how to do business in China. By being able to access competition, access the business environment, and working with a consultant or lawyer that knows the business laws in China will definitely help Target develop a safe and successful entry into China's retail market. To order the Gold Key Service from the U.S. Commercial Service, all Target have to do is contact the nearest U.S. Commercial Service assistance center, call 1-800-USA-Trade, or email their FCS Beijing Office at [e-mail] (15).

Other Factors

In the Chinese culture, the colors red and gold are favorable colors. They represent happiness, good luck, and good fortune. During festive holidays, such as Chinese New Year, red is seen every where. All businesses, as well as households, would put up red lanterns and decorations. This may be beneficial to Target since red is Target's color. By having red in the stores in China, it may attract more consumers because people may associate the Target stores with the same meanings that they associate with the colors, especially during festive holidays.

Aside from culture, Target should look into other things, such as education in China. Education is very important to China's future development if it is to be sustainable, but it is not an easy task. The government has been focusing on the country's economic development, and has neglected to improve the education system and health. However, the government's new goal is to raise education spending to about 4 percent of GPD, with help from the private sector (8).

In the United States, Target currently have a Community Giving Program where Target gives back over $2 million a week to neighborhoods, programs, and schools across the country (16). If Target sets up a similar program in China, it may help build its reputation in the China market. By helping the community receive better education, improving living conditions, and improving living standards will help Target gain favoritism from both consumers and the government, which can only help Target's goal for success in the market.

Conclusion

China offers a golden opportunity for foreign retailers, such as Target. Target should take advantage of China's accession to the WTO and seize the opportunity by entering China's retail market. There are many factors that Target must review and consider before entering China. Main factors like China's economic status, political status, and social status. As well as evaluating options of entry (WFOE vs. JV), understanding the culture, assessing both foreign and domestic competitions, and become knowledgeable in business rules and regulations in the country. Target will be very successful in establishing a foothold in China's retail market and become a major foreign retailer in the country as long as all aspects are carefully reviewed, planned, and understood. Target's presence and success has been well established in the United States, and now it is time to expand to the next big thing - China.

End Notes

(1) http://www.chinabusinessreview.com/public/0401/01.html

(2) http://quicktake.morningstar.com/Stock/Income10.asp?Country=USA&Symbol=

TGT&stocktab=finance

(3) http://www.targetcorp.com/targetcorp_group/investor-relations/investor-

relations.jhtml

(4) http://www.stores.org/pdf/04TOP100chart2.pdf

(5) http://retailindustry.about.com/library/bl/03q2/bl_rf100603.htm

(6) http://www.bjreview.com.cn/200414/Business-200414(C).htm

(7) http://www.pwchk.com/home/webmedia/1024303622085/RetailMarket_

China.pdf

(8) http://www.pwcglobal.com/gx/eng/about/ind/retail/wef%20jan04_external.pdf3

(9) http://en-1.ce.cn/subject/RetailinginChina/Regulation&Policy/200409/29/

t20040929_1882374.shtml

(10) http://www.osec.ch/~0xc1878d1b_0x0001b994/Investments/foreign_investment_

restrictions_in_trade_and_retail_lifted/en/china_fipdf

(11) http://www.sinomedia.net/eurobiz/v200404/story0404.html

(12) http://www.isinolaw.com/jsp/fie/fie/FIE_wfoe1.jsp?LangID=0

(13) http://english.sohu.com/2004/07/04/81/article220848132.shtml

(14) http://www.businessweek.com/adsections/country/asia/

(15) http://www.buyusa.gov/china/en/gks.html

(16) http://target.com/target_group/community_giving/index.jhtml