Introduction
Swipr is a software company that runs a microblogging platform. The company was founded in 2015 by Jeff Weinstein and Rajul Kumar in San Francisco. Within the first year of launching, the company had received a 5 million investment from a famous venture capitalist. Swipr has since made significant strides in terms of userbase and profitability. The company had $37.2 million in revenue in 2020, operating income of $270000, net income of $1.3 million, total assets of $13.37 million, and total equity of $7.97 million. The company has 1000 employees as of 2020. Swipr microblogging platform has 10 million monthly active users as of 2019. Swipr operates in only five countries, namely the US, Canada, the UK, Australia, and recently India.
Swipr has been called the Twitter killer because of its elegant UI and its popularity among Gen-Z. They prefer its content moderation strategy over Twitter’s, which has become a cesspool of hate and harmful content. Swipr is also popular with members of the LGBTQ community, who account for 30% of its userbase. However, the company likes to shy away from this marker to welcome everybody to the platform. The company is performing exceptionally well in India, where it launched in 2020, and is looking to build on this Asian popularity by expanding to China. This paper will study the viability of Swipr’s entry ambitions into China.
After a successful entry into India, Swipr is considering doing the same in China. The reason for considering China is because it is the second-largest economy in the world. The country has a significant role in international business and has made a substantial global impact by doing business with almost every country on earth. There is a wide range of business opportunities in China, especially since they are shifting away from the ‘world’s workshop’ moniker to a mature economy with significant service industry and a sizeable middle-class base. For this reason, Swipr is well-advised to make a foray into China. They are trying to change the narrative that China only welcomes manufacturing companies.
Political & Economic
The People’s Republic of China (PRC) is a socialist country led by the Chinese Communist Party (CCP) as the paramount authority. Almost all top government positions are held by the CCP members (United States Department of State, n.d.). The 25 -member CCP politburo ultimately holds all the power of which there is also a seven-member executive committee. Xi Jinping is the leader of the communist party and has held the positions of secretary-general of the CCP, state president, and chairman of the Central Military Commission (United States Department of State, n.d.). The PRC is the US’s top FDI destination due to its large consumer base and supply chain integration. In 2019, China passed a new law, the Foreign Investment Law (FIL), to open up its financial sector. However, China remains relatively restrictive to foreign businesses requiring foreign firms to form joint ventures with local firms. Other hurdles include the Made in China 2025 policy and their pressure on US firms to release their technology before gaining access to the market.
Legal & Ethical
China desires to do business with other countries; while it may prefer to have it both ways, it is impossible to maintain hardline positions. The PRC sometimes has to make compromises with other countries and enter treaties such as with the WTO. One of the recent concessions is to establish a journal to publish regulations, laws, and measures concerning trade in goods, services, or trade-related aspects of IP rights (TRIPS) (United States Department of State, n.d.). Foreign firms have complained that the Chinese ministries only do this abysmally. China’s economic system often has blurred roles between the CCP, the government, and the Chinese state and private businesses. The prevailing perception is that the PRC prioritizes political objectives, social stability, and industrial policies at the expense of foreign firms, fairness, or the rule of law (United States Department of State, n.d.). China received a rating of 1.5 out of five from the World Bank’s Global Indicators of Regulatory Governance for having a convoluted legal system for businesses.
The legal system in China is uncannily similar to the European legal systems but repurposed for the Chinese. Commercial rules are found in various regulations and laws such as China’s civil law, partnership enterprises law, labor law, contract law, insurance law, bankruptcy law, and other interpretations issued by the Supreme People’s Court (SPC). China lacks special commercial courts, but it creates tribunals for IP disputes. China has a new investment framework for foreign organizations enacted in 2019; the new law (FIL) plans to give a transition of 5 years for firms established under the previous regime (United States Department of State, n.d.). On the new law, all foreign firms will work under the same rules as local firms. It will also ban unfair practices such as forced technology transfers, have better IP protection, and establish a system for reporting administrative abuses.
Regulation of Information Companies
The Great Firewall is a very effective tool in regulating the flow of information in China. To access foreign information sources while in China, one needs a VPN. But that is not to say that there are no information companies in China; Baidu, China’s answer to Google in search engines, is a technology giant (Ruan, 2019). In China, the internet company is supposed to abide by state law, such as being responsible for published content. Companies are supposed to invest in technology to filter unacceptable content (Ruan, 2019). The type of content that is not allowed is usually a blurred line that gives the government a lot of power to intervene when it deems suitable.
Cultural & Social
China is one of the richest countries in heritage; it is one of the oldest civilizations and one of the most resilient. In terms of demographics, China is the most populous nation on earth, with 1.44 billion people as of 2020, representing 18.595%of the global population. (“China Demographics 2020,” n.d.). China’s fertility rate is 1.7, which is below the replacement level as of 2020; this is a decline from 6.3 in 1970 (“China Demographics 2020,” n.d.). China’s life expectancy rate is 77.5 years, an increase from 44.6 in 1960 (“China Demographics 2020,” n.d.). China’s infant mortality rate was 8.4 per 1000 births in 2020 from 135 in 1960. 59.7% of Chinese live in urban centers from 16% in 1960 (“China Demographics 2020,” n.d.). These statistics indicate the tremendous progress that China has made since the 1960s.
One way in which the cultural complexity can be looked at is through Hofstede’s cultural dimension. The framework measures the effect of cultural values in the workplace. In the small vs. large power distance perspective, China can be classified as having large power differences because of the difference between the governors in the CCP and the commoners, with the latter having no power (Luthans & Doh, 2015). In terms of the individualism vs. collectivism dichotomy, Chinese culture falls under collectivism; this is different from the US, where people are encouraged to think as individuals (Beugelsdijk & Welzel, 2018). In terms of masculinity vs. femininity, Chinese culture deviates from the paternal-centric approach, with females having the same access to opportunities as males. In this regard, China matches the US and the West.
In the masculinity vs. femininity category, China is traditionally paternalistic but does not reinforce this approach to formal traditions where women hold high positions of power and influence. Another class is weak vs. strong uncertainty avoidance. China displays strong uncertainty avoidance. The Chinese behave strictly because of reinforcement of conformity; this can mean workers require a high degree of guidance as opposed to the US and the West (Beugelsdijk & Welzel, 2018). The other aspect of the framework is the long vs. short-term orientation. The Chinese have a long-term mindset, especially in light of their superpower ambitions. The recently added category in this framework is indulgence vs. restraint or aggressiveness (Beugelsdijk & Welzel, 2018). In this dichotomy, China is relatively restrained since, unlike in the West, citizens typically aren’t free to express their human desires.
Business Environment Analysis
Business Opportunity in China
China is an obvious option for businesses seeking to expand overseas. The country has a large population, which will form a large consumer base for one’s products. There is also a rapidly rising middle-class, an opportunity for a service business such as a software company. Another reason to consider China is that the government continues to ease restrictions for foreign firms, including protecting intellectual property rights which is attractive for a technology company (Hedley, n.d.). China has been known as the world’s workshop for a long time due to cheap labor and low regulations; however, this has changed, and the economy is changing with a growing service and tourism industry fuelled by a growth in wealth (Hedley, n.d.). China has now shifted into a technology giant with labor costs rising.
In 2018, China accounted for more than a quarter of the world’s GDP; projections show it will become the world’s largest economy by 2030. This remarkable rise is best illustrated by 129 Chinese companies featuring in the Fortune global 500, more than the US’s 121 (Hedley, n.d.). China is becoming a top export destination for US’s high-quality goods. China is also a global leader in innovation, leading in many areas such as R&D and digitalization. Examples of Chinese companies that have had immense success in technology include Tencent, Baidu, and WeChat (Hedley, n.d.). Because of this vibrant tech scene, Swipr would get all the software developers they need. Chinese business environment continues to improve with the recent reforms highlighted. In 2019, China rose to the 39th position in the ease of doing business global index jumping 14 places from 2018; the increase was attributed, among other reasons, to the ease of registering a business (Hedley, n.d.). This represents an excellent opportunity for Swipr to take advantage of where other tech companies have failed.
Challenges of Doing Business in China
One of the biggest challenges for US businesses contemplating entry into China is US-China relations. The two countries’ governments occasionally engage in subtle and overt supremacy battles that sometimes hurt innocent companies caught in the tug of war. During the Trump administration, a trade war over the imposition of tariffs cost US companies billions in losses. Some American companies even considered moving to other low-cost labor countries such as Vietnam (Hedley, n.d.). The trade wars between the countries do not affect all businesses, but one of the most affected sectors is the tech sector because of national security concerns. Chinese firms like Huawei are banned from operating in the US while China bans almost all US tech companies.
Another big difference between the two countries is human resource management. A US company moving into China will find very different labor laws that will affect how they manage their employees. For example, China’s only trade union is the All-China Federation of Trade Unions which is heavily connected to the CCP (Hedley, n.d.). There is also a different value system in China where soft skills such as dispute resolution, leadership, cultural awareness, and communication are not adequately addressed or are ignored.
There is also a negative reputation about intellectual property when it comes to China; a company like Swipr is sure to have many intellectual properties that it would want to be protected through the rule of law. Although China is making changes to address these complaints, a lot is yet to be done. Another source of concern when doing business in China is government interference; for a software company, this is primarily a concern because of the Chinese government’s national security accusations.
Entry Strategy
The chosen strategy of entry into China is a joint venture with a local firm. China is a challenging market for a tech company to enter. Facebook, Google, and Facebook are used as the poster child of American companies banned in China. According to Tse (2016), contrary to popular opinion that Google was banned, it is not the case; they chose to withdraw from the market for failing to comply with Chinese laws. Facebook and Twitter were banned for their information dissemination power. Most American companies have entered China but have either performed poorly on their own or gotten outcompeted by their Chinese counterparts. Uber, for instance, entered the market in 2013 and grew for some years before being pushed out by Chinese competitors Didi and Kuaidi, owned by Tencent and Alibaba, respectively (Ho, 2019). eBay had also entered the market at the height of the dot-com craze but was outcompeted by a Chinese rival, Taobao.
There is a raging debate about the real reason why Google, Facebook, and Twitter do not operate in China. Political sensitivity may be one reason, but analysts have said that the Chinese government simply prefers local companies such as Tencent, Alibaba, and Huawei over foreign companies; in essence, it is not a level playing field. Business experts have even said that even if these US companies were to re-enter the Chinese market, they would face very stiff competition and would probably fail again.
China has been proven to be a hostile market to foreign technology companies; it would therefore be an uphill task to establish a wholly-owned subsidiary. The critical question to ask when deciding on entering a foreign market is which country, which entry method, and when to enter (Ho, 2019). The country of consideration is China which has exceptionally convoluted and complex regulations against information companies. However, it would seem that the problem with China is not just the hostile government; it is that foreign companies fail to tailor their products to the local market. They fail to adjust to Chinese culture. Consider why Uber’s foray into China flopped; it was a virgin market for a taxi-hailing company, but they got outcompeted by Didi and Kuaidi, who had the upper hand culturally. This is why a company entering the PRC market requires a partner who will tailor the product to the local culture (Luthans & Doh, 2015). There is also a possibility that the Chinese are patriotic people and will always choose a homegrown company over a foreign company if other factors are held constant; in this case, the other chief factors are quality.
It is unlikely that Chinese companies would ditch luxury brands such as Mercedes Benz just because their car industry has matured. In this case, the consumers will go for luxury; unfortunately, this characteristic is absent for social media companies since there is nothing particularly luxurious about using Twitter over Weibo. This would also explain why Samsung and Apple have continued to enjoy relative success despite the success of Chinese brands such as Huawei and Xiaomi; the local brands haven’t been able to match the quality of iPhones and Galaxies.
The Decision
This essay has thoroughly dissected the business environment in China. From an economic standpoint, it has been established that China is an attractive environment because of its rapidly expanding economy that is poised to overtake even the United States. The PRC economy is also maturing and is dropping association with cheap labor and low regulation. Although the Chinese economy is not about to drop manufacturing altogether, its service industry is becoming just as important. Politically, the PRC is not a free place; the government is involved in everything, and the judiciary is not independent to act as a refuge in case of disputes. The country is also famous for non-existent IP laws. Culturally, China is one of the richest in heritage, and the Chinese are among the proudest on earth.
Swipr is a relatively young company with a relatively small to the medium userbase. If the company were to enter the Chinese company, it would face extremely stiff competition from the large, already established local companies. They would also have to face extremely complex information laws from the state. Swipr does not have pockets deep enough to finance such operations and would have to do another round of VC funding that would likely be unsuccessful because of Facebook and Twitter’s tales. Homegrown companies have been very successful in China, and research shows that the government prefers native companies over foreign ones. To enter the Chinese market right now for a microblogging site launched barely five years ago would not be advisable. The verdict is that Swipr should cancel its plans to enter China. However, since China is making efforts to liberalize its markets further, postponing the entry would be a wise option.
References
Beugelsdijk, S., & Welzel, C. (2018). Dimensions and dynamics of national culture: Synthesizing hofstede with inglehart. Journal of Cross-Cultural Psychology, 49(10), 1469–1505. Web.
Hedley, M. (n.d.). China market entry strategy: A guide to entering Chinese b2b markets. B2B International. Web.
United States Department of State. (n.d.). 2020 Investment Climate Statements: China. Web.
China demographics 2020 (Population, age, sex, trends)—Worldometer. (n.d.). Web.
Ho, D. (2019). Lessons for tech companies expanding business to China. Web.
Luthans, F., & Doh, J. P. (2015). International management: Culture, strategy, and behavior (9th ed.). McGraw-Hill.
Ruan, L. (2019). Regulation of the internet in China: An explainer. Asia Dialogue.Web.
Tse, E. (2016). Can foreign tech companies win in China? TechCrunch. Web.