Risk Analysis

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Pension’s legislation set low maximum administrative levels and high minimum transfer values. The process of reaching a decision whether to proceed with a business proposition can be difficult anywhere in the country. In China physical distance and cultural differences make the process even more difficult and risky. Post WTO China is the world’s biggest new market. Much of this massive opportunity lies as yet untapped, but any Western business seeking entry into this market faces profound cultural complexities. The most dangerous effect of this cultural complexity for the western businessperson is that it makes it very much more difficult to assess commercial and financial risk realistically.

From a commercial perspective, businesspeople in each culture look for different kinds of ‘signpost’ when considering a possible business opportunity. This is partly because some types of data that are taken for granted in the West are not easily available (if they are available at all) in China, and partly because of different views as to what is crucial in establishing a business relationship. These differences can be a danger for the unwary Western businessperson.

Exchange and repatriation of funds risks: AKLLR have decided to establish or expand our business in China. Before committing resources, we need to find out which banks to use, whether we can borrow from them and the procedures for profit repatriation. There are other related issues of interest, how to protect the investment against political and foreign exchange risks. Foreign Companies’ share of total loans granted in China is only 2.2%. Clearly the reason for the under-utilization of financial resources in China is a lack of knowledge about the local banking system. Although more than 200 foreign banks have offices in China, none of them provide a full range of services.Governments of most developed countries show their commitment to fair treatment for investors through their membership of the Organization for Economic Co-operation and Development (OECD), European Union and/or European Economic Area; therefore there is no need for an additional investment agreement.

Double taxation occurs when a foreign country taxes your business as well as being taxed in China on the same income. Many countries have now reached double taxation agreements with China where they will only tax your income once. Market (4 P’s) Risks: The marketing mix is defined by Perreault and McCarthy (2002) as the controllable variables the company puts together to satisfy this target group. The marketing mix is made up of the four “P’s”. The four “P’s” are comprised of the product, place, promotion, and the price. These elements are considered in all businesses in one way or another. Each element will be discussed as it relates to a specific organization.

The first element is the product, AKLLR offers eight different models of floor based and wall mounted air conditioners. All of our air conditioners come with a remote control. Instructions come with the equipment and they are printed in English, Chinese, German, French, and Spanish. Our air conditioners are very convenient because they can be placed on the floor or mounted to the wall. Accessory materials are all packaged with the air conditioner. Fan speeds range from 2 to 3 speeds. Some models come a dehumidifier and timer modes. We have several models that are set on roller wheels for easy transport to other parts of the room or building. To top things off, we offer a five- year limited warranty on every air conditioner.

The second element is place. Our objective is for our product to be available to all costumers in the market of top quality air conditioners. When our product leaves our production facility, we would like for the equipment to be made available in local markets. We expect to sell our air conditioners in malls, electronic stores, and the Internet. We realize that the market that we are targeting will probably be regular users of the Internet. We intend on targeting three special status municipalities, they are Beijing, Shanghai, and Tianjin. The air conditioners will be transported by truck between two of the cities. This would be Beijing and Tianjin because they are relatively close to each other. Our production facility will be in Shanghai of Tianjin. The air conditioners will be trucked to Shanghai unless there is a large number of backorders. At this time, we would air freight the equipment. Shanghai is about 600 miles from Beijing so it would take our drivers at least two days to reach our distribution site in Tianjin.

Promotion is the third element. We want our target market to know that our air conditioners are the best available in the market. We are focused on acquiring new customers and retain current customers. Our promotional plan consists of billboard advertisements, television and radio commercials, and newspapers. Our salespeople will be trained and very knowledgeable about our products. We intend on having a motivated sales staff. We will target hotels, automotive industry, industrial companies, consulting firms that are renting office space, middle class and upper class people Chinese nationals. We want people that check into hotels in China to be accustomed to seeing the initials of AKLLR and associate them to our air conditioners.

The last element is price. Price must be set according to the competition in the target market and cost of the whole marketing mix. Our air conditioners will range from $100 for our base units to $600 for our higher BTU units. These prices already include markups. We believe our price is acceptable for our target market. If our units are ordered in bulk, we will offer a percentage discount according to the number requested. We will offer the top quality air conditioner but the price will be competitive while still recording a profit.

Distribution/Supply Chain Risks:

Following China’s entry into the WTO, an increasing number of smaller companies from all over the globe are pursuing business opportunities in the mainland. These companies may not have the resources to fully explore the full business potential, regulatory compliance or the employment culture. Through having access to accurate timely information, such as supply chain evaluation, or the right partner, companies are in a much stronger position to make strategic business decisions. In a foreign country or at home, there are inherent dangers associated with developing suppliers.

While the situation in China is complicated by language, distance and cultural differences we hope that the rules of thumb introduced in this paper can help mitigate many of the risks in China. China’s preferential pricing combined with its level of manufacturing maturity clearly emphasizes that the need to understand this market has never been greater. However, with opportunity comes risk. Having found a qualified supplier in China, often the US buyer is still hesitant to place the order as sensitive information such as branding, retail price markings, bar coding, shipping destination, order sizes and even end-buyer information could be exposed. There are three overriding concerns faced by both the first-time buyer as well as the experienced China sourcing specialist.

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