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Iron Pump a/S Into China

In: Business and Management

Submitted By seke13ac
Words 3933
Pages 16
1. Introduction

In 1906, Mr. C.G. Arnesen established Iron Pump A/S. Six years later in 1912, Iron Pump presented their first pump, which was installed in the world’s first ocean going diesel motor vessel, M/S Selandia (Iron Pump, Company). With more than 100 years of experience, Iron Pump is today a leading manufacturer of pumps in the marine and offshore industry. Today, the pumps are supplied worldwide where almost 90 percent of the output is through Iron Pumps network of agents in more than 70 countries (Iron Pump, Company). Iron Pump’s core competence is its main focus on production and R&D in the value creation activities (Hill, 2012, p. 425). This knowledge of applications has founded the corner stone of the company. Iron Pump is situated in Herlev, near Copenhagen and has around 100 employees. Iron Pump has an annual revenue exceeding EUR 18 million (Iron Pump, Company). With an ambitious growth strategy and full capability of competing globally, Iron Pump seeks continuous global growth in the future (Iron Pump, Company). In 2003 Iron Pump entered the Chinese market by establishing a representative office in Shanghai (Interview, Iron Pump).

This report will focus on expansion of Iron Pump into the Chinese market, but why China? Firstly, with an expected GDP growth exceeding 7,5 percent in 2013, the Chinese economy is steadying, showing new signs of stabilization after a 2 year period of cooling due to the global financial crisis, hindering further globalization of new markets (Reuters, 2013). Secondly, from a more market-oriented point of view for Iron Pump, it is critical that the great majority of the Chinese pump market is driven by centrifugal pumps. In 2011 it accounted for 50.56 percent of the total market revenue reaching USD7.28 billion. Additionally, this trend is expected to increase and reach USD10.20 billion by 2015, a 10,67 percent CAGR (Technavio, 2013, p. 15). Thirdly, from an internal point of view, 50 percent of Iron Pumps orders come from China and this trend is expected to increase further in the coming years (Interview, Iron Pump). From a financial point of view, Iron Pump does have the financial resources to support expansion into China. In the period from 2008-2012, the group Iron Pump Holding A/S has generated profit. Important key figures have improved over this period of time, showing a liquidity ratio of 286 as well as solvency ratio of 66,6 percent in 2012 (Iron Pump Annual report, 2011-12). Currently, Iron Pumps presence in China is limited in scope with their RO office (Iron Pump, Agents and distributers). Based on the above-mentioned factors, this report will examine and analyze how Iron Pump can utilize its resources and thereby expand into China.

2. Methodology
In order to give a good and clear insight into the analysis of the report, qualitative and quantitative data will be used to support considerations and statements. The report will initially focus on an evaluation of Iron Pumps competencies followed by analysis of specific conditions and factors in China. Finally, possible entry strategy and risk assessment will be evaluated and a conclusion will be derived thereof.

3. Theories
In order to assess the optimal entry strategy for Iron Pump, the structure of this report will follow John Dunnings eclectic paradigm (Dunning, 2000). By using the OLI-framework analysis will be made dividing the report into three parts. A SWOT-analysis has been conducted to shed light on Iron pumps ownership advantages, where the main strengths identified will be used. In the second part, a thorough PESTEL analysis will focus on and describe location advantages. Finally, the third part will encompass considerations and discussions regarding internalization, including opportunities and threats identified in my SWOT/PESTEL-analysis. The reason for using the OLI-framework is to better illustrate the nature and direction of FDI that Iron Pump can undertake in order to exploit assets that are location specific and resource endowments (Hill, 20012, p. 277).
To further support my analysis, specific theories and concepts will be used. The report will incorporate Hofstede’s cultural dimensions in the PESTEL-analysis (Hill, 2012, p. 122).

4. Ownership advantages:
4.1 Financial stability: As mentioned earlier, Iron Pump has a solid economy and can therefore financially facilitate expansion into China.

4.2 Niche strategy: Iron Pump’s strategy is to focus on high-quality pumps in niche markets (Interview, Iron Pump). Therefore, the firm specific advantage lies within Iron Pump’s core competence where they can exploit more than 100 years of experience/know-how and thereby differentiate themselves from other competitors in niche markets globally. This is identified as a competitive advantage of Iron Pump.
4.3 Organizational architecture: Another crucial specific firm advantage is Iron Pumps organizational structure. Iron Pump is a family owned business (Interview, Iron Pump). The organizational structure is centralized with a functional structure operating in vertically (Hill, 2012, p. 450). Due to the size of the company, Iron Pump can take and implement rapid decisions. Thus, Iron Pump is not limited in its decision making process since no investors are holding them back, making Iron Pump able to respond quickly to tendencies. With the already established RO in Shanghai for many years, Iron Pump does have market knowledge about market tendencies in China. The fact that more than 50 percent of the orders are from China indicates that further focus on the Chinese market is a necessity. In relation to the product development in the future it is important to be in close dialogue with the customers to assure that the company develops in accordance with their customers needs (Moses, 2013).

4.4 Integrated value chain: Iron Pump has complete control of their value chain (Hill, 2012, p. 422). This creates a basis for expanding its activities into China, since Iron Pump’s primary and support activities are well developed and connected. As a result thereof, a great majority of the products are produced in-house (Interview, Iron Pump).

4.5 Current strategy: Iron Pump intends to follow a localization strategy (Hill, 2012, p. 437) in China. By doing so, Iron Pump can increase its profitability by customizing pumps that match specific local demands. In the future Iron Pump wants to keep following this strategy, focusing on Iron Pumps core competencies. This strategy corresponds with the organization architecture. Over time it is likely that this localization strategy will move towards a more transnational strategy as the need for cost reductions will arise (Hill, 2012, p. 439).

To summarize the ownership advantages, Iron Pump has specific firm advantages within its management (ability to fast decision making), economy (funds to facilitate expansion), market knowledge (extensive knowledge about the Chinese market through RO) and full control of the complete value chain (from primary activities to support activities).

5. Localization advantages
To analyze the possible expansion into the Chinese market, a PESTEL-analysis will be used to create an extensive overview of the macro environmental level, focusing on factors that may be relevant to Iron Pump’s organization. Due to the enormous size of China, differences occur in different regions. Thus, since Iron Pump’s RO is in Shanghai the main focus of this PESTEL-analysis will be on East China due to extensive market knowledge and highest number of customers (Interview, Iron Pump).

5.1 Political factors: The political structure in China is very complex. Presently, under the rule of president Xi Jinping, his main economic policymaking focus is on rebalance. A new key driver of growth will be domestic consumption replacing the earlier focus on capital-intensive export led growth (Golley, 2013). It can therefore be argued that China’s market can be described as socialism with capitalistic characteristics where a free market reins, but the government still plays a major role and SEO’s still exist in important sectors (Golley, 2013). As China is soon to become the largest economy in the world, it is worth noticing that the most populous country in the world is governed by the strongest one-party state in the world. Today, there is still a high level of state intervention. Though ‘Integrated fragmentation’ is becoming more common in East China, where state-owned enterprises become more autonomous (Golley, 2013). This reflects a positive change where increased focus is on SOE reforms. However, corruption is still a big problem in the political and commercial sector. According to the corruption index (Hill, 2012, p. 57), China is not ranked well, indicating high level of corruption. Since East China is the most developed area of China, many political initiatives have been implemented in order to promote better infrastructure (Liyao, 2012). According to China’s 12th 5-year plan, China is prioritizing long-term prosperity for the entire nation. This indicates political stability and increased focus on investments within energy efficient products (KPMG Advisory, 2011).

5.2 Economic factors: China’s economic outlook is prosperous. Within the next five years, the annual GDP growth rate is expected to exceed 8 percent (KPMG Advisory, 2011). Secondly the Yangtze River Delta region due to its small size compared to the other four main regions, YRD had the second highest GDP by region in 2010 after Beijing and Northeast region (Dezan Shira & Associates, 2011, p. 11). Shanghai’s GDP growth year-on-year has been decreasing in the period from 2004-2010 from 13,6 to 9,9 percent (Ibid, p. 32). This is still very impressive, however it is more important to focus on the growth of second tier cities in respectively Jiangsu, Zhejiang and Anhui province. For example Ningbo in Zhejiang province realized a GDP growth rate of 12,4 percent in 2010(Ibid, p. 80). According to Du Ying, "The Yangtze River Delta would be the leading force in the country's development and reform, and its leading role will only grow bigger"(Xuequan, 2008). Another side note worth considering for Iron Pump is that even though YRD only compromises 2,1 percent of total land area of China, the region however still generate around 23 percent of China’s GDP (Xuequan, 2008). Thirdly, from a monetary perspective the RMB is floating and has remained very stable since 2010. However, China is not afraid of adjust to a fixed RMB-dollar peg as we saw in 2008 due to the financial crisis (Golley, 2013). This matter is on a high macroeconomic level. This will not have major impact on Iron Pump’s possible business operations in China.

5.3 Social/cultural factors: Since Iron Pump is a manufacturer focusing on B2B, following analysis will focus on cultural factors rather than social factors. Cultural factors are of high relevance when understanding the Chinese business culture and they will directly influence Iron Pump’s business operations. Cross-cultural literacy (Hill, 2012, p. 162) is important when doing business in different cultures. This requires Iron Pump’s adaption to conform to specific norms and value systems of the Chinese culture. The RO in Shanghai is working on business relations (Interview, Iron Pump). That Iron Pump is struggling to integrate guanxi (Hill, 2008, p.107) in their RO is crucial for success, recognizing the importance of Chinese business culture. In order to get a better insight into dynamics and cultural differences in Chinese businesses, using Hofstede’s 5 dimensions (Hill, 2012, p. 121) gives a good general overview. It is to notice that the dimensions are too general, however it still creates a good overview. Firstly, with a power distance of 80 in China, equality is accepted. Secondly, with a score of 20 in individualism it can be derived that China is very collectivistic and guanxi is important. Thirdly, a masculinity of 66, the society is comparatively masculine. Fourthly, with score 30 in uncertainty avoidance, Chinese people have a relative flexible attitude towards rules and regulations. Finally, a score of 118 in long term orientation highly reflect Chinese culture in which close and long term relations are crucial to Chinese people (The Hofstede Centre).
Important social factors is that wage-rates are still low compared to western countries, however, we see increasing wage rates in East China due to shortage of skilled labor (Accentura, 2011 p. 11)

5.4 Technological factors: According to China’s 12th Five-Year Plan (KPMG Advisory, 2011) it can be derived that China in the coming years will focus on more high-end technological products as well as energy saving products.

5.5 Environmental factors: Relating back to above-mentioned technological factors focusing on high-end tech and energy saving products. The technological and environmental factors are linked closed together and have impact on demand for high-tech products. These factors address Iron Pump’s product assortment well.

5.6 Legal factors: The numbers of laws in China regarding business are vast. The commercial laws in China are changing in order to better correspond to commercial laws in western countries (US China, 2006), However, this transition is complex and therefore still has many uncertainties. Furthermore, China has laws that either encourage, permit, restrict or prohibit foreign investors in specific industries (PWC, 2013, p. 26). From Iron Pumps perspective, it is important to be aware of intellectual property rights with patents in China. Patent rights in China are territorial rights, which means that patent rights in a home country does not exist or have no effect in China (Dezan Shira & Associates, 2012, p. 15). A “first to file” system is applied.

To summarize the local advantages, the PESTEL-analysis clearly stated country specific advantages. China is governed by a one-party state, which means that state intervention is still highly affecting the political structure. Also, the exceeding growth in the Yangtze River Delta region is persistent. Furthermore, the substantial difference in intellectual property rights is crucial to be aware of. Finally, the culture of doing business in China is highly complex and demands a throughout understanding hereof to assure successful foreign direct investment. Altogether, it can be derived that Iron Pump certainly have good platform to move forward with their strategy of expansion into East China.

6. Internalization advantages
After having analyzed the Chinese market, it was stated that Iron Pump has incitements for expansion. Therefore, an assessment of three critical parameters will be used. These three parameters encompass (I) where to entry, (II) time of entry and finally (III) scale of entry (Hill, 2012, p. 487).

6.1 Where: Iron Pump’s main markets are in the marine- and offshore sectors (Iron Pump, Company). Ningbo, in East China’s Zhejiang province was one of the first main major east coast cities to open to foreign trade. Ningbo is a major deepwater city and industrial base. The completion of a bridge link with Shanghai will give Ningbo a boost toward its goal of becoming East China’s principal foreign trading port (Dezan Shira & Associates, 2010, p. 87). Ningbo is of particular interest because of the city’s close proximity to Shanghai, the concentration of the marine- and offshore industry and lastly the lower cost- and wage level compared to Shanghai since Ningbo is a second tier city (China Labor Bulletin, 2013).

6.2 Time: Iron Pump will be a second-mover when moving into the Chinese market. An advantage thereof is that Iron Pump does not have to give rise to pioneering costs (Hill, 2012, p. 487). Thus, risks are less due to the second-mover position where Iron Pump has learned from first-movers. However, this include disadvantages since Iron Pump have not been able to exploit the existent market potential. Relating back to the incitement stated in the introduction, it is recommended that expansion take place within a time horizon of two years. This should give Iron Pump sufficient time to execute their planning and implementation.

6.3 Scale: It can be argued that Iron Pump should enter on a large scale since their core competencies are closely linked to a niche strategy. In this specific niche for pumps in the marine- and offshore industries, they mainly face one significant competitor (Interview, Iron Pump). Entering on a full scale will allow Iron Pump to compete on a larger scale into their main segment.

6.4 Entry strategy: It is recommended that Iron Pump focus on establishing a wholly owned subsidiary (Hill, 2012, p. 501) by building up in Ningbo from the ground up, a greenfield strategy. Moreover, it is recommended that Iron Pump consider setting up the subsidiary in a development zone. Specifically, Ningbo Economic and Technical Development Zone would be an optimal choice since the zone aims at technology intensive industries, in which Iron Pump too has strong competencies. This gives Iron Pump an opportunity to utilize know-how, market knowledge and synergies within the zone. The advantageous are vast (Hill, 2012, p. 499). Firstly, Iron Pump will have 100 percent ownership and control of the entire value chain, development of own infrastructure. Secondly, a more flexible business scope is applicable, however it is vital that Iron Pump determine the right business scope from the start. Thirdly, a WFOE ensures better security of technology and intellectual property rights. Moreover, this also gives Iron Pump the option to insert existing company culture in the Chinese entity. Finally, it allows Iron Pump to convert RMB into foreign currency for profit repatriation (Dezan Shira & Associates, 2011, WFOE). There are disadvantages involved too, in which Iron Pump has to fund registered capital requirement as well as other high costs and risks. The wholly owned subsidiary also changes the legal status to a limited liability legal personality versus no legal personality in the representative office in Shanghai.
As mentioned above, pros overrule cons stating that a production facility is beneficial. However, it does not take into account challenges in terms of logistic, operation and quality control in the starting process. In this it is critical that Iron Pump’s organization assure good local management to manage its operations towards the objectives.

6.5 Global competitiveness
By establishing the wholly owned subsidiary in Ningbo, Iron Pump will serve local customers, but also create a production platform in the east. Over time this platform can become a bridgehead for export to other Asian countries. In this way, this new entry into China will increase global competitiveness. The risk is though, whether or not, Iron Pump in China will be able to handle this new market opportunity on short term.

6.6 Business ethics in China
When Iron Pump establishes its wholly owned subsidiary, it is important that they live up to local laws, environmental regulations, human rights, anti-corruption laws and CSR. Business ethics is already an integrated part of the company where each individual pump is designed in accordance with international regulations, requirements and standards (Iron Pump, Quality). From an operational level in China, it is important that Iron Pump regularly discuss such issues within the organization. Another possibility could be to have an ethical officer (Hill, 2012, p. 157) focusing on training and education of ethical awareness of future employees working in Ningbo.

6.7 Issues of cultural differences
Based on previous analysis of the social and cultural factors, it can be derived that a strong culture is existent in China. Doing business in China requires adaption to conform to the norms and value systems. When starting up the business, Iron Pump must be aware that organizational behavior in Denmark differ and might not apply to Chinese employees. During the process of establishment, Iron pump must assure that a cross-cultural organization is being build up. The organization must be able to act according to the management from Danish guidelines, but also execute according to the Chinese business environment. As earlier mentioned, the Chinese culture is to a large extent build up around guanxi and personal relations. To assure motivated employees, professional cooperation and good results within the guanxi business environment is important to have process in place assuring beneficial collaboration. By doing so, Iron Pump can create and maintain a solid organizational culture (Hill, 2012, p.469).

7. Conclusion
This report examined Iron Pump’s possible expansion into the Chinese market by setting up a wholly owned subsidiary in Ningbo Economic and Technological Development Zone starting from the representative office in Shanghai. The whole report has been structured by the OLI-framework in which the report was divided into three main parts.
The ownership advantages (O) showed that Iron Pump has a competitive advantage in expanding into the Chinese market by following a localization strategy. These firm specific advantages encompass ability to fast decision making, extensive knowledge through RO in Shanghai, funds to facilitate expansion and full control of the value chain.
By analyzing localization advantages (L), the analysis showed that particularly focus on cultural factors are important for Iron Pump to succeed in the Chinese market. Iron Pump should address specific attention to cross-cultural literacy and become aware of differences in traditions and business ethics between Denmark and China.
Finally, it can be derived from the internalization advantages (I) that Ningbo Economic and Technological zone is an ideal place for setting up Iron Pumps wholly owned subsidiary with large scale entrance within a two year period of time.

References:
Accentura, 2011, Wage increases in China: Should Multinationals Rethink their Manufacturing and Sourcing Strategies, report,

China Labor Bulletin, 2013, Wages in China, viewed October 14 2013, http://www.clb.org.hk/en/content/wages-china

Dezan Shira & Associates, 2011, Business guide to Shanghai and the Yangtze River Delta (4th edition), Asia Briefing Ltd., Hong Kong
Dezan Shira & Associates, 2012, An Introduction to Doing Business in China, Asia Briefing Ltd., Hong Kong
Dezan Shira & Associates, 2010, Business Guide to China’s Emerging Second and Third Tier Cities, Asia Briefing Ltd., Hong Kong
Dezan Shira & Associates, 2011, Setting Up Wholly Foreign Owned Enterprises in China, Asia Briefing Ltd, Hong Kong

Dunning, 2000, The eclectic paradigm as an envelope for economic and business theories of MNE activity, viewed 14 October 2013, http://www.exeter.ac.uk/media/universityofexeter/internationalexeter/documents/iss/Dunning_IBR_2000.pdf

Golley, Jane, 2013, China’s rise: A ‘socialist’ economy in a capitalist world, Paper prepared for the Wellington Conference on Contemporary China, Australia

Hill, 2012, International Business: Competing in the Global Marketplace, McGraw-Hill/Irwin, New York

Iron Pump, Company, viewed October 14 2013, http://www.ironpump.com/company
Iron Pump, Agents and distributors, viewed October 14 2013, http://www.ironpump.com/company/agent-and-distributers
Iron Pump, Quality and environment, viewed October 14 2013, http://www.ironpump.com/quality-and-environment
Iron Pump A/S Annual report, 2011-12,
Interview, 2013, Iron Pump, Reno Egeborg Hansen – Production and logistics manager

KPMG Advisory, 2011, China’s 12th Five-Year plan overview, Report,

Liyao, Lin, 2012, Top 20 wealthiest cities in China, viewed October 14 2013, http://www.china.org.cn/top10/2012-04/09/content_25093860.htm

Moses, Steffen, 2013, Det gør Iron Pump for at vinde globalt, viewed October 14 2013, http://borsen.dk/nyheder/hvad_kan_vi_danskere/artikel/11/60091/artikel.html

PwC, 2013, Doing Business and Investing in China, Report,

Reuters, 2013, China central bank says 2013 GDP growth to exceed 7.5 percent: Xinhua, viewed October 14 2013, http://www.reuters.com/article/2013/10/11/us-china-economy-growth-idUSBRE99A03P20131011

Technavio, 2013, 2011-2015 Pump markets in China, Report,

The Hofstede Centre, What about China?, viewed October 14 2013, http://geert-hofstede.com/china.html

US China, 2006, Top Ten Legal Considerations for Doing Business in China, viewed 14 October 2013 http://www.uschinabiz.com/TopTens/ChinaBusinessLaw.aspx

Xuequan, Mu, 2008, China's Yangtze River Delta to attain modernization by 2020, says official, viewed October 14 2013, http://news.xinhuanet.com/english/2008-10/17/content_10206478.htm

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