Nike in China

Executive Summary Overview Nike is the marketplace leader in acrobatic enclothes in the United States. The Oregon based company has always utilized offshore facilities in low-income countries to produce at minimal comprise followed by importation into predominantly the US for sales. Nike is quick to undress from emerging markets as costs rise and has recently signed short term deed contracts with a long term strategy of payoff in china. Unlike Nikes previous global endeavors, the authoritiesal and cultural atmosphere in chinaware has made the collaboration more demanding. Opport building blockiesAs the S push throughh Korean standard of living continued to improve, expected engrosss grew forcing Nike to look elsewhere for low cost tog production. Market research identified chinaware and India as the best long term possibilities for the tender production facilities based on finances. Due in part to a trusting affinity between Nike and the Chinese judicature based on the family lines of vice president David Chang, China was determined to be the optimal local anaestheticization to grow. The possibility of a go venture giving Nike access to a possible billion customer market was another opportunity that could only be found in China.Issues in China Nike has fagged the last four years building facilities, training staff, and developing relationships in China. Unlike other facilities in low GDP countries that had been utilized previously, the China collaboration has been less than sure-fire. The current infrastructure combined with inland facilities made transportation logistics difficult. The Chinese government had certain expectations and standardization requirements that were misaligned with Nikes incentives in terms of quality, pay, pricing, and employee motivation.The chinaware government also created difficulties in import/export restrictions causing logistical problems with raw materials, specific entirelyy anything unveiling the cou ntry through South Korea, a major Nike supplier. While a foothold in China could eventually lead to an enormous new customer base, the current global strategy was ill suitable to take good at the current time. Options * Shift strategies in China from global to multi-domestic to take favor of the market. This option would require the formation of a joint venture with the Chinese government. Move mill offices to constrict transportation and logistics issues. * Pull out of China tout ensemble. Recommendations We believe the government regulations will strain quality amelioration and cost effectiveness highly unlikely in China. Furthermore, a multi-domestic strategy requiring a high investing rate would be required to take advantage of the Chinese population as a new customer market. With low expendable income and a forced joint venture with the government necessary to get by Nike in China, we determined that swoping in China is not currently an option.As such, the team recom mends an pressing identification of new possible production environments with a concerted and eventual total divestiture in China. Questions a. How has Nike conceptualized the athletic shoe constancy global or multi-domestic? unloosen your answer. What are the implications of this conceptualization? Nike instituted a global strategy, as opposed to a multi-domestic strategy, from the companys onset to compete in the athletic shoe industry. horse cavalry identified opportunities abroad to reduce costs in the upstream functions of the value chain. Through the coordination of overseas trading trading operations integrated with US downstream functions focused on local US markets, Nikes utilization of a Porter-defined global strategy has brought the company to China. The remote Easts Role in the Value twine Beginning with the first Japanese facilities, Nike factories located in the Far East, Europe, and South America capture accounted for well-nigh 93% of shoe production with only minor assembly in the US.The identified regions within this difficult configuration were almost exclusively production-only facilities without the R&D, sales and marketing, and other downsteam services required for a victorful multi-domestic strategy. The countries had been targeted imputable to low costs with certain factories being divested over the years imputable to increasing wage rates and policy-making uncertainty. Competition to reduce costs between different countries was key to identifying new opportunities and deciding on which factories would remain liberal as economic factors changed.While reducing costs was the main interrelate in global production, Nike could not accept a subsequent loss of quality. Previous experiences in Far Eastern plants had proven successful via quickly accepted technology transfer and ratios of grade-B fit out falling to a lower place 5% at rapid rates. Without the combination of high value and low cost, the strategic competitive advantag e would be lost. Assumptions and Implications of a Global Strategy Nike moved to China based on their strategic business relationship of standardizing the operations life cycle. Knight believed China would mirror other Far Eastern locales.Cost stinger assumptions included pay based on relative Chinese wages (as opposed to relative Nike production wages), employee incentives capabilities, minimal import/export barriers, and an infrastructure for facile distri moreoverion logistics. For each unforeseen difficulty encountered along these assumptions, Nikes costs would increase and could drive margins down to a point where China would no endless be financially competitive. The Olympic team public relations venture attempted to further the relationship between Nike and the Chinese government, not to present a new product for the public.The millions spent were misaligned with a low cost model and were identified with past exploitations by the West. While the possibility of two billion feet was enticing, Nike was in China to produce, not sell, shoes. There was no plan to market, distribute, or sell in China. Accordingly, the idea of a joint venture should not be on the table under the current strategy. However, the mainland China strongly pushed JVs and the miss of a true collaborative environment could be detrimental in an environment so heavily regulated. b. Speculate on the reasons for Nike wishing to drop off China.Before the entry do you compute these reasons were sensible? Justify your answer. Chinas Excellence in Manufacturing China is known for their excellence in manufacturing. Nike think to exploit this excellence in order to drive down their supplier costs, while maintaining their customers willingness to pay constant which creates value for Nikes customers and shareholders. Prior to entry and based on Nikes delinquent diligence, this was a valid reason. However, Nike either underestimated or did not entirely comprehend the challenges of conduct ing business is China.From the difficulty of sourcing local materials to the inconsistency in quality of the finished product, China was not the optimal manufacturing location for Nike. Rapid harvest-feast of the Athletic Footwear Market in the 1970s (& Bad Forecasting) Perhaps Nike did not do profuse high quality market research to see that the growth was slowing in their market. Nike may have become complacent due to their dominance in the industry or Nike may have discounted the market trends in the athletic footwear industry that showed a decline in the rate of growth, when comparing the 1970s to the 1980s.The bottom line is that Nike did not accurately forecast and adjust their strategy to the athletic footwear industry trends and market conditions. Prior to entry and based on Nikes due diligence, this was a valid reason. Nike chose to set down China, in part, to meet the demand of the growing market. However, perhaps they should have spent more time and resources on market research, which would have revealed that the growth rate was declining, and perhaps supernumerary suppliers were not necessary to carry out their business plan after all and that a different international location might unwrap meet their sourcing needs and goals.Rising Costs from Existing Suppliers One of the reasons Nike planned to enter China was due to the costs of conducting business in other countries (for example, South Korea and Taiwan) had been increasing. Nike thought that they could source product from China at a lower cost than their current offshore producers. Prior to entry and based on Nikes due diligence, this was a valid rationale. Due to the multiple issues that Nike faced in China, the costs associated in producing a pair of shoes were rattling higher in China than their other international producers. See table A in the appendix for a landed cost comparison from the slip-up.Two Billion Feet Although the case clearly specifies this is not a reason for entry int o China, one of Changs motives may have been to sell at present to the Chinese. The size of the Chinese population is over three times the size of the United States. yet though the shoes produced in China were for the US, Chang may have considered producing a low cost shoe for the Chinese. Perhaps Nikes long term strategy was to voyage the Chinese political system, develop a strong local production presence, and then ultimately sell low cost footwear directly to the Chinese market.This reason was not valid prior to their entry. Nikes product was not produced for the Chinese, as the add up Chinese consumer could not afford the product. b. How did the decision to enter China complement Nikes overall strategy? Nikes decision to enter China was based on flawed information. Nike underestimated the inherent challenges (political bureaucracy, materials sourcing, shipping and transportation, quality tell and the Chinese culture of non-motivation and non-commitment) they faced when cond ucting business in China.Nike also failed to accurately forecast the demand in the athletic footwear industry. The decision ultimately hurt Nikes overall strategy, as their production costs rose, while the demand for their product was declining. Higher cost and declining demand both negatively affected Nikes bottom line. c. Identify the entry and ownership strategies used by Nike in entering China. Do you think they were appropriate? Base your analysis on the entry and ownership strategies outlined by Robock and Simmonds, referenced above. Justify your answer.As costs started to rise in other Asian markets, Nike made the strategic decision to open new full-scale manufacturing facilities in China, with the goal to reduce production costs. Nikes entry strategy into China created obstacles in achieving their long-term goals, which they should have foreseen. Below are a few factors that contributed to the obstacles. External Factors Nike underestimated the scope of the Chinese bureaucra cy. Nikes only choice was to consider a consultant to navigate the issue. This consultant increased Nikes costs of doing business in China.Furthermore, Nike overestimated the size and proximo growth potential of their target market. Nike should have conducted additional due diligence and more thorough market research before deciding to move into China. In addition, Nike did not forecast the materials sourcing issue, which added to product costs. Internal Factors Nike failed to forecast/implement some key factors when deciding to enter China. Nike lacked the necessary internal operations to actively manage and solve production problems in real time. Also, Nike had gigantic difficulties communicating the issue of quality control to the Chinese.Furthermore, the Chinese managers and workforce lacked motivation to perform their jobs to levels satisfactory to Nike. possession Nike chose to be wholly owned. Nike did not pursue the joint venture route, even though China try to persuade Nike otherwise. Nike did, however, hire a consultant as a strategic partner to help them navigate the challenging bureaucracy. Given the political climate in China, perhaps Nike should have approached China with a joint venture agreement. Having China as a partner may have saved Nike time and resources when institution a new manufacturing platform.Or, perhaps Nike should have formed a strategic partnership with a local footwear manufacturer in order to bypass some of the issues with starting an entirely new rapidness and would have had some assistance in navigating the local market. d. Would you say Nikes entry into China was a success? Give reasons for your view, explaining why the entry was successful or a failure. At the time of case study, Nikes entry into China was not a success. This evaluation is based on several reasons primarily due to the cultural clash between Nike and Chinese production.By 1984, Nike encountered a range of problemsfrom quality issues (only 80% of Chine se shoes were A-Grade), to inventory solicitude (records kept on a guess method of expected usage), lack of flexibility from Chinese managers, motivational issues with management and workers, as well as complex and difficult government relations. Quality Issues in Product and Management When Chinas reformist leader, Deng Xiaoping, opened China to immaterial investment and global market opportunities, Nike seized the opportunity to buy a finished shoe product from the PRC as a long-term, low-cost supplier.However, despite Chinas col to the global market, it still existed as a socialist state with severe trust issues and obstructions to the free flow of information. These factors compounded to cause an cast of production difficulties. Due to the Chinese factories still producing 20% B-grade shoes (significantly higher than both South Korea and Taiwan), Nike management not only wasted additional time arguing with Chinese managers on the quality problems (rather than actually improv ing the problem) but Nike also had to hire additional inspectors for each factory.While the money spent to hire these inspectors was relatively low, this illustrates the need for oversight and the lack of faith and trust in the Chinese managers to run the factories to Nikes standards. political scienceal Regulation Additionally, as a socialist state, Chinese workers lacked motivation to increase production (factories at a standstill by midday) and to adhere to production schedules since they would be paid the same regardless of output. even off attempts by Nike of monetary incentives only appeared to have an effect for approximately 60 days.Because of the central planning system, the Chinese managers were used to stable prices. Price negotiations proved highly difficult as none of the actual participants in the negotiations (foreign trade bureau, factory directors, local production bureau leaders) had the authority to make price decisionseverything relayed to authorities in Beijing . Compared to Korea or Taiwan, negotiations were slow which was extremely detrimental in a global and ever-changing environment. The levels of bureaucracy in China were much higher than those encountered in South Korea or Taiwan.Although Nike tried to establish a absolute relationship with China (through contributions to the countrys sports activities and hosting various Chinese officials visiting the U. S. ), meeting with the high-live leaders in China did not prove useful. The Chinese bureaucracy made making decisions difficult as it was neer apparent who was in charge of what and Chinese officials did not show the same level of interest in establishing a relationship with Nike (leaders sometimes did not show up for appointments).Ultimately, all of the cultural difficulties resulted in extremely low production numbers (Nike originally targeted production growth to 1,000,000 pairs per month by mid-1980s but annual production in 1984 was only 700,000 pairs), significantly lower th an both South Korea and Taiwan. Although Nike had ultimately hoped for a 20% price advantage over Korea, they were still losing $1. 00 on each pair of PRC shoes while the quality was much lower on these shoes as well. e. Identify the options available to Nike regarding its operations in China.If you were Chang at the time of the case, what future course of action would you recommend in China? Options virtually of the options available to Nike regarding its operations in China are to pull operations out of China completely or consider entering into a joint-venture agreement with China. As of 1984, Nikes foray into China has not been a success due to a variety of reasons (listed above). If Nike were to pull operations out of China, they would risk losing all of the equipment investment as well as damaging the sensitive and already tenuous relations ith the government. opposite countries would have to be evaluated as a low-cost source of production. Some possible countries could be I ndonesia or shifting a greater percentage of production to Taiwan as their comparative changes in unit labor cost, although increasing, were significantly lower than Korea or Taiwan. However, if Nike did decide to stay in China and enter into a joint-venture agreement, this step would potentially be viewed as a sign of trust and evidence of commitment by China.Nike would also be allowed to sell its products in Chinaa significant market to consider with a population of 1 billion people. Nike would also have additional freedoms with regards to hiring and dismissing personnel. The costs of a joint-venture agreement though, were estimated at $500,000 per factory and worker salaries would be about 20% higher than local factories. Recommendations to Nike If we were Chang at the time of the case, the future course of action that we would recommend to Nike would be to pull out of China operations.Although the possibility of access to a market with 1 billion people seems counter to this deci sion, Chinas great strides in opening to global markets indicates the likelihood that Nike will be able to access this consumer at some point without having to make the commitment of a joint-venture agreement. Additionally, while recognizing the sunk-costs bias, we feel that the potential costs to continue operations in China would result in Nike still losing money on each pair of shoe produced instead of elusion their losses and finding another profitable production avenue.Conclusions Nike saw China, as well as the numerous impoverished nations where previous production had occurred, as a part of the supply chain with a cost effective advantage. Korea and Taiwan had become increasingly expensive and China was a long term option. Unfortunately, Nike did not understand the political or cultural implications for utilizing China as part of a global strategy. The political environment and infrastructure in China created unforeseen difficulties for Nike in building an efficient product ion system.Government controlled wages reduced the influence of incentives for both work efficiency and quality. Strained relationships with the South Korean government made importation of materials slow and expensive. Transportation logistics and regional cultural differences made the government suggested sites for initial factory locations less than ideal. Chinas two billion feet did not align with Nikes global strategy. The Chinese public could not afford the high costs for the Nike brand and current ROI expectations could not be achieved.The Chinese governments relationship approach to external companies would have much greater acceptance towards a mutually beneficial joint venture. Some saw Nikes global strategy as exploitation. The financial impact of Nikes strategy could not be delivered in China. The collaborative relationship desired by the Chinese government was misaligned with Nikes needs. Together, it becomes apparent that the best option for Nike is to locate a better l ocation for production urgently and completely divest in China.