China To Float Or Not To Float Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

China To Float Or Not To Float Case Solution

Key Success Factors

The key success factors to operate in the telecommunications market of China, had contributed towards the success of the local Chinese telecommunication service providers including the ZTE and Huawei Company. These key success factors of national companies are making it difficult for the foreign companies like the Alcatel Company to maintain its competitive position in the Chinese market. The key success factors behind the success of Huawei and ZTE include the following

Huawei and ZTE had been continuously investing research and development and marketing in order to provide the updated and the high quality services to their customers. The companies spend approximately 10% of their annual revenues over the R&D. Due to high investment on R&D, Huawei had been providing the best quality services as compared to large international players. It is because, the engineers had been kept in contact directly with the customers in order to get the product designed according to the customers’preferences.
The second factor was the American and the US companies did not string business connections to block the new comers from entering the emerging markets, which were becoming the key consumers of the advanced technology. However, the European and the American firms were more focused on the political and economic advantages of working with the Chinese local manufacturers.
One of the main factor behind the success of Chinese brands is the support from the State, as result of which, the Chinese manufacturers had been enjoying the low cost of capital advantage as compared to the foreign producers. The low cost production ultimately leads to lower prices of the Chinese products, ultimately, providing it a low cost competitive advantage over the other industry players.

Chinese Yuan Appreciation

The Chinese government had decided to uplift the Chinese currency by 2.1%, which would affect the telecommunication operators differently. The currency appreciation lead to inflation generally, as the currency appreciation would reduce exports and increase the imports of an economy. It can be observed that China has remained a major exports from 1996 -2004 (See Exhibit 4 of Case Study). The Chinese economy has always remained a fixed exchange rate economy but the economy started a market based exchange rate regime and decided to uplift the Chinese Yuan by 2.1%. The currency appreciation is not healthy for the local producers, because the currency appreciation would make the Chinese products expensive for the foreigners as well as for the domestic users.. Comparatively, the foreign products will become cheaper for the economy, as a result of which, the imports will rise and the exports will decrease.

The profitability of the local producers will be hurt because the demand for Chinese products will decrease, however, the profitability of the foreign manufacturers will increase, as the demand for their products will increase. It will hurt the Chinese economy, as the domestic production will be slower, which the reduce the country’s GDP growth and employment levels, and it may lead to trade deficit, as the exports will be lower than the imports.

Effects of Yuan Appreciation on Alcatel, Huawei and ZTE

The effect of the Yuan appreciation on the sales, operating cash flows and the overall profitability of the Alcatel Company and Huawei and ZTE is explained by the forecasting figures for the fiscal year 2005 and 2006. First of all, as the Alcatel Company is not a local manufacturer, so it would be positively impacted by the Yuan appreciation. It is because being an international player, euro will depreciate as a result of which, the telecommunication equipment and services, offered by the Alcatel Company will become cheaper for the domestic customers of China and the products of Huawei and ZTE will become more expensive. The analysis indicates that the demand for Alcatel products and services will increase and the demand for Huawei and ZTE will decrease. For simplicity, it is assumed that the sales revenue Alcatel Company would increase by 10% and the sales of the Huawei and ZTE will decrease by 10% (See Appendix 1).

Moreover, due to Yuan appreciation by 2.1%, the euro will depreciate which will reduce the sales of Alcatel Company by 2.1%. Similarly, the cost of goods for Alcatel Company will be increased as the company has its operations in China and due to currency appreciation, the cost of goods sold (estimated as a sales percentage) is estimated to be decreased by 2.1%. The other expenses are also foretasted as a percentage of sales, which led to a net income of 392 million euros and 423 million euros in the fiscal years 2005 and 2006. It shows that the net profitability of the Alcatel Company would increase due to the currency appreciation.............................

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