pic: BBC
Thanks to Sam Watson for a model introduction and
conclusion to the recent 40 mark essay on BP2 (Is the possibility of
making financial losses in China
due to the increasingly competitive market the main risk companies need to
consider when weighing up the risks v the rewards of operating in China?). Sam’s introduction and conclusion are reproduced below.
Introduction
Risk is the potential for loss (financial and other) resulting
from a business decision. A reward is the potential for gain (financial and
other) resulting from a business decision.
I think that the main risk to companies operating in china is
making financial losses there. I think this because if a company is making
consecutive losses, i.e. year on year they are losing money, this means that
for a foreign company, the business venture has not been successful. I think
this because foreign companies, when setting up in China,
invest heavily, for example Tesco invested $1.5billion into China. If the
venture into China
is not profitable, this can have major implications on not just the Chinese
branch of the company, but also for the foreign company’s core business. I
think that making a financial loss in China is the main risk because it means
the investment could be wasted, which could have been invested in a much more
secure market, like the UK, which isn’t as heavily exposed to factors like
competition from cheaper products, unlike in China (although Chinese made
products don’t quite have the low-cost advantages that they used to following wage
inflation in recent years). B&Q backs up this point, as they had to close
22 Chinese stores between 2009 and 2010 after suffering from huge losses; in
2012 B&Q experienced a loss of £3m. I think that this is a prime example of
financial losses being the key threat, but I think it is also important to
consider other ways of experiencing financial losses, like damaging a company’s
reputation, which can lead to a decrease in sales, and so a possible decrease
in profit. Overall, after considering this final point, I think that the main
risk depends on what type of company is operating in China,
because a company like Rolls Royce will not experience as much competition from
cheaper products made in China,
because the product is seen as a foreign luxury and so has a strong unique
selling point. A company like that would therefore have a different main risk,
possibly something like changes in the external environment e.g. if problems in
the Chinese economy meant people had less disposable income to spend on luxury
items. However B&Q are in my opinion, most at risk from an increasingly
competitive market, as they could be undercut by a Chinese company who can make
the product for cheaper, and I do not think that B&Q’ customers will have
much attachment to the brand and so will not mind choosing a cheaper Chinese
product.
Conclusion
In conclusion, I think that there are a number of risks that
contend for the ‘main risk’ category, as China can obviously be a risky
market to enter. I therefore think that it can be difficult to highlight a main
risk, without first considering other risks and how they contribute to this
main risk. In actual terms, I mean that financial losses being the main risk of
China
can also be influenced by brand damage and corruption, along with other
threats. I therefore do not think that one risk alone can be identified as the
main one, as they are all linked, for example, brand damage can lead to a
decrease in sales, which can lead to financial losses in China due to
increasing competition as competitors take advantage of the damaged company
. I also think that it depends on what type of company is
operating in China, as
luxury items being sold in China
may be at less risk of competition, but at higher risk from corruption. I think
that this nicely summarises the fact that companies can have different main
risks, depending on their product, and also possibly their location. The Bo
Xilai case is an example of this, as businesses operating in Chongqing would have been exposed to a higher
risk of being embroiled in corruption than businesses in other areas because of
the nature of the politician in charge of that region.
