Download Central planning (Command economy)

Lecture 2
The Transition of China’s Market
Environment
中国市场转型环境
Central planning
(Command economy)
• Planning at several levels
• Walder: investment capital given as a grant,
• Administered prices that did not reflect relative
scarcities
• Insulated from foreign competition and world prices,
• Lack of competition on product markets
• Poor distribution networks
• Lying about output, low productivity, product
scarcity, etc..
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How about consumers and
marketing?
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Shortage and limited variety of goods.
Shoddy products with poor quality
Rationing system
Through state-controlled channels of
distribution
• For everything you needs
• Marketing – what is that? It did not exist!
The Follies of Central Planning-Chinese Heating System
• March 14, 2006 WSJ has an article ("China's Winter of
Discontent," p. B1; sorry no link) that demonstrates the folly
of using central planning to produce and allocate goods and
services. An excerpt:
– Heating systems are one of the last areas that remain under China's
former centrally planned economy, with government regulators still
setting the thermostat for homes, classrooms and offices across the
country. Under the policy, which dates back to Mao Zedong in the
1950s, the government provides heat in the northern half of China, and,
to save money, it provides no heat in the southern half. As a result,
northerners often wilt in steaming apartments, while those in southern
provinces shiver through the winter.
– http://divisionoflabour.com/archives/002391.php
• The Collapse of Soviet Union: winter in Russia
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The Greatest Transition in History
有史以来的最大变革
The Reform of economic system: From planning to
market: 经济体制改革：从计划到市场
• Marketing development is the reform process of the
continuously increasing effect of marketing structure
in economic resource allocation.
• Central planning permeated every aspect of the
economy, from the types of products, quantities,
channels to pricing.
• Two periods for the innovation：
– In the 1980’s, the domestic adjustment and innovations are
the key concerns;
– After the 1990’s, the opening policy drives the innovation,
the coastal cities set exemples for the inner ones, leading to
innovations in policies and theories, and the economic
activities stimulate the social and political changes.
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Shift to market-based systems
• Economic Reforms since 1979
• Focus on the improvement of corporate governance, the
promotion of the non-state sector and the protection of
property rights.
• Building up further a market oriented behavior by regulation
and law.
• The growth of foreign direct investment, import of equipment,
technologies, management know-how, and new business
concepts as well as ideas and lifestyles.
• Private ownership will be or is becoming a fundamental
building block of the economy.
• Now 60%-70% market economy, p.21.
– Greater reliance on market factors and consumer trends,
Reforms of State Owned Enterprises
(SOEs)国有企业的改革
• The stage of decentralizing authority and reducing profit
(1978~1982)“放权让利”阶段（1978～1982年）
– Break the big rice bowl,
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The stage of changing taxation of profits (1983~1986)
“利改税”阶段（1983～1986年）
The stage of contract system (1987~1992)
“承包制”阶段（1987～1992年）
The stage of operation system transition (1992~1993)“转换
经营机制”阶段（1992～1993年）
• The stage of modern corporation system.
• “现代企业制度”阶段（1993年以后）
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The results ….
• Ingenuity and energy of people released!
• Rapid economic growth: in output, brands, and
distribution outlets.
• Unprecedented improvement in productivity and
creactivity!
• Rise of standards of living and quality of life:
consumption waves and upgrade
• Under-developed legal systems, thus many loop-holes
for the opportunitist and corruption!
• Policy swings and over-corrections, and constant
adjustment!
Market Types: From the Seller’s Market to the
Buyer’s Market 市场类型：从卖方市场到买方市场
• Stage one, 1978~1989, typical seller’s
market.第一阶段，典型的卖方市场
• Stage two, 1990~1996, the seller’s market
and the buyer’s market coexist.第二阶段，
卖方市场与买方市场并存
• Stage three, 1997~present, gradually
becomes the buyer’s market. 第三阶段，
1997年至今，整体上进入买方市场阶段
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Market Structure: Fluctuating Concentration Levels:
市场结构：集中度降中有升
• The decrease of the concentration (monopoly)
levels indicates the fierce market competition
and resource waste (duplication), and causes
the drop of the profit rate and the deficit of
corporations. 产业集中度的下降表明市场竞
争越来越激烈，使资源浪费，导致企业利
润率下降和许多企业亏损
• Only until recently, there has been signs of
reconsolidation by mergers of firms.
Still in transition
• From central planning to market forces (70%)
• From an economy of scarcity to oversupply
(seller’s market to buyer’s market)
• From the dominance by SOEs to the coexistence of several modes of ownerships with
an increasing proportion of private businesses
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Market economy with Chinese (socialistic)
characteristics?
• The Walder article
• Gradualism: gradual reforms over time across regions and
industries (unlike the shock therapy in Russia)
• Dualism: a mix of market forces and government planning
depending on industry (capitalism + socialism), thus mixed
forms of enterprises (SOEs, collective, private, stock, FDI),
with government playing a major role, but more flexible and
decentralized
• Constant changes in laws and policies due to the gradual
reforms, creating instability as well as windows of opportunity
and boom-bust cycles caused by the switching between
laissez-faire and austerity programs
• Incomplete or partial reforms: political reforms and legal
development still lagging behind, only recently recognized
private ownership of assets
Unique Features of the Transition
Environment
转型环境的奇异特征
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Typical Features of the Transition
转型的典型特征
• The broad geographic areas and potential.
• 大：地域辽阔，
• Dramatic changes of development, policies, and laws.前景巨
大变：发展快，变化快，政策多变，法规不健全
• Chaos market, infringement, and poor reputation.乱：市场秩
序混乱，假冒侵权严重，信誉缺乏
• Short term orientation, and excessive competition.躁：短期导
向，多度竞争
• Variations across regions, systems, industries, marketing
levels, and generations differences. 异：区域差异，体制差
异，行业差异，营销水平差异，世代差异
The Disadvantages of Government Control
有形之手的巨大阴影
• After 25 years innovation, Chinese market changes from the
pure planning economic to the mixture economic of resource
allocation by both market and government.
• Government can directly interfere the market economic activity
• Some disadvantages of government interference: Negative
influence on stock market and taxation, some authorities are
reluctant to give up their powers for the sake of benefit, and the
local protectionism.
• Example: the recent real estate market ups and downs,
sometimes leads to vicious cycle. But government still exerts a
high degree of influence, which leads to inefficiency, corruption,
and poor investment.
• But a necessary evil!
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Unequal Financing Environment
不平等的融资环境
• Because of the local protectionism, the financial market treats
corporations differently.由于所有制情节和地方保护主义，
金融市场对各类企业的支持力度有很大差异
• The financial market only offers low cost fund to state owned
enterprises.金融市场为国有企业提供成本相对低廉的资金，
却往往不愿意为非国有企业提供资金
• The splitting of financial market is mainly caused by the
government interference of taxation and resource allocation.金
融市场的分割主要是政府对利率，资源配置的直接或间接
控制所导致的
• China is attempting to break the splitting of areas, politics,
industries, and management中国正试图打破地区，政治，行
业或管理方面的分割，从而推动经济的持续增长.
Poor Reputation
缺失的诚信
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Lack of information
Lack of transparency
Lack of accountability
Fake products假冒产品
Fake financial report 财务造假
Fake government statistics 政府统计造假
Unfair competition 不正当竞争
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Significant Difference among Sub-Markets
细分市场非常差异
• There are tremendous regional differences and market
segmentation due to the local economic, political and cultural
factors.
• 中国不同地区的经济文化民俗差别明显，各地方政府执行
政策有差异，造成中国市场的分割
• Difference between rural and city markets
• 中国农村市场与城市市场的差别很大
– The three worlds of China
• Different behaviors of old and young generations of
consumers年轻一代消费群和年老一代消费群差别巨大.
The Limited Effects of Marketing Data
市场数据的有限作用
• Local corporations neglect marketing data and local managers
make decisions according to the experience本土企业淡漠市
场数据，很多企业老总凭经验和感觉做出决策.
• It is extremely difficult to collect marketing data in China.
• 市场数据在中国不易获得市场
• Low validity and reliability of Chinese marketing data.数据的
有效性和可信度也不如国外成熟市场
• Thus, making it difficult to make informed decisions
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The Poor Logistics System
难防的通道陷阱
• It is difficult to make logistics and distribution in such a broad
area in China.中国地域辽阔，进行物流和分销很困难
• The logistics and distribution systems are not reliable配送系
统不可靠.
• International corporations begin to set up their own logistics
system, but fail to compete with local logistics corporations
due to the local protectionism跨国公司建立自己的配送系统，
但“强龙斗不过地头蛇”.
• Corruptions, discrimination, extortion, and unfair competition
in the channel system, p.38
Problems of Consumption Environment
消费环境的问题
• Consumers have no conscious of intelligent property消费者漠
视知识产权
• Shopping discrimination消费购物歧视
• Consumers have no conscious of self protection.消费者自我
保护意识差
– But things are changing slowly, with the advent of consumerism groups
and NGOs
– Growing need for compliance, crisis management, and public relations
• Many discriminatory practices in marketing
– fees
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Chinese Special GUANXI Marketing
关系营销的中国特色
• The Chinese GUANXI marketing is based on the Chinese
cultures.中国关系营销建立在中国的文化基础之上
• Foreign relation marketing emphasizes on the relationship with
customers.国外关系营销强化顾客关系
• Because of government interference, in China, the Guanxi
between corporations and government is more important than
the relation between corporations and customers.中国的企业
受制于政府，官商关系比顾客关系更重要
– Lack of trust of strangers
– Wine and dine, wheel and deal
– Source of corruption: make use of your power before it expires.
Corruptions in Marketing
营销腐败比较普遍
• Kickback吃回扣
– Salespeople, doctors
• Taking advantages of price differences from areas获取通路差
价和区域差价
• Promotion resource cutoff促销资源截流
• High traveling expenses过高的差旅费支出
• Translate into higher costs of doing business and waste of
resources
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Some Thoughts
• A mixture of old and new, East and West, good & bad, pretty
& ugly, “under-developed,”
• Lots of confidence and optimism, and lots of problems which
may mean opportunities (e.g., IPR vs. investigation business).
• Rapid urbanization, urban centers perhaps saturated, more
opportunities in small towns and countryside (appliances go
there家电下乡).
• Firms need to be bold, innovative, introduce something new,
flexible, adaptive, and sometimes creative, to stay ahead. Oldfashions go out of style really fast. People and firms are both
learning fast to catch up with the West.
• Rapid changes, continue to upgrade and moving up the value
chain, keep up with policies and changes.
• Both short-term and long-term planning, and continue to
revise. Seize the time and opportunity, grow, and consolidate!
• http://www.yogiyoga.cn/
More Updates
• The transition is on-going to central planning to a
more rule-based economy
• Where local firms have learned well and become very
competitive, aspiring to be world market leaders.
• The environment is increasing transparent,
competitive, sophisticated although still inconsistent.
• China is already the 2nd largest economy that is redhot and has increasingly affluent consumers.
• In some areas, China has become a huge viable
market such as e-commerce, mobile phones,
automobiles, green energy, and a must-win game for
multinationals.
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Summary of the Video case
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Rapid growth
Rapid urbanization
Cheap labor and huge migration
Hardworking, aspiring, & confident
High volume of trade
Domestic market: goods & brands
The biggest market but no democracy
Hong Kong, the freest but no democratic
Discussion questions:
• Discussion questions:
• 1) Aside from what we discussed in the classroom,
what are some other characteristics of a market in
transition like China?
• 2) How does the transitional nature affect businesses
and marketing, say, differently from those operating
in typical market economy?
• 3) Given the above, how should businesses develop
plans and strategies in China? In other words, what
factors should firms take into consideration when
formulating their business and marketing strategies?
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Group Project
• Market Research and Marketing Plan
• One product (goods & services), one market/segment
• From the perspective of a Hong Kong firm or that of
a multinational
• Environment analysis (socio-cultural, etc.)
• Market research: trend, demand and forecast
• Marketing strategies and planning
– Entry strategies
– Marketing mix strategies
– Implementation and contingency
Examples of Topics
• Selling Australian Beef to Chinese Consumers
• Setting up a diving club in Shanghai
• Fund-raising for a social enterprise in China (raise
fund to educate school-age girls in the country/city)
• Promote clean energy sources in China
• Promote crisis management and PR services to
multinational clients
• Set up a NBA franchise in China
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