International Business
Full details of coursework or other non-exam assessment
One 3,000 word (excluding references) individual essay (100%).
You are required to answer the following question:
Assume that you are advising a company of your own choice on their potential new international
expansion opportunities using foreign direct investment. Your task is to write an essay covering the
following information:
- Briefly provide a profile of the company chosen (no more than one page).
- Identify the most attractive potential new foreign market for the company, with appropriate reasons to
support your choice.
- Recommend the most appropriate method for entering the market and explain your reasoning.
- Highlight the significant liabilities of foreignness presented to the company in that market and advise
how it can address these challenges.
VODAFONE GROUP PLC2
TABLE OF CONTENT
Company Profile Summary 3
Most attractive potential new foreign market 4
Justification for the Market Choice 4
Recommended Market Entry Strategy 6
Justification for the Choice of Entry Strategy 7
Significant liabilities of Foreignness In Chinese Markets 9
Market Identification/mapping challenge. 9
Location selection challenge 10
Grasp of local policies and regulations 10
Other liabilities resulting from Vodafone’s foreignness 11
Recommended strategies for addressing foreignness related challenges 11
Market Identification challenge 11
Location selection challenge 12
Grasp of local policies and regulations 12
Partner trustworthiness 12
VODAFONE GROUP PLC3
Partnership agreement negotiation 13
Potential risk to Vodafone’s Intellectual Property Rights (IPR) 13
REFERENCES 14
APPENDICES 16
VODAFONE GROUP PLC
Company Profile Summary
Vodafone Group Plc. is a U.K based global telecommunications company that specializes
in the delivery of a wide range of telecommunication services to its global clientele through a
network of subsidiaries and partner organisations across the globe. The company provides voice,
data and messaging services to its clients in North America, Europe (central and southern
Europe), Africa, Asia Pacific and the Middle East. In North America, Vodafone acquired a 45%
stake in Verizon wireless (‘VodafoneGroupPlc’, 2016). The company’s corporate headquarters
are in Berkshire, in the United Kingdom. Based on the FY2012 annual report, the Group
employs an estimated 86,400 people. According to the same report, the company reported
revenue more than £46,417 million ($74,095.5 million) for the 2012 financial year, constituting a
revenue increase of 1.2% as compared to the previous year (Vodafone Group Plc., 2016).
Vodafone Group’s operating profit also registered a significant increase estimated at
99.9% above the previous year, ending at £11,187 million ($17,857.8 million). However, the
company’s net profit marginally declined by 12.7% ending at £6,957 million ($11,105.5
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million). According to the Group’s 2017 Annual report, it recorded revenues estimated at (Euro)
EUR47, 631 million, representing 4.4% decline from the previous year’s performance (Vodafone
Group Plc., 2017). In the same fiscal year, the group registered an operating margin estimated at
7.8%, which was a significant increase from 2.6% recorded in 2016. Despite the substantial
increase in operating margin, the Group recorded a net loss totaling to EUR6, 297 million in the
same financial year, which was a net increase as compared to FY2016’s net loss that was
estimated at EUR5, 405 million (Vodafone Group Plc., 2017). Vodafone provides a range of
telecommunications services that encompass fixed and wireless broadband mobile, video on
demand, cloud computing, Internet of Things (IoT) and a range of hosting services. The group
also provides a wide range of communication devices that include smartphones and other mobile
platform applications. The company boasts a robust clientele that ranges from SMEs to large
corporations, multinational companies and government institutions (Vodafone Group Plc., 2017).
Most attractive potential new foreign market
China represents the most significant Asian telecommunications market regarding
numbers with its over 1.46 billion population and a mobile subscriber base of 1.3 billion
(Chinainternetwatch.com, 2018). Although the Group has been widely successful in the Indian
market, which is the second largest after China, this study identifies China as the most attractive
potential new foreign market for the U.K based telecommunications giant.
Justification for the Market Choice
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China remains the best and most potential new foreign market for Vodafone Group in
spite of the fact that the Group sold its 3.2% stake in China Mobile in 2010. Vodafone group sold
its stake at $6.5 Billion, which was double its initial acquisition cost (Chinainternetwatch.com,
2018). Based on the current market trends and growth statistics, China still outshines other global
markets in terms of its potential and attractiveness as a preferred mobile telecommunications
investment destination The justification for the market choice is based on statistics which shows
that China’s population stood at 1,409,517,397 in 2017, and was estimated to increase to
1,415,045,928by end of 2018thereby representing an increase of 0.39% compared to the previous
year. Still, there were an estimated 1.36 billion mobile subscribers by the end of 2017 according
to China’s Ministry of Information Technology report. According to the report, China registered
42.74 million new subscribers in 2017 alone (Chinainternetwatch.com, 2018).
Further justification is based on the fact that China boasts over 888 Million subscribers
on its 4G network, having gained 118 million new subscribers in 2017 (Chinainternetwatch.com,
2018). Thus China remains the leading country regarding total subscriber base in all mobile
service categories. Still, China’s 4G coverage hit 65.1% by the end of 2017. With the nation’s
1.17 billion active Internet subscribers, and having registered 79.38 million new subscribers in
six months, China is the most prolific and highly potential telecommunications foreign market
for Vodafone Plc. (Chinainternetwatch.com, 2018). The country’s rapid penetration and mobile
adoption levels and especially its 1.04 billion broadband subscriber base present an attractive
opportunity. There is an immense opportunity in the broadband market, especially in the 3G and
4G market, given that there are over 400 million Chinese mobile users who are not on the
broadband network. According to Chinainyternetwatch.com, the country per capita data
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utilization hit the 1.591GB/month in 2017 as compared to 707MB/month recorded in 2016
(Chinainternetwatch.com, 2018).
There is a deficit in the smartphone penetration rate which is estimated at 65.5% in tier
1,2 and three cities, while China Mobile leads the pack, having recorded a smartphone
penetration rate of 66.3% in 2017(Chinainternetwatch.com, 2017). The rationale for choosing
China as the most attractive potential market is also based on the fact that China remains the
cheapest destination for foreign corporations due to a cheap supply of labor and flexible labor
laws. The fact that Vodafone made double profits from its divesture in China mobile in 2010 is
testimony that China remains the most potential telecommunications destination of choice.
Statistics suggest a year-on-year decline in the number of broadband user’s especially on
China Mobile, at an adjusted rate of 1.1% annually (Chinainternetwatch.com, 2018). The young
and trendy smartphone users are switching to China Unicom. As the market moves toward
solidification, there is a possibility that the trend will persist, hence providing an opportunity that
Vodafone Plc. can exploit to re-enter the Chinese market.
VODAFONE GROUP PLC7
Figure 1: China’s telecommunications market share (Adapted from
Chinainternetwatch.com)
Recommended Market Entry Strategy
Before the 2010 divesture in China Mobile, Vodafone had initially utilized a joint venture
strategy to enter the market. The company acquired a stake in China Mobile, currently the
world’s largest mobile operator by subscriber base. This market entry strategy provides
numerous advantages that include the elimination of initial setup barriers that are associated with
establishing a new foreign subsidiary (Wei, Liu & Liu, 2015). The strategy guarantees ownership
in a foreign firm based on a going concern-model thereby eliminating regulatory hurdles that are
linked to the new entry. The recommended market entry strategy is a joint venture where
Vodafone will acquire a stake in one of the three existing mobile providers (Norris, 2011).
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However, the current strategy should not focus on acquiring a stake in the dominant player
(China Mobile), but rather it should focus on acquiring a stake in one of the smaller players. The
researcher recommends that Vodafone should enter into a joint venture partnership with Unicom,
China’s second largest mobile operator.
Justification for the Choice of Entry Strategy
The joint venture (JV) market entry strategy is informed by the current mobile usage
statistics, which shows a significant shift in young Internet users, largely female exiting China
Mobile for Unicom. Given Vodafone’s focus on data, voice, video and messaging, acquiring a
stake in Unicom will give the Group an opportunity to optimize the existing broadband network
capability and provide a wide range of value-added data services. Currently, South Africa’s
Telefonica has 8.4% ownership in China Unicom and is expected to increase its stake to
10%(Chinainternetwatch, 2018). Vodafone should, therefore, target other shareholders and
negotiate for 10-25% stake. Vodafone should then target to optimize its broadband 4G network
based on the long-term evolution technology (LTE) and the Internet of Things (IoT).
A joint venture strategy presents numerous merits. Firstly, the local firm already has
significant knowledge of the local market dynamics (Michalski, 2015). In this case, China
Unicom is already an established Chinese brand and has a cutout market niche, which
differentiates it from the competition. Currently, China Unicom is emerging as the most
preferred smartphone network for the young elite Chinese subscribers. A joint venture strategy
will eliminate the high cost of setting up a mobile telecommunications infrastructure network
(Nisha, 2016). The joint venture strategy is preferred as it eliminates the various regulatory
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requirements that usually slow down the process of establishing a foreign subsidiary.
Furthermore, it provides foreign corporations with an existing local platform, a pre-existing sales
network, and supply chain (Balmer & Chen, 2015).
Besides benefitting from a pre-existing clientele and sales networks, Vodafone Plc. will
find it easy to penetrate the Chinese market using China Unicom’s existing market share (Tsang,
2012). Secondly, acquiring a controlling stake will give Vodafone the freedom to take advantage
of its already existing global network to offer competitive international tariffs in the Chinese
market. This will give China Unicom a competitive edge over its two rivals. Joint venture
ownership will eliminate the laborious requirement of understanding the local language and
culture of the foreign market (Kim, Zhan & Krishna Erramilli, 2011). Since Unicom is a local
Chinese company, it’s already accustomed to the Chinese language and culture as its
management and personnel will be largely local.
Further justification for joint venture entry strategy is that it’s the most preferred foreign
market entry strategy due to its simplicity (Si &Bruton, 2013). The efficacy of this entry strategy
can be further underscored by the fact that it was the strategy that Vodafone initially employed
when it acquired a stake in China Mobile. Since China Unicom is a local Chinese company,
Vodafone will be exempt from the substantial regulatory and tax burdens that are usually placed
on wholly owned foreign firms (Fong, Lee & Du, 2014). This strategy is justified, as it will
provide Vodafone with a foreign platform that can be used to export technology from its London
headquarters’ while also importing the Chinese technology back home.
Significant liabilities of Foreignness In Chinese Markets
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China’s rapidly growing middle class, rising middle class per capita income, ballooning
consumer expenditure doubled with an open business environment is attracting foreign
corporations to invest in the Chinese market (Chinainternetwatch, 2018). However, there are
diverse challenges that foreign corporations encounter in this endeavor. While China remains the
most attractive foreign direct investment destination for Vodafone Plc., there are numerous
liabilities that the Group will have to contend with due to its foreignness in the Chinese market.
These liabilities are:
Market Identification/mapping challenge.
The first challenge that foreign firms face in the Chinese market is curving out the
specific market that it needs to serve (Niu, Dong & Chen, 2011). China’s population that is
expected to hit the 1.46 billion mark in 2018 can pose a great challenge to foreign firms. It’s a
significant challenge for foreign corporations trying to understand the specific needs of different
population groups. Identifying and understanding the opportunities that can be exploited can be a
great challenge. Besides, China’s vast landmass can present a great challenge to foreign
telecommunication’s companies since they will have to establish a network infrastructure across
the country.
Location selection challenge
Foreign firms entering the Chinese market face numerous challenges due to their
foreignness and lack of local experience (Xuegong, Liyan&Zheng, 2013). Due to the vastness of
China, foreign firms face a dilemma in selecting whether to set operational headquarters in
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China’s tier 1, tier 2 or tier 2 city. Although most foreign corporations choose tier 1 cities that
have a robust middle class, tier 2 and tier 3 cities present numerous advantages that include
lower initial setup and reduced long-term operational costs (Niu, Dong & Chen, 2011). Tier 1
cities are mature markets and present an ideal market for foreign corporations due to rising
incomes and hence increased spending power. The success of a foreign firm will also depend on
its potential to select the ideal location.
Grasp of local policies and regulations
According to Niu, Dong & Chen (2011) foreign companies need to understand the
dynamics of China’s business policies and regulations. Although China’s market is semi-
liberalized, due to its WTO membership, there are still industries that are only open to local
companies. One sector that is controlled is the telecommunications sector. Due to these
restrictions, foreign telecommunications firms have only one option of entering the Chinese
market, which is through a joint venture. Still, there is capping on the stakes that foreign firms
can acquire in a Chinese local telecommunications company (Xuegong, Liyan&Zheng, 2013).
China has divided investment opportunities into three categories namely ‘encouraged,’
‘restricted’ or ‘prohibited’ besides numerous industry-specific standards and regulations that
foreign firms are required to comply with.
Other liabilities resulting from Vodafone’s foreignness
Another liability resulting from Vodafone’s foreignness will be less management control.
The Chinese laws on restricted industries prohibit significant foreign ownership in local firms
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that fall within this category thereby giving the local shareholders greater control in the
management of the company (Niu, Dong & Chen, 2011). Still, there is the liability of
trustworthiness especially for local firms that are not publicly listed. Another challenge is
negotiating favorable partnership terms and the fact that the partnership negotiations may take a
prolonged period to conclude. Vodafone’s entry in China could also pose liability challenges
related to intellectual property rights (IPR). Operating in China will increase potential risks to
Vodafone’s IPR (Xuegong, Liyan&Zheng, 2013). Furthermore, there is a high possibility that the
local partner (China Unicom) may negotiate contracts in their favor.
Recommended strategies for addressing foreignness related challenges
Market Identification challenge
The market identification challenge will be addressed through a joint venture entry
strategy. Vodafone will be exempt from location identification challenge as it will acquire China
Unicom and ride on its pre-existing resources and infrastructure (Niu, Dong & Chen, 2011).
Vodafone will also be spared the hustle of carving out a market niche since it will use a joint
venture entry strategy. Local knowledge, which is critical in market identification, will no longer
pose a hindrance to Vodafone.
Location selection challenge
Given that Vodafone is a telecommunications provider, the location will not significantly impact
its entry into China, also considering that it will acquire stakes in China Unicom (Balmer& Chen,
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2015). The company will simply operate from the current location and ride on Unicom’s pre-
existing network infrastructure.
Grasp of local policies and regulations
Although there are numerous industry-specific standards and regulations that all foreign firms
must comply with, a joint venture will enable Vodafone to benefit from the legal expertise of the
local partner who has a better grasp of the local regulatory environment (Balmer& Chen, 2015).
.
Partner trustworthiness
Vodafone will not have to deal with reliability of its partner, as it will be entering China through
a joint venture partnership with China Unicom, which is a publicly listed company. The fact that
the joint venture partner is listed provides a certain level of trustworthiness as listed firms are
subject to more reporting regulatory requirements (Niu, Dong & Chen, 2011).
Partnership agreement negotiation
The challenge of negotiating partnership terms should be addressed by sub-contracting an
experienced firm such as Price water house who should help with valuation and partnership
agreement negotiations (Balmer & Chen, 2015).
Potential risk to Vodafone’s Intellectual Property Rights (IPR)
The challenge of exposing Vodafone’s IPR to potential risk will be dealt with by registering the
company’s copyrights with China’s intellectual property organization (Xuegong, Liyan & Zheng,
2013). This will protect the company’s copyrights against local infringement.
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REFERENCES
Balmer, J. M. T., & Chen, W. (2015, April 21). China’s brands, China’s brand development
strategies and corporate brand communications in China. Journal of Brand Management.
Palgrave Macmillan Ltd.
ChinaInternetWatch.com. (2018).
