Nike in China

closing cropr Summary Overview Nike is the grocery store leader in gymnastic office in the United States. The Oregon based company has always utilized offshore facilities in exposeset-income countries to produce at minimal be fol natural depressi singled by moment into predominantly the US for sales. Nike is quick to denude from emerging grocery stores as be rise and has recently signed short marches intersectionion contracts with a long marches dodge of exertion in mainland chinaware. Unlike Nikes previous global endeavors, the political and cultural atmosphere in china has made the collaboration more demanding. OpportunitiesAs the South Korean sample of living carryd to im taste, expected wages grew forcing Nike to look elsewhere for broken in bell shoe production. Market research identified chinaware and India as the best long term possibilities for the bracing production facilities based on finances. Due in part to a curseing alliance betwixt Nike and the Chinese government based on the family lines of vice president David Chang, mainland china was determined to be the optimal location to grow. The possibility of a enunciate pretend giving Nike overture to a possible billion node market was a nonher opportunity that could only be found in mainland China.Issues in China Nike has spent the last four years construct facilities, training staff, and developing relationships in China. Unlike other facilities in junior-grade GDP countries that had been utilized previously, the China collaboration has been less(prenominal) than prosperous. The underway radical combined with landlocked facilities made menu logistics difficult. The Chinese government had plastered expectations and standardization requirements that were misaligned with Nikes incentives in terms of quality, pay, pricing, and employee motivation.The mainland China government in any case created difficulties in moment/export restrictions causing logistical probl ems with raw materials, specifically anything openingway the country through South Korea, a major Nike provider. bandage a foothold in China could eventual(prenominal)ly lead to an rattling(a) new customer base, the current global outline was ill meet to take advantage at the current age. Options * Shift strategies in China from global to multi-domestic to take advantage of the market. This option would require the formation of a joystick venture with the Chinese government. Move factory locations to reduce transportation and logistics issues. * Pull out of China completely. Recommendations We believe the government regulations entrust bushel quality improvement and cost effectiveness highly unlikely in China. Furthermore, a multi-domestic strategy requiring a high investment rate would be required to take advantage of the Chinese macrocosm as a new customer market. With low expendable income and a forced joint venture with the government necessary to sell Nike in China, we determined that merchandising in China is non currently an option.As such, the team recommends an pressing identification of new possible production milieus with a concerted and eventual total divestiture in China. Questions a. How has Nike conceptualized the athletic shoe industry global or multi-domestic? Justify your answer. What are the implications of this conceptualization? Nike instituted a global strategy, as hostile to a multi-domestic strategy, from the companys onset to compete in the athletic shoe industry.Knight identified opportunities abroad to reduce be 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 usage of a Porter-defined global strategy has brought the company to China. The Far Easts Role in the Value Chain Beginning with the first Japanese facilities, Nike factories proved in the Far East, Europe, and South America charter accounted for most 93% of shoe production with only minor assembly in the US.The identified regions within this concentrated configuration were almost exclusively production-only facilities without the R&D, sales and marketing, and other downsteam services required for a successful multi-domestic strategy. The countries had been targeted collectable to low be with certain factories being divested over the years collectable to increasing wage rates and political uncertainty. Competition to reduce cost between polar countries was key to identifying new opportunities and decision making on which factories would preserve open as economic factors changed.While reducing costs was the main concern in global production, Nike could not accept a ulterior loss of quality. Previous experiences in Far eastern plants had proven successful via quickly accepted technology transfer and ratios of grade-B property falling beneath 5% at rapid rates. Without the combination of high va lue and low cost, the strategic competitive advantage would be lost. Assumptions and Implications of a Global schema Nike moved to China based on their strategic history of standardizing the operations life cycle. Knight believed China would mirror other Far Eastern locales.Cost cutting assumptions included pay based on comparative Chinese wages (as opposed to relative Nike production wages), employee incentives capabilities, minimal import/export barriers, and an infrastructure for facile distribution logistics. For each unforeseen difficultness encountered along these assumptions, Nikes costs would increase and could drive margins down to a point where China would no longer 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 erstwhile(prenominal) exploitati ons 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 PRC upstandingly pushed JVs and the lack of a true collaborative environment could be detrimental in an environment so heavily regulated. b. Speculate on the reasons for Nike wishing to enter China. in front the entryway do you think these reasons were valid? Justify your answer. Chinas Excellence in Manufacturing China is known for their excellence in manufacturing. Nike mean 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 cod diligence, this was a valid reason. However, Nike either underestimated or did not entirely com prehend the challenges of conducting occupancy 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 Growth of the Athletic footgear Market in the 1970s (& Bad Forecasting) Perhaps Nike did not do enough high quality market research to see that the crop was slowing in their market. Nike may welcome become complacent collectable 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 back line is that Nike did not accurately bet and adjust their strategy to the athletic footwear industry trends and market conditions. Prior to entry and based on Nikes repayable diligence, this was a valid reason. Nike chose to enter China, in part, to meet the demand of the growing market. However, peradventure they should have spent more time and re ancestors on market research, which would have revealed that the growth rate was declining, and perhaps surplus suppliers were not necessary to ply out their business plan after all and that a different international location might better meet their sourcing collects and goals. rising slope Costs from Existing Suppliers One of the reasons Nike planned to enter China was collectable to the costs of conducting business in other countries (for example, South Korea and mainland China) had been increasing. Nike thought that they could source product from China at a tear down 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 confront in China, the costs associated in producing a pair of shoes were actually higher in China than their other international producers. See Table A in the appendix for a landed cost comparison from the case.Two gazillion Feet A lthough the case clearly specifies this is not a reason for entry into China, one of Changs motives may have been to sell directly to the Chinese. The sizing of the Chinese population is over three times the size of the United States. tied(p) 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 aviate 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 antecedent to their entry. Nikes product was not produced for the Chinese, as the average Chinese consumer could not afford the product. b. How did the decision to enter China complement Nikes boilers suit strategy? Nikes decision to enter China was based on blemish information. Nike underestimated the inherent challenges (political bureaucracy, materials sourcing, shipping and transportation, quality co ntrol and the Chinese culture of non-motivation and non-commitment) they faced when conducting 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(prenominal) 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 c ontributed to the obstacles. External Factors Nike underestimated the scope of the Chinese bureaucracy. Nikes only choice was to hire a consultant to navigate the issue. This consultant increased Nikes costs of doing business in China.Furthermore, Nike overestimated the size and future 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 knowledgeable operations to actively manage and solve production problems in trustworthy time. Also, Nike had great difficulties communicating the issue of quality control to the Chinese.Furthermore, the Chinese managers and manpower lacked motivation to perform their jobs to levels satisfactory to Nike. Ownership Nike chos e to be wholly owned. Nike did not pursue the joint venture route, even though China act to persuade Nike otherwise. Nike did, however, hire a consultant as a strategic partner to help them navigate the challenging bureaucracy. Given the political temper 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 launching a new manufacturing platform.Or, perhaps Nike should have make a strategic partnership with a local footwear manufacturer in order to bypass some of the issues with starting an entirely new facility and would have had some assistance in navigating the local market. d. Would you swear 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 C hinese production.By 1984, Nike encountered a range of problemsfrom quality issues (only 80% of Chinese shoes were A-Grade), to inventory management (records kept on a guess rule of expected usage), lack of flexibility from Chinese managers, motivational issues with management and workers, as rise up as complex and difficult government relations. Quality Issues in Product and Management When Chinas reformist leader, Deng Xiaoping, opened China to foreign investment and global market opportunities, Nike seized the opportunity to buy a finished shoe product from the PRC as a long-term, cheap supplier.However, despite Chinas opening to the global market, it relieve existed as a socialist state with severe trust issues and obstructions to the free blend of information. These factors compounded to cause an array of production difficulties. Due to the Chinese factories still producing 20% B-grade shoes ( significantly higher than both South Korea and chinaware), Nike management not only wasted additional time arguing with Chinese managers on the quality problems (rather than actually improving 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 triumph the factories to Nikes standards. presidential termal 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 said(prenominal) regardless of output. plain 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 termss. Price negotiations proved extremely difficult as none of the actual participants in the negotiations (foreign business bureau, fa ctory directors, local production bureau leaders) had the authority to make hurt 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 more higher than those encountered in South Korea or Taiwan.Although Nike tried to establish a positive 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 never 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 pr oduction growth to 1,000,000 pairs per month by mid-1980s but annual production in 1984 was only 700,000 pairs), significantly lower than 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 live up to would you recommend in China? Options whatever 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 change the sensitive and already tenuous relations ith the government. Other countries would have to be evaluated as a low-cost source of production. Some possible countries could be Indonesia 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 wo uld be to pull out of China operations.Although the possibility of access to a market with 1 billion people seems counter to this decision, 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 cutting their losings and finding another profitable production avenue.Conclusions Nike saw China, as well as the many 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 production system.Government controlled wages reduced the influence of incentives for both work efficiency and quality. constrained relationships with the South Korean government made importation of materials slow and expensive. carry-over 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 sufferance 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 Chin ese government was misaligned with Nikes needs. Together, it becomes apparent that the best option for Nike is to locate a better location for production urgently and completely divest in China.