International Business for Etisalat in China

Introduction

Etisalat is the leading telecommunications operator in the United Arab Emirates (UAE), and one of the largest companies in the GCC. Its headquarters is in Abu Dhabi, UAE. The company serves nearly 11.6 million residential customers as well as more than 300,000 small, medium, and large enterprises and government entities in the United Arab Emirates. Apart from establishing various technologies over the past few decades, the company has also used the technologies to continually be the leader in the provision of customer experience. Etisalat has an excellent ecosystem that has the ability to effectively drive success across sectors and industries.

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Currently, Etisalat boasts of the widest coverage of both 3G and 4G network platforms in the country. Besides, the telecommunication company reports that it has put in place what it refers to as an elaborate fiber-to-the-home (FTTH) network that already covers 86.4 % of the country’s populated area. This investment has put the country among the most fiber-connected countries in the world at the moment. The FTTH is crucial because it supports the provision of ultrafast internet network speed that goes up to 500 Mbps to residential homes. By 2011, the telco had rolled out the country’s as well as the region’s first 4G+LTE network.

Thus, it was able to provide more broadband speed and cover more than 90% of the UAE’s territory. It is important to mention that Etisalat has a widespread network among 735 international networks found in more than 200 countries. The services that Etisalat offers at the moment have enabled it to strategically transform into a major digital service provider. The company has supported the creation of smarter cities and smarter services in large, medium, and smaller businesses.

Etisalat offers the following services in the UAE currently: enterprise solutions, e-vision, customer care, networks, human resources, corporate social responsibility, and software solutions. The company can venture into international markets to accrue various benefits. In this essay, Etisalat is presented as a company that intends to venture into the Chinese market. However, before the company can make the step, various factors are put into perspective. The analysis focuses on China’s PESTEL factors, how they affect foreign investment, and SWOT analysis of the telecommunication company.

Overview of China as a Business Destination

China is still considered one of the most attractive investment destinations all over the world. It has attracted foreign investments that are the second-largest in the world after the United States’. Among all foreign direct investments into China, most of them have been done to the capital and technology-intensive sectors as well as value-added fields (Xinhua, 2016). Therefore, Etisalat, being a technology-focused company, could also enjoy the benefits that other investors in the sector have witnessed using different approaches. However, before entering China, a PESTEL analysis is conducted to evaluate the feasibility of the country for this type of investment.

PESTEL Analysis

PESTEL (political, economic, social, technological, environmental, and legal) method is a tool that marketers use to analyze and monitor external marketing (macro) environment factors that can impact the organization. Political factors focus on how and the extent to which the government interferes with the economy. The factors can be political stability or instability, government policy, the policy of foreign trade, labor laws, tax policy, consumer protection laws, trade restrictions, and environmental laws. All of these factors impact organizations and their businesses; therefore, Etisalat must consider the Chinese government's effects on the factors, especially in the company’s line of operation.

Economic factors affect not only the business of a company but also its profitability. The factors such as economic growth, inflation, interest rates, consumers’ disposable income as well as business determine the performance of an organization. Socio-cultural factors refer to the areas of shared attitudes and beliefs. For instance, organizations could consider age distribution, population growth, career attitudes, and health consciousness in their investment plans. The factors are important because they directly affect marketers’ understanding of customers as well as the aspects that drive the customers.

Changes in the technological landscape along with its impact on product marketing are critical factors before investing in a country. Technological factors can affect marketing and management through new strategies of production and distribution of goods and services, and communicating with target markets.

Environmental factors have become important for business entities that want to succeed in their ventures. Of note are scarce raw materials, the need for ethical and sustainable operations, and pollution targets as well as carbon footprints that governments set, among other factors, must be considered in the companies’ operations. Customers are also showing a preference for products or services that are produced ethically or with the usage of sustainable sources.

Legal factors focus on consumer rights, equal opportunities, advertising standards, health and safety, product safety, and labeling. A company has to know what is considered legal or illegal for trade to be successful. An organization that trades globally must strive to get it right in various countries considering that different countries have a different set of rules and regulations.

PESTEL Analysis of China

Political Factors

China has a socialistic political system with a focus on the market economy. The country is a unitary state with the Chinese Communist Party (CCP) holding all the political power. The one-party state may be indicative of a stable political agenda, but there are major features that are likely to hinder political stability in China (Zhang, 2011). Firstly, there have been rising tensions between the Chinese poorer and richer areas. The increasing gaps between these areas mean that Chinese authorities have had to struggle with separatist movements in areas such as Xinjiang and Tibet. Secondly, China’s international disputes regarding political belonging, pro-democracy activists in Hong Kong as well as with Japan on how to exploit natural resources all have the likelihood of threatening the country’s stability (Zhang, 2011).

Besides, China has not had a good record on matters of transparency and corruption. China’s corruption perception index compares badly with those of Western nations and other Asian nations. However, Chinese bureaucracy compares favorably with other Asian nations, but the system has remained rigid when it comes to closing down businesses. Enforcing a successful contract requires numerous separate procedures that can take several months. Therefore, before Etisalat invests in the countries, it must be ready to navigate the country’s bureaucratic and rigid systems.

It is, however, important to note that since the 1990’s China’s foreign investment systems have increased tremendously. Private investments have been a major source of foreign capital. Indeed, Chinese authorities have been supporting foreign direct investments towards tech industries. In addition, China’s increased participation in global economic activities clearly indicates its critical role in the world economy.

For instance, China is a member of the World Bank and the International Monetary Fund. It is also a member of the Asian Development Bank, and its assent to the World Trade Organization in 2001 became the decisive indicator of it being actually fitting into the developed world. The accession to the World Trade Organization has allowed foreign telecom companies’ rapid growth in China. Furthermore, the country’s effort to meet the requirements of the World Trade Organization has improved the business environment.

Economic Factors

The first aspect of economic factors is stability both in terms of economy and growth. The Chinese economy has continually been strong even in times of economic recessions, for instance, during the Asian crisis that occurred in the late 1990s (Zhang, 2011). The country’s financial structure has been used to partly explain the stability. Unlike other developing economies, China boasts of a higher share of foreign direct investments to foreign loans. Importantly, foreign direct investments are not as volatile as other sources of financing. China is among the largest recipients of direct foreign investments in the world. Even though the country has witnessed the rapid development of its economy, the mainland still experiences structural problems with the financial sector.

Furthermore, the country’s capital market remains underdeveloped, thus viewed as very risky, loosely regulated, and lacking transparency. In fact, even though the structural reforms have been instituted, there is still the perception that the country’s financial factors are susceptible to economic instability.

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In recent times, there has been notable shift from total state ownership to private ownership, but such changes have not been very smooth. The private sector has shown strong growth resulting in the creation of most of the jobs in the country. In contrast, enterprises owned by the state have not had a good time while trying to adjust to ever-increasing competition and have been operating at deficits.

The second aspect of economic factors is China’s monetary policies. The country’s monetary authorities have, for a long time, managing the exchange rate. For instance, there was a ten year fixed pin to the United States’ dollar, which came to its end in 2005. Since then, the Yuan has been varying slightly with respect to other foreign currencies. Managing the country’s exchange rate can create a non-existent currency risk during financial transactions. Traditionally, pegged exchange rates have had the tendency of being vulnerable to speculations and have consequently been accused of economic crises. Moreover, China is said to be lacking totally independent policies on interest rates and inflation because the monetary tools are used in stabilizing the pegged exchange rate.

The third aspect is price development. There have been significant increments in price levels since the 1990s. Nonetheless, there have also been price reductions in such fields as transportation, household goods/services, and communication. Advancements in computer technology have resulted in both reduced costs of communication and increased availability (Zhang, 2011). Through mobile technology, options for communication have broadened. For instance, people can send short messages (SMS) which are somewhat cheaper.

Moreover, the Chinese labor market is an economic factor that is worth considering. The country has a large labor population. Chinese labor market seems to be limitless with respect to availability. However, recruiting highly skilled labor may not be easy. Similarly, in order to comply with the requirements of the World Trade Organization, China’s import tariffs have been lowered significantly since the 1990s.

The country’s dual tax system means that different taxes are imposed on foreign and local firms. Taxes for foreign companies can be reduced depending on their administrative locations. Further, foreign companies enjoy a three-year tax exception that is followed by a 50 percent three-year tax reduction. Taxes are charged progressively with value-added taxes being divided into various categories for small firms. Exporters are often not charged value-added tax and may receive tax refunds.

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Social Factors

These are factors that influence what customers choose as well as their purchasing power. In China, both gross as well as disposable income for consumers has increased over the past years. This kind of growth is expected to continue in the future. There is, however, a widening gap between high- and low-income earners. Both urban and rural populations have a noteworthy share of income that they can spend on non-basic goods and services. Also, the country’s advancement in healthcare and the one-child policy seems to have influenced the current population structure. At the moment, the country is considered to have reached the aging population. The country’s population density also differs significantly from one region to another with southeast being denser, while the northwest has low density.

Chinese consumers show interest in new products and services and adapt easily to new forms of technology. The male population is dominant with men aged 25-59 dominating. It is also this group that has individuals whose purchasing power is the strongest. Young males are highly likely to spend more on digital products, for instance, digital cameras and phones. As a consequence, this is an important population that Etisalat must consider in its investment plans as it invests in the country. Even though credit card payment systems have been introduced into the country, there are still individuals who prefer to make daily payments using cash. The younger generation has shown a preference for using consumer credit making this kind of payment system has a brighter future.

Technological Factors

The Chinese government is emphasizing on science and technology; thus, the country is now connected to the world economy. As a consequence, there has been increased funding for scientific research. Research and development constitute a significant component of the country’s gross domestic product. As the government channels more funds to research and development in the future, the country will be able to compete more favorably with such technologically oriented countries as the United States and Japan.

Legal Factors

To support foreign investments into the country, the Chinese government has progressively created a complete law system. For example, in 1979, the country published the Law on Foreign Equity Joint Ventures. Since 1999, the government has not only promulgated but also issued laws and statutes on how to establish, operate, terminate, and liquidate foreign companies that invest in the country. The main laws include:

  • the Law on Chinese-Foreign Equity Joint Ventures (CFEJV);
  • the Law on Wholly Foreign-Owned Enterprises (WFOE);
  • the Law on Chinese-Foreign Contractual Joint Ventures (CFCJV).

Similarly, the company law, the income tax law for foreign companies, interim provision regarding foreign investments, and industrial catalog detailing investment in China are all critical for Etisalat. The laws and regulations provide the necessary foundations upon which foreign companies can base their independent operations and protect their legitimate interests and rights (Zhang, 2011).

It is worth noting that in China, the labor force is heavily regulated as opposed to other countries found in the Asian region as well as to the countries from the Western world. For instance, regulations for dismissing workers are tighter than those for hiring them. Despite efforts, the protection of intellectual property rights still remains poor in China. Since joining the World Trade Organization, the country has enforced several new regulations in its endeavor to improve intellectual property rights. However, the enforcement of such laws remains unfulfilled, and penalties have repeatedly not been imposed where they should have been.

The Ministry of Information Industry regulates telecom services. Before a foreign company enters the Chinese telecom market, the ministry must provide its consent. Existing prohibitive regulations have prevented most of the foreign telecom companies from venturing into the country. Nonetheless, there are a number of VAS licenses being approved by the information ministry. The National Developing and Reform Commission (NDRC) helps in the determination of maximum prices for telephone services. The state console issued the regulation on Foreign-Invested Telecommunication Enterprises (FITE) in 2001. There have been efforts to enforce the laws.

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Environmental Factors

Even though China has had rapid industrial development, some serious notable negative effects, for instance, increased pollution as well as depletion of natural resources, have also been reported. By 2007, China had become the major emitter of carbon dioxide as well as other greenhouse gases. Most of the Chinese cities are either moderately or severely polluted. Similarly, there has also been water pollution in nearly all of the country’s rivers, and water scarcity is an issue in the northern part of the country. This can be a serious threat to the country’s continued economic growth. In fact, there have been major projects by the government to deliver water to northern cities such as Tianjin and Beijing from the Yangtze River. Despite the environmental challenges, the Chinese government has continued with its relentless efforts to combat the problems (Zhang, 2011)

For instance, environmental legislations to stop environmental degradation being part of the Asia Pacific Partnership on Clean Development and campaign to control pollution are worthwhile initiatives that the government has taken to conserve the environment. Etisalat could support government initiatives on the environment if the company eventually decides to invest in the country. Indeed, the government efforts have not been in vain because there have been improvements in the quality of air in some of the cities. When China participates in climate change discussions and negotiations and signing of conventions such as the Basel Convention and the Montreal Protocol, such efforts cannot pass by unnoticed. Etisalat must seriously consider climate change because it affects not only company operations but also the products that are offered.

Entry Strategy for Etisalat into the Chinese Market

As China continues to be one of the fastest-growing economies in the world, more and more companies get attracted to its markets. However, the major challenge remains how to enter the markets. Etisalat should consider investing in China through a wholly foreign-owned enterprise (WFOE). A WFOE is a limited liability company that is owned by foreigners. Foreign investors are responsible for the capitalization of such companies. WFOE is appropriate for manufacturing companies, trading, information technology, and business consultancy (The Canadian Trade Commissioner Service, 2015).

Therefore, WFOE would be the most appropriate option for Etisalat that belongs to companies in the information technology category. Under WFOE regulations, the investors can set up a wholly foreign-owned enterprise that supports China’s economic development, and such an enterprise must not be restricted or prohibited by the government. Since China’s entry into the World Trade Organization, WFOE conditions have been amended to provide additional services such as software development.

In China, WFOE remains the preferred form of the foreign-invested enterprise (FIE) because it gives freedom in the management of businesses. WFOE is established using large overhead investment, but it is guaranteed legal independence. As a consequence, it can engage in profit-making activities, decide on the type of human resources to hire and continue to expand by creating additional subsidiaries. The license for this type of business is limited to 30 years but can be extended or shortened.

A foreign investor who opts for WFOE must clearly define business scope as well as the type of investment during the application, but all these must be approved by the government. A WFOE is required by law to remain within its scope as well as financial requirements. In addition, the law requires that a WFOE investor pays 15% of registered capital not later than three months following the issuance of a business license with the remaining balance being paid within two years (The Canadian Trade Commissioner Service, 2015).

For two or more investors, a minimum of 30, 000 RMB is payable, while a single investor pays 100,000 RMB (The Canadian Trade Commissioner Service, 2015). However, since Etisalat will be investing in the hi-tech business, it will require between 100,000 and 500, 000 RMB (The Canadian Trade Commissioner Service, 2015). Etisalat should consider this strategy to enter the Chinese market because it will accord full control of the business to the owners, profits would be readily changed to foreign currency and repatriated if necessary, it allows protection of technical information and secrets, and gives full authority on staffing matters. Similarly, WFOE will allow the investors to sell their services in China and abroad, and the investors would not necessarily have to reside within China (The Canadian Trade Commissioner Service, 2015).

SWOT Analysis of Etisalat

The telecommunications industry in China has witnessed restructurings from monopoly to the competitive market over the past few years. Before Etisalat can invest in China, it must consider the 4Ps of marketing which are crucial for SWOT analysis.

  • Firstly, the company has to ensure that the product and/or services that it offers fulfill the needs of the customers (Rahmani, Emamisaleh & Yadegari, 2015). Investors must ensure that the products and services are unique and can be successfully marketed.
  • Secondly, investors must ensure that price decisions are made right. Price determinations affect profit margins, demand, and supply as well as a marketing strategy. The prices will have to arrive based on the prices that competitors charge.
  • Thirdly, the company will have to promote its products and services. The promotion will be critical in spreading information to customers as well as in differentiating the products and services from those of competitors (Rahmani et al., 2015).

Promotion could be done through advertising, use of social media, video marketing, or email marketing. In the venture that would involve many customers, the company may use advertising. The last factor that the company will have to consider is the place. Even though Etisalat has chosen China as the place to invest, it could further identify the most appropriate area within the country where it could invest in anticipation of profit-making.

The company must choose an ideal location where it can convert its potential customers to actual ones. Even though the number of competitors has increased, the market is still dominated by three state-owned businesses, namely China Telecom, China Mobile, and China Unicom. In this section, a SWOT analysis is conducted to guide Etisalat’s entry into China.

Strengths

  1. Etisalat provides services such as internet, voice, mobile, and roaming as well as broadcasting. It also offers corporate data services. The ability to provide more than one service minimizes means that the company can make a profit even if one or more segments are having losses. For instance, if voice and roaming services are not profitable, then the business can still make profits from the internet, corporate data, and/or broadcast services. It is appropriate to say that Etisalat diversifies its risks.
  2. The other strength is that Etisalat has signed numerous roaming service agreements; thus, it can connect to more than 190 countries. Through these agreements, the company’s roaming services remain reliable. Therefore, as the company invests in China, it can position itself as a reliable company with the evidence that its roaming service is being felt in many other countries.
  3. The company operates on a 3G platform. Three mainstream technology standards used in China currently include: TD-SCDMA, CDMA2000, and WCDMA. Undoubtedly, the possession of these advanced technologies increases the company’s competitive advantage.
  4. Etisalat has maintained a leadership position in the United Arab Emirates in terms of financial resources. Considering its assets and market capitalization as more than 136 billion AED, an equivalent of 36 billion USD, the company can compete effectively with telecommunication entities in China. In 2015, for instance, the company’s revenue was 51. 7 billion AED (Etisalat Group, 2015). Next, the company can attract the best talents in the market and acquire the most current equipment that it would need in the provision of services.
  5. · Etisalat has been longer than any of its would-be major competitors in the telecommunication industry. For instance, while China Telecom and China Mobile were founded in 1999 following the restructuring of the China Telecom Communications Corporation, Etisalat has been in place since 1974. For more than 42 years, Etisalat has gained valuable experience in this industry that would enable it to withstand competition from any challenger.

Weaknesses

  1. Broadening the company’s services to China can affect the quality of service.
  2. There could also be the problem of managing its global operation.

Opportunities

  1. Etisalat has the opportunity to benefit from China’s large population. With a population in excess of 1 billion, China offers a large market for the company’s products and services. The company has the opportunity to focus on the dominant age group of 25 to 59 believed to have the strongest purchasing power.
  2. Etisalat has the opportunity to go for the latest technology, particularly the 4G network. While the 3G network remains dominant, the company can go for the 4G network that is known to be faster. This would further give the company a competitive advantage over its rivals in China.
  3. The company’s financial position provides an opportunity to introduce new or valuable products and services. Etisalat has the opportunity to acquire advanced technology tools, which would enable it to compete favorably. It is important to note that China is a large country with most of the telecommunication companies operating either in the north or in the south of the country. Therefore, Etisalat can invest in tools that would allow it to provide services for both regions.
  4. The company has the opportunity to use local talents in China in order to grow its business. China has a large population with education training, knowledge, and skills in information technology. The human resource in China can be very valuable for the company because it would easily adapt to the company’s product and services to the unique needs of the customers.
  5. Investing in China is an opportunity for the company to expand its presence internationally. Even though Etisalat has invested in many other countries before, going into China is a good way to enhance its profit-making.
  6. The company has an opportunity to support China’s endeavor to stop pollution, which has been a serious problem in the country. As a company that supports corporate social responsibility, Etisalat has an opportunity to partner with locals or non-governmental organizations to promote a green economy (Etisalat Group, 2015). Such an undertaking is likely to endear the company to many more customers as the service provider of choice.
  7. By investing as a WFOE, Etisalat has an opportunity to benefit from the three-year tax exception that the Chinese government accords to foreign companies in this category.
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Threats

  1. Venturing into the Chinese market exposes Etisalat Company to competition from companies such as China Telecom, China Mobile, and China Unicom. Some of the competitors such as China Telecom and China Unicom are funded by the government. In fact, even though there have been restructurings to reduce monopoly, the Chinese government still holds sway in these companies. As a result, competition is unlikely to even, and this can threaten the operations of the company.
  2. Government incentives to local companies can lead to unfair competition with foreign-owned companies such as Etisalat. Through such incentives, local services are likely to be cheaper than the services offered by foreign companies. In the end, customers may continue to prefer local telecommunication companies, thereby threatening the survival of Etisalat.

The Resources Needed to Manage New Initiatives

One of the resources that the company will consider is human capital. This resource is very critical in the running and management of the company’s programs. Etisalat will need to hire people with knowledge of the Chinese market or global management of telecommunication companies. Besides, the company can recommend that one of the chief executives in the UAE will be sent to the new branch in China. The other resource that the company would require is machinery and equipment (e.g. computers). The company will not be able to execute its functions effectively without putting these requirements in place. Finally, a physical building will be necessary for the company’s location. The building will be used for coordinating the activities of Etisalat while operating in China. The building will be leased initially for ten years.

Even though the Chinese government has set the minimum for investing in this kind of business at 100,000 RMB, the company will initially invest a budget of approximately 32,000,000 RMB. The money will be used for hiring employees, leasing the building, and putting in place the necessary infrastructure that the company would need to commence its operations.

Conclusion

The Etisalat telecommunications with its headquarters in the United States Emirates serves nearly 12 million customers currently. The company provides various technologies with both 3G and 4G network platforms which are considered to possess ultrafast internet speed. The company serves more than 90 percent of the United Arab Emirates’ territory with additional network coverage in over 200 countries. Some of the services that the company provides currently include e-vision, enterprise solutions, networks, customer care, software solutions, and corporate social responsibility. Etisalat intends to invest in China, but it must be appreciated that the country is one of the most attractive investment destinations in the world before that. PESTEL analysis is important for Etisalat before investing in China. Some of the political events that have been witnessed in China in the recent past include:

  • the tension between poorer and richer classes;
  • political disputes;
  • conflict on the exploitation of natural resources.

There have also been issues about the lack of transparency and corruption, which are the factors that can hinder investment in the country. Opening the door for foreign investments and joining international bodies such as the World Trade Organization, World Bank, International Monetary Fund, and Asian Development Bank have portrayed the country as ready for investment. Some of the economic factors that have been evident in China include:

  • stable economic growth;
  • increased private ownership of firms or economic areas that the government once held control;
  • sound monetary policies;
  • availability of skilled labor;
  • price development.

These factors have elevated the country as a unique investment destination. Social factors are evident through consumers’ increased purchasing power. There are also technological, environmental, and social factors. The most appropriate entry strategy that Etisalat should use to enter the Chinese market is the Wholly Foreign-Owned Enterprise. However, before the company enters the foreign market, it should consider its strengths and opportunities to capitalize on, and weaknesses and threats to correct.

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