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Tsao and O’Neill were motivated to expand internationally and specifically into China by the prospect of getting software programmers who would be cheaper to employ.
They expected to get cheap labor in China. Previously, they had outsourced labor from Ukraine which had proved quite expensive for the company. They thus believed that the cheap labor force in China could be the magic to high profits as opposed to a failed startup. This made them rush to the China market which they did not understand.
Settling on the idea to relocate their software development to China was not a good decision. Firstly, they never understood the China market but worked with assumptions based on the prospect of a cheap labor force.
As they realized, jobs that have moved to China mostly faced legal barriers, issues to do with security as well as different working situations and culture. The hope of reducing costs of operations makes many a company blind to the rigid government bureaucracy in China, misunderstand the local culture, underestimate the workforce as well as local competition.
Malaysia and Pakistan are some of the countries that should have considered. The reason being, that the countries mentioned present a cheaper working environment due to the cheap workforce as well as less stringent government bureaucracies. For instance, there exists low-cost freehold land and even cheaper workforce in Malaysia than in China.
Starting a business in Malaysia requires nine procedures as compared to China where a total of fourteen procedures are a must. Starting a business in Malaysia takes eleven days only while it takes thirty-eight days in China. Malaysia scores highly when it comes to regulatory support for business. It is ranked 2nd, ahead of Brazil and China among others.
Malaysia has moved to the single tier company income tax system, unlike China. Under this system, tax on the company’s profit is a final tax and dividends distributed to shareholders are exempted from tax. It is 25% cheaper for doing business in Pakistan than in China. Also, companies can easily repatriate profit easily in all seasons including bad financial periods. Work ethic in Pakistan is way higher than in China.
Tsao and O’Neill, choose a multinational global strategy to inform them to move to China. They did not choose the right since multinational strategy demands a deep understanding of the customer and competition as these two aspects are different in every country. They should have opted for the international strategy which emphasizes on the home market but has activities in other markets.
Given the culture of the people in China, Tsao’s adjusting his management style might not make a difference in the performance of his workforce in China. He was right in employing a staff trainer, but he was not right in granting meal subsidies to employees as it allowed the staff to lavishly treat themselves over lunch.
Over and above, instead of working on the team, he implemented a departmental recreation budget which was abused. I would recommend that Tsao works on team dynamics so that he instills work ethics and culture from deep within the team.
There exist several opportunities that exist in China that would favor U.S. firms in China. Firstly, China is such a huge market place. For instance, in 2009, China sold 13 million cars while the U.S. sold 10 million cars, a difference of whooping three million cars.
This was a result of rising consumer spending rising from 1.6 trillion U.S. dollars in 2008 to 1.9 trillion U.S. dollars in 2010. Also, China did a fiscal stimulus of around 13 percent of GDP and pumped 1.2 trillion U.S. dollars into the economy. The government’s ‘Going Out’ policy encourages firms based in China to explore international markets.
Tsao experienced numerous challenges in doing business in China. These included catering for unseen expenses which were a result of China’s steep payroll taxes. The law required his company to pay an additional forty percent in expenses that were not part of his initial budget.
He bore additional 26,000 U.S. dollars in cost. He also experienced a very different work culture like a very high staff turnover in comparison to the U.S. As such; more money went into recruiting and training new people to replace those that left for big companies.
Also, Tsao found it hard to work with people who lacked initiative. These people were completely unable to see inefficiencies and problems. Even where they could find solutions, they did it horribly. During staff meetings, Tsao always got mad because they could not respond even where it was so obvious.
Above all, these people lacked personal growth as all they cared for was luxury and pleasure as seen in the lavish spending of the meal subsidy as well s the management utilization of the luxury budget.
For businesses willing to operate in China, they are likely to face slow government bureaucracy, high staff turnover, lack of initiative among the employees and insecurity.
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