Quality Product With Lower Cost

Published Date: 02 Nov 2017

1.0 Introduction

China has a vast market potential and its growing. The number of people using mobile phone rose sharply and the statistic shows rapid growth of a new middle class in China (Xinhua, 2013). There was news stating that mobile phone users in China had rose from 32.57 million to 1.02 billion in year 2012 ("China’s Mobile Phone," 2012; Flannery, 2012) and it continues to increase to 1.11 billion at the end of year 2012 (Xinhua, 2013). For the latest news in year 2013, mobile phone communication services subscribers in China had rose to 1.122 billion and it is growing for about 0.81% in a month and 12.59% growth in a year (Hwang, 2013). It was a sign of opportunity for mobile phone manufacturers, especially Nokia to increase market share in China market. Besides that, there are many factors that Nokia take into consideration to expand their business in China.

Moreover, the number of population in China can be determined as a factor which can influence the availability of workforce in the country. With more than 1.3 billion people, China’s large labor force has been central to its rise as an economic power (Schneider, 2011). The large labor force allowing companies to tap a seemingly endless pool of workers willing to move from their home towns, often live at the factory site and accept comparatively low wages (Schneider, 2011). Therefore, the large labor force in China becomes one of the attractive factors for Nokia to set-up factory in China.

Additionally, low production cost in China is also one of the factors that drive to increase in Foreign Direct Investment ("The Boomerang Effect," 2012). As the production cost of China is comparatively lower than in Finland, Nokia move out from its home-based country and set up manufacturing factory in China to reduce their cost of production. On the other hand, the low production costs enhance Nokia business strategy, to become price leader in high-ended telecommunication industry (Ando, 2013).

Rapid growth in China’s telecom industry is driven by their economic reform and changes in international telecom market. These changes favored the telecommunication companies from other countries to invest and conduct business in China as well (Chang, Fang & Yen, 2005). Nokia sees this as an opportunity and they seized this opportunity to set-up factory in China.

2.0 Analysis

There are several gains and shortcomings of Nokia entering in to China and will be discussed as below.

2.1 Gains

Low cost of production

Nokia are not only targeted on high-end market but also on the low-end mobile phone (Chang & Horng, 2010). Hence, the maintaining the low cost production is a critical issue towards Nokia either in smart phones or mobile phone’s battlefield. In the year 1995, Nokia had joint venture with China’s Nanshin Industrial Development (Chang & Horng, 2010). Therefore, China became the largest selling and production market in the world for mobile phone, computer/PC, and TV in 2011("Measuring China's Dominance," 2012). China is one of the low labor cost manufacturing country (Rawski, 2003). As a result, the cost of hiring blue collar worker in China is much cheaper (Jiang, 2002). Furthermore, since logistic cost is high and increase the cost of production, hence Nokia had established its assembly plant in Beijing which is closer to their supplier’s location and this will able to resolve prolong delivery time, shipping cost and improve the ordering lead time substantially within 24 hours. Besides, the huge quantities of productions enables Nokia to minimize its fixed cost during production where by variable costs will be covered by fixed costs and this will fully utilize the resource. In addition, Nokia may reduce the cost in term of transportation cost, reduce time to market through locating assembly lines at China and avoid from the import duty of electronic device (Earl, Jim, Shijie & Doung, 2000). Hence, it provides a low cost of production opportunity, reduces the uncertainty of transportation which will enable fully utilization of resources that will eventually lead to economic of scale towards Nokia to establish their factory in Beijing, China.

Quality Product with Lower Cost

Nokia will move most of the factory in Beijing, China to assemble their product (Steve, 2012). Since 2000, there is a major shift of electronic product manufacturer industry to low cost country (Earl, Jim, Shijie & Doung, 2000). China’s Electronic Manufacturing industry is particular in low labor cost and law material procurement ("Measuring China's Dominance," 2012). Nokia’s manufacturing strategies are focusing on integrating supply chain by integrating resources, zero stocks and long-term partnership worldwide partner in chips and LCD modules (Chang & Horng, 2010). Besides, Nokia in China has includes quality control during production process such as the selection of raw materials are only ordered from authorized suppliers to ensure the quality (Shi, 2008). However, the building, testing and deploying of software will developed by Microsoft Corporation (Shi, 2008). Furthermore, Nokia has six R&D center which exploring to meet China’s local technology to better responding and developing mobile phone to meet with the rapid changing, diversify demand, it enables Nokia maintain their brand equity by producing the quality products and achieve a low production cost at the same time.

Leading company in China

The advantage gained by Nokia when doing business in China is the leading position in terms of manufacturing and in the market. Nokia has come out with GSM phone which lead them to successfully become the largest manufacturer in China in year 1998 (Khedekar, 2012). Nokia able to take the leader position because of the understanding of Chinese culture and they learn the "rule of the game" in China which enable them to play well in the China’s mobile phone industry ("Why Nokia Is No.1", 2008). This shows that Nokia is the master of localization and they understand well of the local wants and needs which makes them to be able to manufacture the product that satisfy the market needs and meet the demand (Zhou & Shanturkovska, 2011). As Nokia having the first-mover advantage and knowing the China culture well (Zhou & Shanturkovska, 2011) this has resulted in Nokia to be able to be the leader in the mobile phone industry for 14 years until last year Samsung had finally overtake Nokia position as the number one phone manufacturer (Lynch, 2012).

2.2 Shortcomings

High initial cost of doing business

China is a collectivist society which emphasizes on relationship network, guanxi, where Chinese focus on the ties between family and former contacts in order to build business relationship (Björkman & Kock, 1995; Davis, Leung, Luk & Wong, 1995; Xin & Pearce, 1996; Ambler, Styles & Xiucun, 1999). Guanxi is needed in order to have business network (Törnroos, n.d.) however, this is might be difficult for the foreign countries to develop relationship in China as this is not the Western countries culture and they do not implement this in their managerial practice (Zhang & Pimpa, 2010). Thus, foreign countries will have to find another alternative such as bribery in order to cut the red tape into China market. According to Yang (2011), Guanxi can relate to bribery and corruption. Legal experts and government statistics stated that bribery in China allows the company to get into the country easier even though there are tough rules and regulations (Magnier, 2007). The World Economic Forum has came out with the estimation that bribery and corruption will cause the increase cost of doing business that up to average of 10% ("The Rationale for Fighting Corruption," 2013) when the foreign companies such as Nokia wish to enter China market. Bribery is a common sight in China. Since bribery has became a business culture in China (Subler, 2012; Barstow & von Bertrab, 2012) the money spend on bribery is unavoidable when the foreign companies wish to enter the market. Thus, this will increase the cost of doing business.

Trade secret leaked out

In order for Nokia to enter and access into the China market, it is compulsory for Nokia to joint venture with other company in China ("Successful Joint Ventures in China, 2013). The benefit of joint ventures to Nokia is that Nokia will able to transfer its technology into China for manufacturing and production of its mobile phones but at the same time, it would be a drawback for Nokia as well. This is because in order to collaborate with a local Chinese contractor, Nokia has to transfer its technology to the contractor. ("Technology Transfer To China," 2008). Besides, this is also a point whereby the design of the products will be exposed too.

When the technology is fully transferred, the probability of leaking out the company’s trade secret is higher. This is due to the employees either from Nokia Company or joint ventures company with who have received certain information may not realize that they are required to keep the information confidential (Road Map For Intellectual Property," n.d.). Therefore, this will eventually resulted in the production of counterfeit products in the China market such as the existence of Shanzhai phones which eventually will lead Nokia to the loss of competitiveness and market share in the mid to long run ("Technology Transfer to China," 2008).

Brand image issue

Another shortcoming that Nokia faced is their brand image issues as there are a lot of counterfeit products in China. This caused the consumers to create a perception that the products that manufactured in China are produced by using cheap material and inferior and low quality products as well (""Made in China" and Fake Phones," 2010). The major cause of this issue is related to the China’s culture – Shanzhai which is referred to the imitation and pirated goods in the market (Huang, Tse & Ma, n.d.). This copycat culture is a phenomenon that beyond of the government control (Hennessey, 2012). Even though China government has involved into effort to protect intellectual property, the lack of effective enforcement of laws in China still becomes a major problem towards the intellectual property issue (Wang, 2004). Additionally, China government has quietly tolerates the manufacturing of counterfeit and pirating products due to the counterfeit products manufacturing can provide job opportunities for a large amount of local citizens (Jacky, 2010). Moreover, the inconsistency interpretation of rules and regulations among the government agencies is caused by the widespread corruption in China ("Enforcing and Implementing Patent Protections," 2012). Thus, laws and regulations which include patent and intellectual property are being vulnerable. Due to ineffective of legal enforcement of China government, protection of intellectual property rights becomes the issue towards Nokia brand. The inferior and poor quality of counterfeit products can adversely govern the consumer experience towards Nokia brand. As a result, the quality of Nokia products becomes questionable and customers will lose confident towards Nokia.

3.0 Recommendation

Coorperate with microsoft in R&D.

In order to gain back competitive advantage in smartphone market, Nokia are having a partnership with Microsoft in running the next generation of Nokia smartphone – Lumia (Ina, 2013). The successful of cooperation can refer to Google partnership with LG introducing the latest Nexus 4 and the sales reached 1 million units (Funaro, 2013). Furthemore, Nokia should not partner with Googles’s Android due to there are much more competitor using Googles’s Android OS, and the only way to win back market share is differentiate among others, hence partnering with Microsoft is the best choice. Microsoft had designed the latest mobile operating system which is Window Phone 8 (WP8) for Nokia in order compete with Googles’s Android and Apple’s IOS smartphones (Susan, 2012). The unique of WP8 OS able to avoid the duplication for counterfeit product. It is because WP8 is not an open-source OS and the designs are different from Android or IOS. It is grouping in categories accocdingly instead of organize the icons by app, thus it is more user friendly (Ina, 2013). Nokia design team is developing towards a personalize phones beyond Apple and Android done by mimic human interaction, leaving comsumer to communicate though all thier senses. Its ‘HumanForm’ concept shape the competitive advantage of Nokia window phone. According to designer Athtisaari, ‘this breakthrough completely changes the user experience. With the new phone, the user does not need to bow his head to poke at a salient pixel on the screen.’ (Susan, 2012). With the partnership with Microsoft, Nokia able to improve the smartphone OS problem. By the mean time, they also able to diffentiate themselve from IOS and Android platform interface and avoid from infringement claims over patent. These all will help Nokia to shape the competitive advantage towards them.

Using "Guanxi"

Next, bribe is the culture of doing business in China. Therefore, it is an inevitable cost of doing business in China. However, Nokia still can gains cost advantages in the long run business by building relationship with government and supplier to enhance the efficiency of work. For instances, Nokia can sub-contract some of part of their product to the local manufacturing factory. On the other hand, Nokia needs to practice the right "Guanxi" relationship with government and also their business partner. By getting the right "Guanxi", the organization can minimizes the risks, frustrations, and disappointments when doing business in China (Jiang & Prater, 2002). Often it is acquiring the right "Guanxi" with the relevant authorities that will determine the competitive standing of an organization in the long run in China. With the long-term relationship with local business partners, Nokia has the bargaining power to reduce the price with the local sub-contractors. Also, due to there are many manufacturing factories in China, Nokia can gain advantage by collaborating with the lowest cost factory. Apple Inc also set up their manufacturing factory in China. The strong "Guanxi" with supply chain member and government has become the major factor that lead to the success of Apple business in China (Dennis, Patricia, Chen, Wang & Hung, 2009). Besides, Microsoft also noticed the importance of guanxi in order to survive in China market. Thus, Microsoft developed relationship with government in order to protect on their IPR and they are able to sell their product in a favorable environment ("Developing Guanxi", n.d.). This guanxi has proved successful and important when Microsoft developed close relationship with local government in Shenzhen and it helps to protect Microsoft’s intellectual property rights (IPR) in southern China. This protection has directly contributed to the sales of Microsoft in South China where half of the revenues generated in Shenzhen ("Microsoft Growing Rapidly", 2008).

Implement robotic manufacturing

In 1980’s Nokia entered China market as is a low cost country which has attracted a lot of foreign companies to enter and invest in the country. The low cost can refer to labor cost, manufacturing cost or raw material cost. Taking Apple Inc case as example, Apple assembles iPhone in China due to the big difference of manufacturing wage in United States and China. The average manufacturing wage in China only cost $2.00 whereas in United States it costs up to $34.75 which cost Apple to pay more 25 billion per year and decreased 14 billion of their profits annually (Chen, 2012). Thus, this shows that manufacturing cost in China is much cheaper and this is one of the advantages gained by Nokia in setting up their plant in China. However, China’s labor cost is increasing nowadays; it can no longer maintain as the country with low cost labor due to the shortage in available workers (Loyalka, 2012). Comparing to other low cost countries like Vietnam, Chinese are paid more 282% of wages than Vietnamese workers and Chinese will received 13.6% increase in their minimum wages (Timothy, n.d.). So, it is suggested that Nokia should replaces the human capital with robotic workforce. Taking Apple Inc. as the benchmark of this recommendation, Apple is implementing this replacement since China wages have increased for 15% ("Apple’s Revolutionary Move", 2012). The advantages gained by Apple in using robotic manufacturing not only limited in the reduced of labor wages but also increase in the efficiency in manufacturing. Apple’s leading contractor, Hon Hai Precision’s plant which is based in Shen Zhen has use robotic workforce to produce iPhone. By using more than 100 robots, the work efficiency in producing iPhone has rose by 140% compare to using labor force (Purcher, 2013). Hence, in order maintain cost advantage in China and increase the manufacturing efficiency, this suggestion should be considered by Nokia so that they can keep up with the future trend.

4.0 Conclusion

In a nutshell, China as one of emerging markets that offers a low-cost environment; low labor costs and raw materials, had captured a lot of foreign investor to invest into the country by setting manufacturing and production plant there.

Nevertheless, setting up a plant in China will be tough if the investors do not have the knowledge about the cultural practice in that particular country. China has been practicing the culture of "bribe" whereby this is one of the necessity for doing business there. By practicing this culture, the investors are able to build relationships with the government or the suppliers which will eventually help the company to gain advantages to survive in the market. Nokia has known for its long term relationship with local partners and able to committed to each of the partners and localize with the culture in China.

Besides that, investors have to literally observe and analyze the trends of the market they are entering. As for mobile industry, investors will have to observe the gains and shortcomings they are going to face if they want to enter into the market as there are many competitors competing in the same industry. Nokia are able to capture the local market by offering high quality products with cheaper price as Nokia had observe the trends that the market needed before placing its products to the market.

Overall, learning one’s culture in a particular country is truly important as different country is practicing different culture. By learning and integrating the culture as a part of practicing businesses, it will help the company to adapt to the external and internal environment of the country. Not only that observing and analyzing the market and competitors doing is also important as it will help the company to understand more about the market and sort out strategies to compete in the industry.