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IMM Assignment

Group-8

Internationalization LILLIPUT KIDSWEAR LTD to China

1. Amit Mathur : 07
2. Anson Antony : 08
3. Arjun S : 09
4. Arpit Maheshwari : 10
5. Ashok George : 11
6. Ayan Das : 12
I. Corporate Policy

Corporate Goals

With e-commerce exploding across China, businesses from around the world are flocking to enter the fray.
According to a study by Accenture and Ali Research, China is expected to become the largest cross border
B2C market in the world by 2020, with over 200 million shoppers purchasing US$245 billion worth of
imported goods online. Accessing this tremendous market, however, presents a variety of challenges. The
payback period will depend on the amount and channel invested. The payback period will be around 3 to 4
years as it is not that capital intensive industry. The Market share percentage is will be proportional to the
amount invested and the time spent in the Chinese market. We will look for incremental approach in
getting market share. The target will be to cater to large Chinese audience and to become major player in
next 5 years.

Desired Control Over


Distribution, ownership and pricing Responsibility

The technology-driven initiatives of Internet has a significant impact on the ways businesses interact with
each other and with consumers. This has not only created an environment in which businesses are able to
perform at a higher level, but also it has created many new business opportunities. Even so, not all
companies are destined to succeed. Despite the weak economy, a more fundamental reason is whether its
business model or strategy can add value. Generally speaking, there are two drivers of success, which are
price efficiency and lower transaction cost. Trust & Confidence, rich variety and convenience of shopping,
in turn, contribute to the reduction of overall transaction cost.

One of the
most important motivations that drive people to go shopping online is to get a better price. Thus, the most
successful companies are more likely to be those able to hammer down costs at each point in the value
chain. Lower cost enables the companies to adopt more aggressive price strategies. By offering the lowest
possible price, these companies gain market share through price advantage.
However, price is not the only element that people care about. Transaction cost should be taken into
account carefully as well. For instance, few people would like to spend a whole day to buy a toothbrush,
even though it is very cheap. Additionally, one would extremely hesitate to purchase a LV handbag if the
handbag could be a fake one, even though the probability is not very high. Therefore, the companies that
can reduce the overall transaction cost are more likely to excel among their rivals.

Distribution, Research, Financing

In China Suppliers to Chinese retailers have complete autonomy to manage their own products. Even
though they carry the inventory cost, they do not carry the burden of late payment from retailers. Suppliers
have more control over their promotions and prices. As long as they can pay the space rental and
commissions to the retailers, it is a harmonious partnership. Hence, Big Bazaar should try to supply its
products to Chinese retails too to have control over market. There are significant differences between
Western and Chinese structure and practices in the retail industry. The differences seem to give Chinese
retailers competitive advantages while challenging foreign retailers to penetrate the Chinese market
effectively. In addition, the unique Chinese consumption culture poses extra barriers for foreign retailers.
The following sections will discuss these issues as they apply to The Home Depot and Best Buy.

Trust & confidence

In general, online services and products are not immediately verifiable, along with the paucity of rules and
customs in regulating e-commerce, trust hence should be more important in e-commerce than in traditional
commerce. The question put to traders who are aiming to succeed is how to develop trust and confidence in
light of the risks inherent in B2C e-commerce.

Rich variety

Another reason why people would like shop online is that some particular products are not easily accessible
due to geographic restrictions or that some products can barely be found in traditional shops. Indeed, the
immense varieties of products will contribute to the reputation of the B2C platform which leads to a solid
customer loyalty.
Index score: 8, weight: 4, total: 32
II. Companys strength and competitive position

In India, the kidswear market is around 10 billion, which is growing at a 10% compounded annual rate
and is likely to touch $22 billion in 2023, according to retail consultancy Technopak Advisors. Lilliput has
now become one of the dominant player in Indian branded kidswear market. With more than 210 exclusive
brand outlets and 6 state of the art manufacturing units, it has an extensive network & reach spread
across the country.

Strength Statistics

Six manufacturing units in Delhi/NCR

High end Machines: over 4000

Workforce: Above 7500

Production Capacity: - 1 million units per month

Total Production Area: 4, 50,000 sq. ft.

More than 30 stores in 10 countries apart from India

Exclusive Brand outlets: 250

Shops in Multi-brand outlets: over 400

Distributors: More than 160

Cities:153

Domestic Market Analysis


Brands and retailer previously catering only to adults have extended their product lines to include children
and are attempting to transform themselves as a complete family shopping destination. In this respect, even
international brands have begun offering childrens apparel. Some Indian manufacturers who had
previously been focusing solely on the export market have started reorienting themselves to meet the
growing demand within the country. Consequently they have come up with their own brands and
independent retail operations.

With a promising future for kids apparels, the market has attracted international brands into India
.Global brands like Mothercare, Mona Lisa, Benetton, Espirit have entered the Indian kids apparel
market. While International brands eye Indian kidswear market, domestic brands like Lilliput, Lil
tomatoes and catmoss are also gearing up to have a share in the global market.

Market Landscape - Huge volume of kids apparel in India is being dominated by local and
unorganized players. Around 12 % of the market is organized. Below is the market landscape depicting
market players and their target group and pricing
Analysis of Kidswear market in China

According to Frost & Sullivan, a US-based market consultancy, annual spending per household on
childrens products in urban China increased from $288 in 2011 to $663 in 2015 and is expected to reach
$1,256 by the end of next year.

In the past few years, there was a structural change for the top 10 brands in the kids wear market in
China. According to Euro monitor International, the total brands account for 10% market share in 2014
while 5 new entrants including Red, Gap, and Anta Kids replaced the origin brands as Balabala (3.6%),
Annil (0.9%), and Pepco (0.9%) remain ranked the first three places. In this rapidly changed market,
innovation is the key to retaining and developing the companys market shares.

Most companies pay more attention to diversifying distribution channels as an important part of the
strategies. Although conventional retail channels through shopping malls and department stores are still
the most popular channels, online stores ranked exactly after these methods. According to a recent research,
shopping malls dominated 70% market as the most effective channel, while department stores, online stores
through PC and mobile portals take up 56%, 54% and 53% of the market shares respectively.

Because childhood is a period of fastest development, it is better to find most suitable clothes by trying on
in physical stores. Meanwhile, according to a focus group discussion results, most parents rely more on
seeing, touching and feeling to judge the quality of clothes. This makes people incline to buy clothes at
physical stores. Since physical stores provide this service, parents still prefer to visit stores and collect
clothes for their kids at stores. On the other hand, online stores provide more choices and lower price,
services of delivery packages are also convenient and fast. These are the reasons that foster the rapid
improvement of online sales.
Index score:7, Weight: 3, Total: 21
III. Product Characteristics

Lilliput initially focused only on westernwear categories like denim, shirts, T-shirts, etc. However, it has
now started foraying into childrens ethnicwear categories and are offering ethnically styled products for
kids. Brands and retailer previously catering only to adults have extended their product lines to include
children and are attempting to transform themselves as a complete family shopping destination. In this
respect, even international brands have begun offering childrens apparel. Some Indian manufacturers who
had previously been focusing solely on the export market have started reorienting themselves to meet the
growing demand within the country. Consequently they have come up with their own brands and
independent retail operations.

Lilliput has classified kidswear market into following categories and have specialized products for these
categories:-
Infants(0-6 months)
Toddlers(7months-2 years)
Kids(3-8 years)
Pre-teens(9-12 years)

Lilliput offers a wide range of apparels for children including T-Shirts, Shirts, Jackets, cargos, jeans and
trousers for boys, and capris, dungarees, skirts, Jamaicans, and coordinate tops for girls. Around 75% of
the merchandise is made of 100% cotton fabric which is most comfortable for children. Lilliput follows
strict quality parameters. It specially takes care of testing for saliva and perspiration color fastness while
designing clothes. An attempt has been made at making the merchandise child safe for e.g. care has been
taken to not provide any drawstring around the neck and wherever it is included-it conforms to specified
length.

Lilliput has partnered with all the major large multi brand outlets to ensure the products availability to
patrons everywhere.

Index Score: 8, weight: 2, Total: 16


IV. Domestic Government Policies

*The home country of Lilliput is India, which at the present, is going through a very fast growth phase and
as of 2014 is the second largest textile exporter in the world. This is a testament to the pro
internationalization approach that the government has em ployed. At a time even when the rest of the
apparel industry was reeling under economic slowdown the kidswear segment continued to show an
upward swing.

Break up of Kids Wear

15%

Other Graments
Kidswear

85%
Following the economic liberalization reforms of 1992, under the recommendations of the Kalyan Banerjee
committee, outward investments in India got a boost. It now allows Indian entrepreneurs to invest 200%
of their net worth abroad through automatic route not restricted to any annual cap. For any proposals
outside the automatic route, clearance of the Special Committee on Overseas Investments was needed.
Recently, Indian banks are allowed to extend financial assistance to Indian firms facilitating overseas
acquisitions, JVs or wholly owned subsidiaries (WOS).

The different steps taken by the government include to boost internationalization of firms include

The Department of Commerce has announced increased support towards export of various products and has
also included some additional items under the Merchandise Exports from India Scheme (MEIS) in order to
help exporters to overcome their challenges faced by them.

The Central Board of Excise and Customs (CBEC) has developed an 'integrated declaration' process leading
to the creation of a single window which will provide the importers and exporters a single point interface
for customs clearance of import and export goods.

The Reserve Bank of India (RBI) has simplified the rules for credit to exporters, through which they can
now get long-term advance from banks for up to 10 years to service their contracts. This measure will help
exporters get into long-term contracts while aiding the overall export performance.

The Government of India is expected to announce an interest subsidy scheme for exporters in order to boost
exports and explore new markets.
Other than the above said measures, specific to China as the host country, certain domestic
government policies work against the internationalization of textiles India.
The higher value of the Indian currency with respect to the Chinese Yuan, would lead to a dip in
consumption of Indian exports to China as was seen in the recent dip in export of cotton yarn to China in
June 2016. There should be a suitable foreign exchange policy so that the competitiveness of the Indian
exports in China doesnt reduce significantly.

The Make in India initiative by the present Narendra Modi Government aids the manufacturing of the
goods locally and then exporting it and hence wouldnt prefer an Indian company setting up a wholly
owned subsidiary abroad but would rather prefer that the company exports its goods to China

From the above said policies, considering that the government is pro export of goods that are locally
manufactured and not very much pro internationalization when it comes to wholly owned subsidiaries, the
score for this parameter would be 5.
Index Score: 5, Weight: 3, Total: 15

V. Comparative Costs

Labour Costs
The hourly labour costs in India is 92, compared to the $3.52 in China (as of 2014). This doesnt appeal
toward Lilliput setting up a wholly owned subsidiary in China but rather would encourage an export
based model based out of India

Unit Transportation Costs


Transportation costs in India is $38 as compared to $33.16 in China (as of 2014). The very good
infrastructure is responsible for the reduction in transportation costs in China, this would serve as an
encouragement to setup a wholly owned subsidiary outside India

Material Costs
China is the worlds largest producer of cotton, cloth, yarn and natural fibre which are the raw materials
used for cloth production. The abundant supply of these materials would result in a reduction in the cost of
the same. This would lead to Lilliput favouring to setup a manufacturing plant in China under the wholly
owned subsidiary mode.

Energy
The energy consumption costs in India is INR 2137.31 as opposed to INR 3300.39 in China. However,
when it comes to energy efficiency in production Indian firms lag behind owing to Infrastructural problems
and less advancement in technology, hence China compensates for the higher energy tariff by employing
efficient methods in production.

Research and Development


China is way ahead when it comes to technological development which aids the country in having better
R&D facilities. As per a 2004 statistic the Chinese spending on R&D was 27.8 billion USD as compared
to a mere 5.9 billion USD by India which is indicative of the importance given to R&D by both the
countries. Moreover, when it comes to the R&D researchers in both countries per million the number is 708
in China as compared to 119 in India. Thus on from a R&D perspective Lilliput would consider setting up
a wholly owned research facility in China as compared to India.
Effective Tax Rate
The corporate tax rate in China is 25% as opposed to 34.61%(2016 figures) in India which would be a
further incentive for Lilliput to set shop in China. This would encourage Lilliput to set up a firm in China
as opposed to having an export based model.

Borrowing
Though India had higher borrowing costs before, with very high growth rates in the recent years, India has
cut its borrowing its costs. However, China provides loans at an even more cheaper rate thereby
encouraging firms to setup operations in China. This would serve as a source of encouragement for Lilliput
to move to China rather than just export to China.

Fixed Capital
China has a higher fixed capital of INR 28976.9279 as compared to INR 9091 billion which is a
representation of how conducive the environment is for Industries to thrive. This would encourage Lilliput
to setup wholly owned subsidiaries with manufacturing facilities in China.
On the basis of the costs of various factors of production, China has an upper advantage when it comes to
unit transportation costs, research and development facilities, effective tax rate, energy efficiency,
Borrowing and Fixed Capital. However, the increase in labour costs as compared to that in India would be
the only deterrent preventing Lilliput from coming to China. However, the advantages of other factors
would overweigh the high labour costs. Hence the points for this parameter can be fixed at somewhere
between medium and high. 7 would be an appropriate score for this parameter when it comes to market
entry to China from a comparative cost perspective.
Index Score: 7, Weight: 3, Total: 21

VI. Host country marketing opportunity


Market size

Population: 1,375,000,000 (2015 data)

Growth Rate: 0.47% (inc.) 2015 data

GNP per capita: $11694.54 2015 data

Regional Market Size in China

As one of the big emerging markets, China's enormous population and rapid increase in consumer spending
have attracted many multinational corporations (MNCs). Meanwhile, the misconception of China as a
homogeneous market often leads to difficulties in assessing market demand and enacting effective
strategies. Examines the diversity among Chinese consumers across seven regional markets. Data from a
national survey suggest that consumers from various regions are significantly different from one another in
terms of purchasing power, attitudes, lifestyles, media use, and consumption patterns. MNCs need to take
a cautionary approach when expanding into the inland regions, and must adapt to the local market
conditions and devise sustainable strategies.
TV and Radio penetration

The market penetration of TV and radio is barely 55% in China. It is still a doubt what ads on TV and
radio will have an impact in China. But that said the size of population that is covered in this percentage
is still higher than many country population.

Income distribution and biggest buying group.


China has one of the worlds highest levels of income
inequality, with the richest 1 per cent of households
owning a third of the countrys wealth, a report from
Peking University has found. The poorest 25 per cent
of Chinese households own just 1 per cent of the
countrys total wealth, the study found.

Chinas Gini coefficient for income, a widely used


measure of inequality, was 0.49 in 2012, according to
the report. The

World Bank considers a coefficient above 0.40 to


represent severe income inequality.

Demand Lag

Demand Lag following the product introduction stands at 1-2 months in China. This is based on a
theoretical work done at Peking University. As Chinese are already introduced to the world of foreign
products and are aware of the various brands as most of them produce in China only. Most people are
employed in the agricultural sector and manufacturing, yet Chinese have realized the importance of internet
and taking a decision based on the brands available.
Chinese customer tastes

The American dreamwealth that culminates in freedomis intoxicating for the Chinese. But whereas
Americans dream of "independence," Chinese crave "control" of their own destiny and command over the
vagaries of daily life. Material similarities between Chinese and Americans mask fundamentally different
emotional impulses. If Western brands can learn to meet China's worldview on its own terms, perhaps the
West as a whole can too. So bsically Chinese consumers like Western clothing. If Lilliput focuses on that
front, they have a good opening in China. SO the market looks rich enough to absorb any western sounding
name or brand.

SUPPLY CHARACTERISTICS Productivity vs home country

The chart from Bloomberg perfectly describes the productivity rates in China when compared to India.
Further analysis will also show why making in China makes a lot of sense.

Trade Union Density


The trade union density for China stood at 23% for the year 2015 according to ILO. The same for India
stood at 12%. This clearly shows the lack of collective bargaining power that India workers have compared
to China. This also implies how much more stringent the labour laws must be in China. The western
countries follow much more strict laws. This translates to higher difficulty in terms of negotiations with
labourers and their support groups. Another major issue would be pressure groups that could be part of the
govt policy framing and could be detrimental to smooth functioning. But with greater unionization,
greater fixity of laws can be expected.

Average points scored on this parameter: 7.5/10


Weight assigned: 4
Total: 30
VII. Host country economic development and performance

ECONOMIC PERFORMANCE , Real GDP growth

Consumers keep rising as old industry declines. Retail sales


and industrial production are heading in opposite directions.
Retail sales growth reached 11.1% year over year in
December, a tick less than last December, but sales continued
rising faster than most of last year. Industrial production
rose 5.9% year over year last month, slower than Novembers
6.2%. Investment in fixed assets, which grew at an annual
clip of over 25% in the four years following the 2008 crash,
grew only 10%, its slowest rate since 2001. Both are now
exerting a substantial drag on the overall economy
Inflation levels

Consumer prices in China rose 2.1 percent year-on-year in October of 2016, compared to a 1.9 percent rise
in September and in line with market expectations. It was the highest inflation rate since April, as the
politically sensitive food prices increased by 3.7 percent while non-food cost rose at a slower 1.7 percent.
Cost of consumer goods gained 1.9 percent and those of services advanced 2.5 percent. For 2016, the
government sets inflation target at around 3 percent.

Index score: 8, weight: 4, Total: 32

VIII. Host Country Political/Legal Stability

Index of Recent Political and Legal Stability: China has high political stability because of their one party
system. China is not a political risk hot spot, with little political violence, business interruption, strikes or
riots. However, due to recent economic turmoil in China, there has been a rise in political violence in China
and the widening income disparity between urban and rural communities will make it even worse.

But on the flip side, lack of transparency in rules and other aspects of doing business make it challenging
for a foreign investor. Transparency poses a big problem for foreign companies in China. For example,
corporate filings and accounts can't be treated in the same way as those in the U.S. or Europe, and there
are many conflicts of interest within or between companies, buyers, suppliers, etc.
The index of Political Stability and Absence of Violence/Terrorism measures perceptions of the likelihood
that the government of China will be destabilized or overthrown by unconstitutional or violent means,
including politically-motivated violence and terrorism. The index is an average of several other indexes from
the Economist Intelligence Unit, the World Economic Forum, and the Political Risk Services, among
others.

B)Operations Restrictions
Price Control Laws: Beijing on May 2015 announced that it will relinquish its control over setting the
prices of a wide range of commodities and services, as a part of its Market based reforms. The National
Development and Reform Commission (NRDC) announced that they have dropped 80 per cent of the
products from the list of products under price control. According to the new list, only products belonging to
seven categories will be subjected to price control. These include natural gas, electricity, tap water and
anaesthetics etc.

Red Tape (Bureaucratic delays): China does well in bureaucratic efficiency when compared to other Asian
countries like India, Pakistan, Vietnam etc. but lags behind other east Asian economies like Japan,
Singapore etc. Chinese premiere, Li Keqiang recently blasted the bureaucracy by blaming them for tying up
Beijings policy directives in red tape, delay and archaic approval procedures that are putting off much-
needed restructuring.
Index Score: 5, Weight: 2, Total: 10

IX. Geo- Cultural Environment


Cultural Unity: China is a culturally diverse country but Han Chinese constitute 90 per cent of the
population. There are 55 minority groups in China comprising 8.3% of the population or 106.4 million
people. Compared to the majority Han population, there is more poverty among minority peoples. There is a
connection between cultural education and cultural sustainability. Poverty restricts minority children from
reaching their full potential in primary and secondary education.

With Mandarin made mandatory for education, the communist party has gone for unification of country
with one language. This has made Chinese more culturally uniform unlike its Asian counterparts like India
which is very diverse thanks to number of languages in the country.
Socio-Cultural Distance from the Home country: When you compare culture of India and China, the socio
cultural distance is not huge, thanks to their trade relations from Middle Ages. The exchange of cultures
because of these relations has reduced the socio cultural distance between India and China.

India and China has similar scores in most of the parameters in Hofstede cultural dimension. In other
words, India and China are not culturally dissimilar. So culture wont pose a huge problem for Lilliput to
open their store in China but they should not discard it altogether.

Index Score: 8, Weight: 1, Ticket: 8


Total score: 175

Average score: 6.73/10

This points to a JV with minority partnership. So a model where Lilliput is the minority
partner would work best. The production and marketing would be from the partner, the
services, ERP and supply chain, and certain printing equipment and dyes are also more
economic in India.