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ISSN : 2233-4165(Print)
ISSN : 2233-5382(Online)
Journal of Industrial Distribution & Business Vol.5 No.3 pp.25-34
DOI : https://doi.org/10.13106/jidb.2014.vol5.no3.25.

Global Distribution Enterprises' Entry into the Chinese Market: Focus on the Three Northeastern Provinces*

Nam-Myun Kim**, Myoung-Kil Youn***

**First Author, Professor, Department of Marketing Management,
Daejeon Health Sciences College, Korea. Tel: +82-42-670-9282.
E-mail: nmkim@hit.ac.kr.
***Corresponding Author, Professor, College of Health Industry, Eulji
University, Korea. Tel: +82-10-2263-7292. E-mail: retail21@hanmail.net.

Received: June 04, 2014. Revised: July 12, 2014. Accepted: September 15, 2014.

Abstract

Purpose - This study aims to investigate Korean distributionenterprises' entry into the Chinese market. By studying Koreancompanies’ strategy and current situation in the Chinese retailmarket and analyzing Lotte Mart’s strategy, this study wasaimed at identifying comprehensive strategies for Korean companiesstriving to expand in China’s retail market.
Research design, data, methodology - A case study approachis used, focusing on the three northeastern provinces inChina, and examining global firms' entry into the Chinesemarket. The study employed a direct survey and a literaturereview.
Results - Korean distribution firms' entry into the overseasmarket is in the inception stage and it should be developed,considering its effects on the national economy and otherindustries.
Conclusions - The cases of E-mart and Lotte Mart, representingKorean distribution firms, showed that they should not relyon scale to succeed in China. Both preliminary analysis andcareful strategies are required to ensure success. Consideringthe high growth potential of the Chinese market, a managementstrategy that takes account of Chinese people's emotions wasneeded.

JEL Classifications : R12, M16, L11.

1. Introduction

1.1. Purposes and Background

 Wal-Mart and Carrefour that were world distribution enterprises withdrew business in South Korean market with relatively slow growth to preoccupy the Chinese market: In other words, since 1996 when distribution market was opened, distribution market in South Korea has been saturated. Accordingly, domestic distribution businesses rushed to enter overseas markets (Kim et al., 2007; Noh & Seo, 2009; Youn & Kim, 2010).

 Since opening the 1st super center in China in 1997, e-mart have opened 16 super centers in Shanghai and Tianjin and other places. Lotte Department Store opened department store at Moscow in the first half of 2007 and department store in Beijing in latter half of 2008. As such, distribution enterprises rushed to enter overseas markets to show saturation of domestic market and to survive under the 21st century global environment. China with the largest population in the world had distribution market with sales of about 6 trillion Yuan in 2005 owing to consecutive annual economic growth rate of 9% as well as high buying power in accordance with large-scaled economic volume: After joining membership of WTO, China accelerated to open distribution market and made leading enterprises in the world compete each other in the Chinese market after 2008 Beijing Summer Olympic Game as well as 2010 Shanghai EXPO.

 However, e-mart, Korean distribution business that entered the Chinese market was forced to encroach capital at accumulated losses in 16 years after entering the Chinese market. e-mark suspended investment in the Chinese market and made effort to do restructuring and to lessen deficit of existing shops and/or stores. In 2011, e-mart disposed of 11 shops by sale among 27 shops and made reformation plan to elevate product competitiveness of remaining 16 shops. And, Lotte Mart increased number of super center in foreign countries from 99 super centers at the end of 2009 to 149 super centers at the end of 2013, in other words, 50 super centers for 4 years. Lotte Mart's super centers in China occupied 107 super centers to account for 72%. e-mart that failed to open super centers at urban towns withdrew shops to lessen business scale, while Lotte Mart has increased number of super centers continuously to enter the Chinese market. In a word, Lotte Mart has expanded- business in China despite red of overseas sales business including China (Aju Business Daily, 2014).

 As shown in the case of e-mart and Lotte Mart, Korean distribution businesses were not assured of business success by relying upon enormous scale of the Chinese market. Careful preliminary analysis and elaborate strategy shall assure of success in the Chinese market. The market with high growth potential and the Oriental emotion requires management strategies enough to satisfy the Chinese people's emotion.

 This study investigated Lotte Mart and other distribution businesses with good overseas business record in the three Northeastern provinces in China that had close relation with Korea in geography, culture and emotion: Literatures, distribution businesses' materials and the author's survey were used. Discussion on the distribution business was done according to on-the-spot survey according to norm methodology to be free from empirical analysis (Youn et al.(2005).

1.2. Domestic studies on the distribution

 Since the 2000s, many researchers investigated domestic distribution. First, studies on distribution policy and theories were (Kim & Youn, 2012a,b; Kim et al., 2010a; Kwon et al., 2007b; Youn, & Kim, 2007; Kim et al., 2005; Youn & Kim, 2005; Youn et al., 2004). Second, studies on conventional market were (Shin & Youn, 2014; Kim et al., 2014c; Lim et al., 2011; Kim et al., 2009b). Third, studies on offline distribution were (Sim & Youn, 2013; Kim et al., 2012a; Cho et al., 2012; Lee et al., 2012; Kwon et al., 2010; Cho et al., 2001; Youn & Cho, 2001; Seol & Youn, 2000). Fourth, studies on commercial areas and demand were (Youn et al., 2013; Youn et al., 2012a,b; Su & Youn, 2011; Kim et al., 2011; Kim & Youn, 2010; Ahn et al., 2009; Park et al., 2006). And, studies on distribution were (Kim et al., 2013e; Kim & Youn, 2013; Youn et al., 2008; Kwon et al., 2007a; Youn, 2000). Lastly, studies on retail business, distribution system and merchandising were (Kim et al., 2014a,b; Kim et al., 2013a,b; Kim et al., 2013c,d; Kim et al., 2012b; Kim et al., 2010b; Kim et al., 2008; Kim et al., 2007; Kim et al., 2007; Youn & Namkung, 2005; Youn, 2004; Youn & Namkung, 2000). But, this study did not discuss many studies on points of view of marketing and other complex studies.

2. Current Situation of the Northeastern Three Provinces in China

 China is places in the middle of Asia and to the west of the Pacific Ocean to have the largest number of population and to be country with the third largest area following Russia and Canada. China has borders in land with 14 countries to have as many as 1.3 billion population as well as 56 minority races. China's administrative areas include 23 provinces, 4 cities under direct control of central government, 5 autonomous regions and 2 special administrative regions (Jung, 2013).

 The three northeastern provinces in China that consist of LiaoNing Sheng, JiLin Sheng and HeiLongJiang Sheng have the longest national borders including the Korean Peninsula of as long as 1,318km in China. The three provinces have kept close relations with Korea from point of view of history and culture to play strategic point at powers' struggles with Russia and Japan. The three northeastern provinces have area of about 790,000k (about 8.2% of total area of China) and population of about 108,320,000 persons (8% of population of China), and they have recorded more than 10% of annual economic growth rate since 2003 when development of the northeastern regions started. In 2011, the three northeastern provinces recorded annual economic growth, for instance, LiaoNing Sheng 12.1%, JiLin Sheng 13.7% and HeiLongJiang Sheng 12.2%, and annual economic growth of LiLin Sheng was the highest (Jung, 2013). The three provinces had economic indicators (Table 1):

<Table 1> Major Economic Indicators of the three Northeastern Provinces (2010)* Growth rate comparing with previous year. Based on statistical year book of each provincial government in 2010. ** GRDP that differs from GDP in nationwide unit indicates total production of each province, city and others during specific period; *** GRDP per captia of the three northeastern provinces has been made by dividing total GRDE of the three provinces by total population of the three provinces Source: National Bureau of Statistics of China (2011)

 The three northeastern provinces are placed adjacent to Korea to have homogeneity of languages and cultures and to let Korean firms invest actively and sell and buy each other in the beginning of diplomatic relations between the two countries and to lose their position greatly under influence of coastal regions of China and to be given attention again these days.

3. Situation of Global Distribution Firms

3.1. Situation of Global Discount Stores in the Three Northeastern Provinces

 In the first half of 2010, about 1,900 super centers did business in China. Number of super centers constantly increased every year to be likely to reach up to more than 10,000 super centers in China with as many as 1.3 billion population: And, not only multi-national corporation but also local enterprises have competed fiercely each other. Five big super centers, that is to say, Wal-Mart, Carrefour, RT-mart, Tesco and Lotus, have governed the Chinese market. 

 Global discount stores in the three northeastern provinces in China were (Table 2): At the end of 2013, as many as 103 discount stores had done business in the three northeastern provinces, for instance, 23 discount stores of Wal-Mart, 26 stores of Carrefour, 23 stores of RT-Mart, 17 stores of Tesco, 5 stores of Yong Hui and 9 stores of Lotte Mart. 69 discount stores had done business in Liaoning sheng and 16 discount stores had done in Jilin sheng and 18 discount stores had done in Heilongjiang sheng

<Table 2> The Situation of Global Distribution Firms for the three Northeastern Provinces Source: Own

 Lotte Mart of South Korea has done business in China, Indonesia and Vietnam the most actively among domestic distribution businesses, and it took over Makro of China in December 2007 and did Makro of Indonesia in October 2008 and did TIMES of China in December 2009: So, Lotte Mart has currently opened 149 super centers in South East Asia (107 super centers in China). Lotte Mart had the largest overseas business among domestic distribution firms, and had the largest number of domestic and overseas distribution businesses among domestic distribution firms. And, Lotte Mart had more overseas distribution shops than domestic distribution shops enough to grow up to be global distribution firm. China is said to have the closest relation with South Korea among countries that Lotte Mart had entered.

3.2. Business of Lotte Mart in the Three Northeastern Provinces

 Lotte Mart started to enter Chinese market in 2007, and it had 107 super centers at the end of 2013 including six super centers in the three northeastern provinces. Lotte Mart in the three northeastern provinces had recorded sales amounting to 103.2 billion KRW at the end of 2012 with 132 employees at head office as well as 872 employees at the shop and Lotte Mart Hebei Business Division's 3rd team at Shenyang, Liaoning sheng. Lotte Mart and its competitors in the three northeastern province were:

3.2.1. YuHong Super Center

 Lotte Mart opened YuHong super center at first in the three northeastern provinces that was placed in Hwanghebeidaeru Liaoning Sheng and that consisted of commercial center at the 1st floor, and processed food and fresh food at the 2nd floor, and home appliance and garment at the 3rd floor, and bookstores, cinema, restaurants and toy shops at the 4th to 6th floor, and to have underground parking lot for 400 cars and/or vehicles and to have 8 bus lines and shuttle bus service. YuHong Super Center had large area with spacious parking lot than that of competitors in same commercial area had, and it recorded relatively low sales of 2.7 billion KRW a month than competitors had. YuHong Super Center was thought to have better commercial area and location and larger business area and shop layout than competitors had. Situation of competitors of YuHong was (Table 3):

<Table 3> Situation of Competitors of YuHong Source: Own

3.2.2. ChuanYing Super Center

 ChuanYing Super Center that was placed at 10-ho Haebangseo-ro ChuanYing-gu, Jilin with population of 2.12 million persons, town with the second largest population in Jilin Province was opened firstly in Jilin Province. ChuanYing Super Center that was placed at population crowded area in Iilin's new development area had convenience transportation services to have one floor shop and to develop housing in southeastern district. ChuanYing Super Center had much lower sales and poor commercial area and shop layout than RT-Mart, competitor, had, ChuanYing Super Center had monthly sales of 1.67 billion KRW to be much lower than that of RT-Mart, competitor (6.3 billion KRW), had. On the other hand, RT-Mart, competitor, was placed adjacent to the best commercial area in Jilin town to have very good transportation and to open in April 2006 for the first time in Jilin town. XinMaTe that was opened in 2013 had much inferior place, commercial area, sales and shop layout than Lotte Mart recorded monthly sales of 1.2 billion KRW. ChuanYing Super Center had competitors (Table 4):

<Table 4> The Situation Rival Firms of ChuanYing Source: Own

3.2.3. LvYuan Super Center

 LvYuan Super Center with business area of 8,000㎡ that is placed adjacent to traffic artery of both Howoldae-ro and Chunseeongda-ga in Changchun, capital city of Jilin Province consists of 1st floor of flower and fish-bowl markets, 2nd floor of fresh food as well as processed food, and 3rd floor of small-sized home appliances. LvYuan Super Center had competitors such as OuYa department store and RT-Mart. OuYa department store that was well known among consumers well has similar business area as Lotte Mart and much more sales than Lotte Mart. This was because RT-Mart had much better brand awareness and commercial area. Monthly sales of not only OuYa department store (2.2 billion KRW) but also RT-Mart (2.6 billion KRW) was much higher than that of Lotte Mart was. Situation of competitors of LvYuan was (Table 5):

<Table 5> Situation of Competitors of LvYuan Source: Own

3.2.4. Hwapyeong Super Center

 Hwapyeong Super Center at center of Shenyang, capital city of Liaoning Province, is placed adjacent to the area with many population to have convenient transportation and to consist of parking lot in underground first floor, 1st floor with tenant, 2nd floor with fresh food, and 3rd floor with fresh food. Four competitors have done business within radius 2.5 km of Hwapyeong Super Center, and Hwapyeong Super Center have inferior place, commercial area and location than the competitors have. Hwapyeong Super Center recorded monthly sales of 1.2 billion KRW that was much lower than Carrefour Cheongnyeondaega shop of 2.5 billion KRW, Carrefour Munhwa shop of 7 billion KRW, RT-Mart Hwapyeong shop of 7.2 billion KRW and RT-Mart Simha shop of 5.4 billion KRW. Hwapyeong Super Center's competitors were (Table 6):

<Table 6> Situation of Competitors of HePing Source: Own

3.2.5. DongGang Super Center

 Dandung shop at Dandong, Liaoning Sheong is placed at important commercial area of Dandong to have convenient trans portation service. Donggang super center consists of 1st floor of commercial center, 2nd floor of both fresh food and processed food, and 3rd floor of non-food shop. Donggang super center with the largest business area at Dandong recorded monthly sales of 11,400,000 Yuan to be much larger than that of competitors, and to have spacious parking lot (200 cars to park). Donggang super center's competitors have done business (Table 7):

<Table 7> Situation of Competitors of DongGang Source: Own

3.2.6. ErDao Super Center

 Erdao Super Center at Changchun, capital city of Jilin Province, consists of 1st floor of shopping center, 2nd floor of both fresh food and processed food shop, and 3rd floor of non-food shop. Erdao Super Center recorded much lower sales than that of competitors such as Wal-Mart, Yataiyichao and Ouyachoshi. Erdao Super Center is much likely to develop in the future considering good transportation service, commercial area and location. Competitors of Erdao are (Table 8):

<Table 8> Situation of Competitors of ErDao Source: Own

3.3. Promotion of Distribution Business of South Korea

 The Chinese distribution market looks to be much attractive from point of view of foreign distribution business owing to higher consumer purchasing power based on gigantic land, population and rapid economic growth to let foreign distribution businesses compete each other. Since entering the Chinese market for the first time, Lotte Mart has made effort to expand the market actively despite deficit to be free from domestic market with saturation and to look for long term growth. So, domestic distribution businesses should take actions to enter the Chinese distribution market:

 First, domestic distribution businesses should inspect the market  and prepare carefully in advance for entry into the market. China with socialism market and economic system differs from South Korea in culture, politics, economy and society. In China, the commerce has been very much developed from ancient times: Since Ming and Qing Dynasty, merchants at developed commerce region competed collectively to organize many merchant organizations each region. The Chinese people made groups based on human nature and friendship of territory, blood ties and local area, and territory covered province and/or town to gather and disperse merchants and to form commercial culture for considerably long time. So, short term success in the Chinese distribution market is not permitted.

 Second, China has national land as large as 45 times of that of the Korean Peninsula to have 56 minority races and to have various kinds of consumption culture, living life standards and commercial transaction practices that vary depending upon regions and races. So, marketing strategy of each region is needed. China that is not said to be single country has different consumption patterns, preference of commodities, and supply of commodities even in same province, town and district. A distributor who had succeeded in business at Liaoning Sheng could not succeed in business in Shandong Sheng and Heilungjiang Sheng.

 Third, foreign enterprises often applied their own corporat  culture to China without inspection into appropriateness when they entered the Chinese market so that they produced many cultural conflicts. Distribution barriers existed between regions in China. Each region has its own culture, distribution structure, life habit and consumption nature. Localization strategy is needed to enter the Chinese market.

 Fourth, new distribution technique is needed to develop economic ability as well as technical levels. The Chinese people prefer cash to credit card, and the Chinese government has alleviated regulations to increase use of credit card, and online distribution market in China has grown up remarkably. Korean distribution enterprises have advantages of technology and knowhow and the Chinese consumers' consumption pattern has made change to be likely to have positive influence upon growth of new distribution businesses.

 Fifth, China still has legal and political regulations and uncertainty of the socialism. Korean distribution enterprises shall understand the Chinese laws and regulations before entering the Chinese market. Korean enterprises shall prepare for the Chinese consumers' cultural styles and life styles to find out the Chinese people's consciousness levels and desire and to make appropriate marketing strategies.

 Sixth, Korean distribution enterprises shall consider entry into the three northeastern provinces with Korean enterprises and Korean ethnic group society, and Shandong Sheng, and Beijing, Shanghai and Tianjin with the highest income level, and shall adopt policy that diversifies and expands entry region.

 Seventh, by taking advantages of Korean Wave in China, Korean distribution enterprises shall keep friendly relations with Korean commodities and enterprises and to raise cognition on Korean commodities and images toward Korea. Korean enterprises shall train employees with good command on the Chinese language who have cultural consensus considering the Chinese consumers' cultural pride.

4. Summary

 The world economy has been internationalized and localized rapidly. China with the largest population in the world is said to promote FTA with India with the second largest population in the world. FTA between China and India, in other words, Chindia (China plus India) that are compared to dragon and elephant shall produce free trade market with as many as 2.4 billion persons being equivalent to one third of world population. Chindia, in other words, China plus India shall threaten existing economic order of the world to have great influence upon Korea.

 Korean distribution enterprises are said to enter China (80.6%) the most, followed by USA (41.9%), Japan (30.6%), Vietnam (25.8%) and Indonesia (17.7%) in order (see Korea Chamber of Commerce and Industry's overseas management conditions survey on 62 countries dated December 2013). The most promising countries in the world are thought to be China, Vietnam, Indonesia, Malaysia and other South East Asian countries. The markets in those countries are thought to be  promising considering gigantic market scale, preference of Korean products, friendly market environment and high economic growth. Korean distribution enterprises had difficulties at overseas market, for instance, local distribution network buildup that was the greatest difficulty, and human resources management, legal and administrative regulations, shortage of local information, marketing activities and shortage of fund and/or money, and so on.

 Since joining WTO in 2001, China had opened market. In China, world distribution enterprises have competed very much each other considering enormous scale and growth potential of the Chinese market, global distribution enterprises' desire of entry into the Chinese market, and the Chinese distribution enterprises's development. But, the Chinese distribution industry has problems, for instance, poor distribution system, backward distribution facilities, and low competitiveness of distribution industries. Most of the Chinese distribution enterprises have low modernization, inferior corporate management and control, and low distribution efficiency.

 This study investigated situation of Lotte Mart's entry into the three northeastern provinces to cognize Chinese market development trends seven years after Korean distribution enterprises' entry into the Chinese market and to understand market situation and to take proper actions. Lotte Mart has suffered from deficit in the Chinese market every year and has recorded rather good business performance in the three northeastern provinces and are likely to lessen deficit by efficiency and to continue business. Lotte Mart is likely to lower aggressive marketing by careful investment policy.

 Korean distribution enterprises' entry into overseas market is still in beginning stage, and it shall be promoted considering situation of domestic market, and effects of entry into overseas market upon Korean economy and other industries. Political supports, for instance, supply of systematic information on overseas market, and diplomatic supports for various kinds of corporate activities that require clarification, change and/or cancellations of the Chinese government related regulations, are needed.

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47.Youn, Myoung-Kil, Kim, Yoo-Oh, & Namkung, Sok (2004). A Study on the Conception Academic of Distribution Theory. Journal of Distribution Science, 2(1), 1-16.
48.Youn, Myoung-Kil, & Cho, Sun-Ku (2001). A Study on the Information Systems Development for Internet Shopping Companies. Journal of Korea technology innovation society, 4(2), 198-210.
49.Youn, Myoung-Kil, & Namkung, Sok (2000). Reduce middle management and improvement plan for Department Store. Journal of Global Scholars of Marketing Science, 6, 93-110.
50.Youn, Myoung-Kil, & Namkung, Sok (2005). A study on tukjeongmeip system of Department store in Korea. Journal of Distribution Science, 3(2), 1-14.
51.Youn, Myoung-Kil, & Kim, Yoo-Oh (2005). A Study on the Conception Academic of Distribution Theory(II). Journal of Distribution Science, 3(1), 1-22.
52.Youn, Myoung-Kil, & Kim, Yoo-Oh (2007). A Study on the Methodology of Distribution Study in Korea. Journal of Distribution Science, 5(1), 75-88.
53.Youn, Myoung-Kil, Kim, Yoo-Oh, Lee, Min-Kweon, & NamKung, Sok (2006). Domestic Restrictions on the Opening of Retail Stores. Journal of Distribution Science, 4(1), 121-160.