The Royal Dutch Shell multinational company is a leading global producer of oil, natural gas, and petrochemicals. Its international presence has been established through a century-long exploration of operations in China. Taking advantage of the policy of reform and opening to the outside world in China, Royal Dutch Shell established two joint venture oil depots in Shenzhen, China in 1985 and 1987. Subsequently, the company increased its investments in the Chinese market.
Entering a market is a challenging task for companies, making the selection of appropriate entry modes highly significant. In this assignment, the reasons for choosing China as a target market will be identified, and the methods employed by Royal Dutch Shell in entering the Chinese market will be analyzed. The main body of the text will elaborate on how and why Royal Dutch Shell, a multinational company, has established its international presence through different entry modes. The subsequent sections are divided into two parts: the first part discusses the considerations for entering specific markets, while the second part defines the entry modes employed by Royal Dutch Shell in China.
Choose a target market to enter. Many factors have contributed to Royal Dutch Shell’s presence in China. The following part will analyze why China is a desirable foreign market to enter in three aspects.
1, Market environmental factors. China’s economy has developed rapidly during the past three decades and still shows an upward trend. According to the statistics provided by National Bureau of Statistics of China, China’s GDP has improved more than 10% annually five years in a row, and even during the period of September, 2008 to October, 2010, when the Global Financial Crisis has swept worldwide, China’s GDP has improved 9. % and 10. 1%, respectively. Consequently, the purchasing power of China grows dramatically. (China’s purchasing power is No. 2, reported by the World Bank) However, different from other industrialized countries which have adopted market economy decades ago, China’s market is comparatively immature; as a matter of fact the mixture of Socialist Planning or Market Socialism is the main feature of China’s economy. Therefore, the competition in the Chinese market is not as fierce as western countries.
First-movers in China have several advantages over their competitors. These include pre-empting rivals and capturing demand, building sales volume, and creating switching costs. China is a vast market with a population of approximately 1.3 billion and GDP of 33535.3 billion RMB in 2009 (predicted to reach 368000 billion RMB in 2010). The Chinese market has untapped potential, especially in the energy industry, high-tech industry, and tourism sector. Therefore, due to its rapid economic growth and immense market size, the Chinese market presents significant business opportunities.
Multinational companies are making significant efforts to enter and expand their market shares in China. The reform and opening policy has caused a noticeable increase in China’s import and export trade. In 2008, the value of imports reached USD 1133.08 billion, with the Petrochemical industry alone importing USD 294.83 billion, which is a 35.2% increase from 2007. The Chinese government should be acknowledged for playing a crucial role in promoting global trade and facilitating this impressive growth.
China has fulfilled its promise to grant foreign capital wholesale rights and management rights in crude oil and finished oil transactions since joining the World Trade Organization (WTO) in 2001. On January 1, 2007, the Chinese government collaborated with Royal Dutch Shell, China National Petroleum Corporation, China National Offshore Oil Corporation, and China Petrochemical Corporation to demonstrate this commitment. In the past twenty years, China has actively encouraged investment within its borders by implementing different laws and regulations.
China has established policies that foster an attractive and consistent investment environment for foreign investors, with its stable political climate further enhancing this stability. This has earned China a worldwide recognition as a politically stable country. Consequently, multinational corporations encounter reduced investment risks and uncertainties when engaging in equity investments within China.
Over time, the investment landscape has undergone significant transformations. Initially, most investors consisted of small businesses from Hong Kong and Taiwan.
But now, the investors from Europe and U.S. have transformed into world-renowned multinational companies. Secondly, the small companies aim to benefit from China’s cheap labor. However, the multinational companies are now interested in penetrating and dominating the Chinese market. They are primarily focused on high-technology and high value-added activities. Moreover, these companies target the global industry to achieve their strategic objectives and maximize overall profits. Consequently, they consistently opt for an entry mode that provides them with a high degree of control.
Within multinational companies, there are four primary entry modes for accessing target markets: exporting, contractual agreements, joint ventures, and wholly owned subsidiaries. Each of these entry modes varies in terms of resources required, risk levels, control, and flexibility. Generally, wholly owned subsidiaries demand more resources, entail higher risks, and offer lower levels of flexibility. On the other hand, choosing exporting and contractual agreement entry modes allows multinational companies to utilize fewer resources, encounter lower risks, and enjoy greater flexibility.
This assignment will discuss the main entry modes that Royal Dutch Shell uses to enter the Chinese market. There are two types of exporting entry modes: indirect exporting and direct exporting. Royal Dutch Shell initially chooses the direct exporting mode. In 1964, the company builds two energy transport ships and exports a significant amount of energy to China. One reason for choosing this mode is the low labor costs in China, which gives the company a comparative advantage over other oil companies.
Secondly, utilizing the exporting entry mode can assist Royal Dutch Shell in gaining position advantages and acquiring exporting experiences. Nevertheless, there are risks associated with this approach. Firstly, tariff and non-tariff barriers have the potential to diminish the competitiveness of exported products in comparison to local alternatives. Secondly, transportation costs are anticipated to be substantial. Thirdly, it may require a significant amount of time to reach the target company.
In summary, considering these factors, the company determines that employing the exporting entry mode may not be suitable for their particular products.
The Royal Dutch Shell has decided to abandon the exporting method and instead opt for more frequently used entry modes. One such mode is licensing, which involves exporting intangible assets like technology and skills. This approach allows the company to bypass trade barriers and overcome the loss of competitive edge due to high transportation fees. In addition, the company can leverage the advantages of overseas markets to enhance the effectiveness of its technology.
The Royal Dutch Shell has acknowledged the advantages of coal gasification technology and began researching it 25 years ago. The company’s third-generation coal gasification technology guarantees a cleaner utilization of coal, which has an environmental impact equivalent to that of natural gas. In collaboration with China Petrochemical Group, The Royal Dutch Shell has established a joint venture factory in Hunan Province, China. This factory utilizes the company’s coal gasification technology to build and operate, with a production capacity of 2,000 tons per day.
In addition, Royal Dutch Shell has also transferred coal gasification technology to ten other factories in China. Furthermore, the company announced three new clean coal technology licenses in China on November 20th, 2008. These examples demonstrate typical licensing entry modes for entering the Chinese market. Another option is through joint ventures, which many companies choose to avoid the risks associated with licensing and protect their specific advantages.
In May 2010, Royal Dutch Shell and China Petroleum & Chemical Corporation formed a partnership in Jiang Su Province, China. The objective of this collaboration is to develop refined oil retailing and intends to grow by incorporating 500 gas stations within three years. China Petroleum & Chemical Corporation holds a majority stake of 60%, with Royal Dutch Shell retaining the remaining 40%. The total investment for this undertaking totals around $200,000,000. According to the agreement, the Chinese company will have greater influence over the joint venture.
Despite the aforementioned factors, partnering with a Chinese company remains a feasible choice for Royal Dutch Shell. This enables the company to increase its involvement in China’s economy and further explore their market. Additionally, this strategy facilitates the sharing of knowledge, which can enhance the company’s competitive edge. Furthermore, by establishing this joint venture, Royal Dutch Shell can effectively decrease transportation costs and tariffs, ultimately resulting in reduced production expenses.
The acquisition of International Investment Holdings Limited by Royal Dutch Shell on September 22nd, 2007 and the establishment of Shell Petrochemical Co., Ltd. aim to enhance product adaptability in the local market. Expanding production scale is one of Royal Dutch Shell’s motivations for this acquisition, given that both companies operate in the same market and manufacture similar products. Consequently, this acquisition will not only boost production scale but also reinforce market shares.
After acquiring the Royal Dutch Shell, the company has become the leading international energy company in China’s lubricants market and now holds third place in terms of market share for lubricants in China. Moreover, its global production of lubricants has increased by 8%, resulting in its products accounting for 16% of the global market share by 2008. These statistics demonstrate that this entry strategy has greatly benefited the company.
Strategic Alliance: 5
On November 13rd, 2000, the China National Offshore Oil Corp and the Royal Dutch Shell established a strategic alliance agreement. The purpose of this agreement was to enhance collaboration between the two companies in oil and gas exploration, as well as natural gas marketing and sales. To accomplish their shared goals, both companies assumed joint responsibility, coordinated efforts, and engaged in various collaborative activities. This approach resulted in blurred boundaries between the two companies as they worked together towards common objectives within the Strategic Alliance.
Strategic Alliance will have both advantages and disadvantages for the Royal Dutch Shell. On the positive side, it can enhance the competitive strength of the company and allow for shared risks and costs. This means that resources will not be duplicated or wasted. Additionally, when entering the Chinese market, the Royal Dutch Shell can acquire valuable complementary resources at a low cost. However, if the strategic alliance does not generate more value compared to other similar transactions, it will be considered a failure.
It is crucial for companies to thoroughly evaluate the appropriateness of a strategic alliance agreement. Additionally, ongoing monitoring of the alliance ensures its strategic worth and efficacy. For Royal Dutch Shell, signing a strategic alliance agreement with the China National Offshore Oil Corp is recommended as an entry mode. Ultimately, due to China’s economic reform and opening-up policies, it has become an attractive region for multinational companies.
China’s rapid growth in overseas direct investment has positioned it as the largest market for such investments globally. Royal Dutch Shell considers multiple factors, including market environment, policies, and changes in investment structure when deciding to target China. To enter this important market, Royal Dutch Shell employs various entry modes like direct exporting, licensing, joint ventures, acquisitions, and strategic alliances.
Although different entry modes have their own advantages and disadvantages, The Royal Dutch Shell has effectively adapted to the changes in China’s economic and political landscape. The company has successfully managed the proportion of each entry mode, which is crucial for its exploration of the Chinese market. (References John D and Lee H., 1995, International Business Environment and Operation, 7th edition, Addison-Wesley Publishing Company).
Johnson, D and Turner, C (2010), 2nd edition, International Business, London: Routledge
Li Lusha(2010) Shell announces three new clean coal technology licenses in China [Internet] Available from [Accessed 15th November]
Monir H. Tayeb, (2000) International Business Theories, policies and practices, Prentice Hall
Shell (2010) Shell and China National Petroleum Corp. announce natural gas cooperation [Internet] Available from [Accessed 15th November]
Shell (2006) Shell Is Global Number One In Lubricants [Internet] Available from [Accessed 16th November]
