Global Business Materials Compilation

GLOBAL BUSINESS COMPILATION CASE ANALYSIS
By: Deqsha Novendra

IN1167
Case Study
Unilever in Vietnam:
The “Perfect Village” Initiative
06/2019-6184
This case study was written by Jasjit Singh, Associate Professor of Strategy at INSEAD, and Helen
Duce, INSEAD EMBA ‘13. It is intended to be used as a basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Extra teaching materials are available at https://publishing.insead.edu/case/unilever-
vietnam. Copyright © 2015 INSEAD
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This document is authorized for use only in Dr Abu Elias Sarker's MBA 9.24.2021 at University of Sharjah from Sep 2021 to Mar 2022.
In October 2015, Alex von Behr, Unilever’s Chief Customer Officer, was busy at his desk in
Singapore – finishing up some work before heading for the airport to catch a flight for the
quarterly meeting of Unilever’s global leadership team. 1 He had just finished a call with senior
managers from Unilever Vietnam, where they had updated him on the latest status on their
“Perfect Village” initiative. In addition to Nguyen Thi Bich Van, Vice President (VP) of Customer
Development for Vietnam, the call had also included Tran Tue Tri, VP of Marketing and Tran Vu
Hoai, VP of Communications and Sustainable Business.
The Perfect Village approach was launched in Vietnam in October 2013 under the leadership of
J.V. Raman, who had been the General Manager of Unilever in Vietnam until his recent move to
Russia (in September 2015). For Unilever, this represented a new way of going to market, as it
extended traditional marketing and sales activities to also include active engagement and
investment in economic development-related activities for the local communities. Alex was
pleased to note that, in just two years, the model had already showed signs of delivering
impressive sales growth as well as having a significant social impact.
With extensive managerial experience in senior roles in marketing and sales in other multi-
national companies, Alex had joined Unilever six years ago. Shortly thereafter, Unilever had
launched the “Unilever Sustainable Living Plan” (USLP) as a bold commitment to finding new,
more sustainable ways to do business. Alex was a strong supporter of USLP, and firmly believed
that - properly integrated into strategy – the sustainable business approach also provided an
opportunity to drive business growth, build trust and reduce costs and risks.
It was in this context that Unilever had launched Perfect Village as a new business model for
rural markets. The model held the promise of bringing together Unilever’s expertise in three
areas – marketing, sales and social and environmental sustainability – in an integrated fashion
for these traditionally difficult-to-reach markets. While the management teams in some countries
had doubts about suitability of the model for their context, Vietnam had enthusiastically agreed
to be an early pilot (soon after India).
Now, looking at the results from Vietnam, it was difficult not to get excited. Alex knew it was early
days, and the current scale small by Unilever standards. Still, as the model had worked out well
so far in the initial villages it had been launched in, what was there to stop it from being just as
successful at scale? Could this become the next big growth platform for Unilever not just in
Vietnam but also other emerging markets? As he gathered his papers and readied to leave for
the airport, Alex wondered whether it was time to put bigger investments behind the approach
and how to facilitate adoption of possibly localized version of this across markets.
Unilever’s Worldwide Business and Sustainable Living Plan 2

Unilever was an Anglo-Dutch multinational and a leading supplier of “fast moving consumer
goods” (FMCG). Its portfolio included more than 400 brands, including some of the world’s
leading brands with annual sales approaching or above Euro 1 billion: Dove, Rexona, Lux, Axe
and Sunsilk in Personal Care; Knorr, Hellman’s, Flora and Rama in Foods; Lipton, Magnum
and
1 In Unilever, “Customer Development” was the term used to describe the sales function and “Chief Customer Officer”
referred to the global leader of this function.
2his seTction draw s significantly from www.unilever.com.
Copyright © INSEAD 1
Heartbrand in Refreshments; and Omo and Surf in Home Care. Its 2014 turnover was Euro 48
billion (Exhibit 1), 37% in Personal Care, 25% in Foods, 19% in Refreshments and 19% in Home
Care. Emerging markets accounted for 57% of all business.
With strong local roots in more than 190 countries, Unilever had about 173,000 employees
globally. Its employees were particularly proud of the company’s historical commitment to social
responsibility that went as far back as 1890 to the days of the company’s founding father Lord
W.H. Lever – who had sought to improve the lives of ordinary people, and also championed for
better welfare, shorter working days and improved social conditions.
Unilever had stayed true to its roots of integrating societal considerations into everyday
business. Former Chief Operating Officer (COO) Harish Manwani explained in a 2013 TED talk,
“I don't know how many of you know that two million children don't reach the age of five every
year, because of illnesses that can be prevented by a simple act of washing their hands with
soap. With Lifebuoy, we are now running the largest children’s school hand-washing program in
the world. Across Unilever, we now have programs on hygiene and health that touch about half a
billion people. It's not just about selling soup and soap, there is a larger purpose out there. And
brands indeed can be at the forefront of social change.”3
Unilever’s commitment to integrating sustainability and growth agenda had been further
strengthened since 2009, when Paul Polman took over as CEO. Soon after taking over, Polman
had done away with earnings guidance and quarterly reporting - stating that a focus on short-
term performance gets in the way of achieving sustainable results. This radical move had
garnered a lot of media attention, particularly when he went as far as saying, “We tell hedge
funds and short- term speculators: You don’t belong in this company. The sheer fact that you buy
a few shares doesn’t give you the right to mess up our strategy.”4
In 2010, Polman had introduced the “Unilever Sustainable Living Plan” (USLP), a blueprint for
building a more sustainable business. The plan was based on a careful review of future mega
trends impacting the business. Among these was the recognition that by 2020 there would be
another billion people on the planet. While this represented significant growth opportunities for
Unilever’s brands, it also meant putting more pressure on already-constrained natural resources
and social systems. Polman explained, “We thought about some of the megatrends in the world,
like the shift east in terms of population growth and the growing demand for the world’s
resources. And we said, ‘Why don’t we develop a business model aimed at contributing to the
society and the environment instead of taking from them”’
USLP’s stated vision was to “make sustainable living common place”. It aimed to double the size
of Unilever’s business, and at the same time reduce its environmental footprint and meet
ambitious social impact goals by 2020. It spanned Unilever’s entire portfolio of brands and
impacted all countries, with 72 specific targets clustered under three key themes with nine broad
commitments under them (Exhibit 2). Each of the nine commitments was supported by clear
metrics, with a process for continuous monitoring and public reporting on progress. J.V. Raman
shared the rationale for this approach, “USLP brought the various parts of the business together.
This whole
3 www.ted.com/talks/harish_manwani_profit_s_not_always_the_point
4 “The HBR Interview: Captain Planet” Harvard Business Review. June 2012.
concept of bringing purpose into business was a very powerful motivator and a great tool for
energizing and rallying people across the company globally.”
Unilever’s efforts seemed to have paid off, with strong financial performance as well as
significant headway against the USLP targets. In fact, USLP had established Unilever as a role
model for sustainability. In September 2015 it was awarded number one within its industry group
in the 2015 Dow Jones Sustainability Index, the 14th year it had achieved that since 2000. In the
same month, Polman won the UN’s highest environmental accolade – “Champion of the Earth”
Award – for leading the business world towards a new model of sustainable growth. Unilever’s
leadership was also being recognized by leading sustainability experts, such as it being an
undisputed number one in Globescan’s 2015 global rankings.
As Unilever’s Chief Customer Officer, Alex von Behr had formulated a comprehensive go-to-
market strategy to embed USLP’s sustainability goals into the way that his team conducted
business. For him, the USLP approach presented a particularly promising opportunity in serving
low-income populations in emerging economies (often referred to as the “base of the pyramid” or
BOP). He believed that, both for achieving sustained impact and growing the business in this
segment, it was critical to build viable business models with the same level of rigor and analysis
that was expected for other (higher income) segments.
Unilever had a long history of employing decentralized management structures and allowing its
subsidiaries flexibility in adapting to local conditions. As a result, Unilever had a lead over its
global competitors in terms of coming up with solutions addressing the unique needs of
emerging markets, which had helped it build market leadership (Exhibit 3). In addition to
investing in localizing its own business and building a strong workforce, Unilever invested
significantly in recruiting and training small retailers as a part of its sales network. This
sometimes went as far as providing them with extended credit, business training and even
equipment (like bicycles). Unilever’s distribution network already reached millions of small-scale
retailers, giving it a competitive edge particularly in serving rural markets.
Unilever did not have to start from scratch in integrating sustainability goals with BOP strategy,
as many such initiatives already existed. The most visible was “Project Shakti”, which Unilever’s
Indian subsidiary had been running since 2000. The initiative, targeting relatively small and
remote villages, relied on locally recruiting women as micro-entrepreneurs and training them on
basics of accounting, inventory management and selling. These women then helped create
demand for categories like soap and toothpaste, and then sell the corresponding Unilever
products door-to- door. Unilever thus empowered these women and enhanced livelihoods, while
also profitably bringing its products to the hardest-to-reach consumers. As of 2015, the Shakti
network was comprised of 70,000 micro-entrepreneurs, giving Unilever access to four million
rural households in 165,000 villages.5 Unilever had also in recent years rolled out similar
schemes in Bangladesh, Sri Lanka and Vietnam.
5 http://www.hul.co.in/sustainable-living-2015/casestudies/Project-Shakti.aspx
Unilever in Vietnam
Vietnam was one of the largest and fastest growing countries in South East Asia. With a
population of over 90 million, its economy has grown by over 70% in the last 5 years due to
rising exports and significant foreign direct investment. While GDP per capita was still relatively
low at $2,000, the overall domestic market was large and growing rapidly.6
Compared to other emerging economies where Unilever had typically existed for close to a
century, Vietnam was still a relatively new place for it to do business. Since it started operations
in 1995, Unilever Vietnam had achieved double-digit annual growth and now employed more
than 1,600 people. It was already #1 in 95% of the categories it competed in and had revenues
about three times that of its global rival P&G, the lead being even bigger in rural areas. While the
Vietnam revenues were still small by Unilever standards, there was clear headroom for
significant growth as the country continued to develop. As a result, Unilever had set ambitious
targets for Vietnam as a part of its global strategy (Exhibit 4).
Unilever saw a key growth market as rural Vietnam. This was comprised of approximately 9,000
communes (local communities or villages), accounting for about 68% of the country’s population.
Western-style “modern trade” was small in Vietnam, present only in major cities. Practically all of
the rural business was conducted through distributors managing retail relationships for selling
products to the end consumers. About 37% of Unilever’s Vietnam turnover came from rural
areas, amounting to Euro 219 million in revenues and Euro 98 million in gross profits as of 2014.
While still behind urban areas in terms of income levels, rural areas had seen rapid income
growth in recent years. Given the difficulty of penetrating these markets, the competitive intensity
was also lower than that in cities. Nguyen Thi Bich Van, Unilever’s VP of Customer
Development, explained how Unilever had been a first mover: “Winning in rural has been on the
agenda for Unilever almost from day one. We’ve been focusing a lot in terms of how to build our
products in rural households.” Noting the rural potential, she added, “The economic development
in rural will help unleash growth. When we look at per capita consumption across our categories,
rural consumption is still between half to two-thirds of the urban level.”
Addressing the rural opportunity was not without challenge. As the smaller towns and villages
were typically spread out over large geographic areas with weak infrastructure links, it was hard
to build economically viable business models. At the same time, as rural incomes were on
average half of urban dwellers, consumers did not have as much disposal income to spend on
FMCG products. Further, about 70% of the income was seasonal, being dependent primarily on
traditional means of livelihood (like farming and fishing). Education levels were also relatively
low, with only 12% of the adults completing college.7
The biggest challenge, however, was that most product categories Unilever operated in were
nascent and underdeveloped in rural areas. Therefore, driving rural growth was not just about
building sales distribution or market share but also first creating demand for these categories.
Even basics like soap and toothpaste often needed to be built from the ground up in order to
increase awareness regarding these products as well as their use. This became even more
6 http://country.eiu.com/vietnam
7 http://www.nielsen.com/apac/en/insights/reports/2014/demystifying-rural-vietnam.htm l
challenging where infrastructure was underdeveloped. For example, there was little point in
educating people to wash hands or brush teeth if they did not have access to clean water.
Through years of trying to build a rural business, Unilever had come to realize that rural
challenges were closely intertwined with the community’s broader economic development
priorities. Tran Tue Tri, VP of Marketing commented: “In the past we looked at a one-time
marketing investment, and it never worked. We learnt that we need to start with people. In the
rural areas, people don’t have a proper toilet to use and don’t have good education. So we need
to start with these bigger needs.”
Defying conventional wisdom, Unilever’s rural profit margins in Vietnam were comparable to
those in urban areas despite rural incomes being lower and there also being unique sources of
cost. The management attributed this to rural sales generally involving smaller package sizes
(with bigger margins), traditional distribution channels (with less price pressure than large
retailers) and a smaller range of fast-moving products (enabling economies of scale).
Recognizing that it needed to take a more integrated approach in developing rural areas as
markets, Unilever often worked in partnership with local NGOs and communities to ensure they
understood the particular needs of these individuals and the socio-economic context in which
they lived and worked. Managers also invested significant time in building a close relationship
with the government, which had in recent years launched a number of initiatives and resolutions
towards a decentralized development policy based on local participation. In this approach,
infrastructure- related funding for rural areas would continue to come from the government, but
have to be complemented by resources mobilized locally in the form of voluntary contributions
from communities and business investments.
Tran Vu Hoai, VP of Communications and Sustainable Business, explained Unilever’s approach

of engaging the government and communities: “It was not about writing a cheque but using the
company’s strengths to help address the country’s needs. We identified three core areas where
we could really contribute to Vietnam’s progress: child development, health and hygiene, and
women’s empowerment. We chose these three areas because they are priorities not just for
Unilever, but also the three top priorities for Vietnam. The government was our main stakeholder
- we developed long term strategic partnerships with them.”
With an existing foundation already in place, Unilever Vietnam was well-placed to adopt USLP
goals when the programme was first announced. A natural opportunity to formally align
Unilever’s USLP agenda with the government’s goals came up when Vietnam announced a
national framework for rural development. The framework was based on 19 “New Rural
Development” (NRD) criteria for improving living standards in rural communities (Exhibit 5). Van
reflected “When the government introduced the new rural program, we got so excited because
their objectives were the same as ours - to improve the lives for rural people… But we knew we
needed a new model. How do we find a repeatable model for us to scale up with the ambition of
the new rural program of the government?”
The “Perfect Village” Initiative
Experience from Project Shakti in India and similar initiatives elsewhere provided a natural
launching pad for Unilever to come up with a more comprehensive rural strategy. The first
extension was to broaden the scope of the distributor and retailer support Unilever provided. The
second was to coordinate these more closely with market development, as low penetration rates
would otherwise limit the potential of distribution and retail. The third was to combine the go-to-
market approach with broader USLP goals. Developed first in India, the resulting “Perfect
Village” (PV) model aimed to drive awareness, knowledge and adoption of product categories
and Unilever products therein in hard-to-reach communities (Exhibit 6).
PV was unique in the way it integrated three key elements that in the past had been seen as
largely independent activities: retailer support (through the “Perfect Store” programme), market
creation (through “Market Development” investments), and sustainability (through USLP-related
goals). With this approach, Unilever aimed to create an ecosystem in which sustainable living
would be an integral part of the company’s go-to-market operations. As J.V. Raman explained,
“By coordinating all Unilever activities in a community, our impact would be significantly larger
and our business footprint bigger... To be sustainable, USLP could not be about CSR but had to
be linked to the business and connected to our brands. This was a very important link that came
about with the Perfect Village.”
Given Unilever’s decentralized organization, however, an initiative like PV could not be forced
upon individual subsidiaries. Instead, templates and best practices had to be made available to
the countries, who were then free to adopt and adapt as they saw best. Alex remarked “I was
asked by our COO Harish Manwani to identify great ideas - in part from experiments conducted
‘on the ground’ – in order to build repeatable models that we would encourage countries to
adopt. As he used to say, ‘Think global, act local.’”
After India, Vietnam was one of the first countries to adopt the PV framework in October 2013.
Tri recalled, “I was sitting in a meeting when people shared the India example. We thought that
we could do it even better because the Vietnam team had been doing community activities for
many years anyway, and already had a strong program with the government in education and
health”. PV had reached 150 villages by 2014 and 300 by 2015, with an ambition of scaling up to
500 villages by 2016 and 1,000 by 2020. J.V. Raman explained, “A lot of good ideas get killed if
they do not have business viability. So my approach has been to think big but start small: first
show business viability and then roll out fast.”
A key difference between PV implementation in India and Vietnam was the critical role of
government partnership in Vietnam. J.V. Raman explained, “We were already running public-
private partnerships, and had one of the closest relationships in the world with the government…
The government was embarking on a development project called ‘New Rural’ for 2,000 villages
and we had called out for rural to be a strategic intent for us, so it made sense to join hands
together… In a country like Vietnam, if you have the blessings of the government, things
obviously move faster and it opens the doors to make things happen.”
Starting with the 2,000 villages announced as a development priority by the government,
Unilever identified villages with high long-term adoption potential for its products. The villages
were selected on four criteria. First, they had to have a population of more than 1,000 people to
ensure
sufficient market size to justify the fixed costs, which translated into the villages in the PV
programme having an average annual turnover of about Euro 53,000. Second, there had to be
at least 20 stores in order to justify the cost of a Unilever sales representative servicing the
village weekly and supporting the retailers. Third, the villages needed to have a school and a
medical clinic already so that there was a platform to launch Unilever’s health and hygiene
campaigns. Finally, there had to already be active engagement and support from the local
authorities to facilitate implementation of Unilever’s PV agenda.
Once a village had been selected, the PV approach involved Customer Development taking the
lead to ensure local availability of its products, enrolling small local retailers in their “Perfect
Store” programme. An Area Sales Manager and a local distributor was selected to build
Unilever’s distribution reach and ensure appropriate execution of the “4Ps of Marketing”
(Product, Pricing, Place and Promotion) in local outlets. The programme also helped nurture
local entrepreneurs and teach small-scale distributors basic merchandising and business skills.
Working with the local government, Unilever also sponsored women in opening small shops and
supported store owners with preferential financing.
After solid distribution was achieved, Market Development followed up by “activating” the village
with a range of programmes. These included product education sessions as well as health,
beauty and hygiene workshops that helped accelerate the adoption and growth of Unilever’s
product categories. Unilever promoters would actively engage the village, and train local brand
influencers (such as beauty parlors and small retailers) on product function and usage. This
would also often involve running product education and experience sessions.
Tying the sustainability agenda back to USLP goals, the third part of the PV model involved
making broader USLP investments in the community. Some of these could have a direct
business benefits in the form of creating demand for certain product categories. For example,
sponsoring school camps explaining the benefits of brushing teeth twice rather than once a day
increased demand for Unilever toothpaste (like PS) and demonstrating how hands washed with
soap are more effective at killing germs than just using water increased the demand for
Unilever’s soap (like Lifebuoy). However, USLP also involved making general investments in
things like a hygienic wet market or a children’s playground, even though the link to business
was less direct and had to involve a longer-term perspective.
The Vietnamese team focused on three main brands for initial PV rollouts: Lifebuoy soap, PS
Toothpaste and Vim toilet cleaner. Villages were classified into three groups - “Bronze”, “Silver”
and “Gold” - depending on the level of investment made and the extent of deployment (Exhibit
7). Van explained “A Bronze village starts with basic execution, building relationships with
retailers and executing the ‘Perfect Store’. Once this is done, we can transition to Silver by
putting in place market development activities, such as educational and awareness programs.
Finally, if there is good support from local authorities and existing investment in schools and
clinics, the village can transition to Gold with the addition of USLP activities, such as upgrading
toilets, improving wet markets and building playgrounds.”
Making a “Business Case” for Perfect Village?
The essence of PV was to take the village as a unit of analysis in making a business case and
evaluating financial performance. This meant that all costs incurred on a village were to be
treated as business expenses, whether these were related to retail support (through Customer
Development), market creation (through Market Development), or community development
(through USLP). And these investments were expected to provide a financial return in the form
of increased revenues and profits in the following years, though the time horizons allowed for
payback were now longer than what had been the practice in the past.
All expenses – even those for community investment – came from “Brand Marketing Investment”
(BMI) budgets. Unilever leadership consider this important in order to emphasize that the project
was to be managed and executed with as much rigor as any other business, rather than treated
as a separate “Corporate Social Responsibility” (CSR) initiative unrelated to business activities.
Tri explained “We see this as an integrated and more effective way to engage rural markets. I tell
the employees that this is their everyday work, not extra work. If they don’t do it the PV way, they
would still have to find another way for rural activation”.
In the earliest pilots, PV start-up costs turned out to be high relative to benefits. The Vietnam
team therefore carried out a careful cost-benefit analysis of all activities to make the model more
viable. They found that market demand in many villages was smaller than expected, manifesting
in the number of people turning up at the events also being smaller. The team therefore scaled
back on things like promotional materials, demonstration aids, sound systems for events, etc.
There was a sharp focus on cutting out things that looked fancy on paper but not effective in the
field. Rather than carrying out the campaigns through its own employees or costly agencies,
Unilever also started relying more on local individuals (such as school teachers) and
organizations (such as women’s associations) to educate the communities. The team figured
that, because the created value was to be shared, the costs could also be shared.
The openness of the Vietnam team to learn from the initial experiments and reengineer the
model for financial viability achieved positive results. By 2015, the investment of rolling out a
new PV had fallen to about Euro 6,000 for a Gold village (about one-third of what the level had
been in the earliest experiments). Out of this, about half was to bring a village to the Bronze
level, and about three-fourths of the remaining difference between Bronze and Gold was related
to USLP activities. One PV investment was expected to suffice for three years.
Results for PV also looked good in terms of growth. The current year Gold village sales growth
(annualized) had been 32%, more than double of the 14% achieved in similar villages not in the
PV programme. J.V. Raman remarked, “While it might be too optimistic to expect Gold PV
growth to remain twice as much as for the average village in the longer run, the growth rate
being a third larger is perfectly realistic.” There was also evidence that USLP-related
investments had been particularly effective: Bronze villages – which executed the Perfect Store
but had no USLP investments – had a much lower growth rate of 15%.
The PV approach also held significant promise for profitability. A crucial aspect of the “business
case” for PV was that most of the brand marketing budget would be needed even in activating a
conventional village. Hoai explained, “Profitability can be significant because PV doesn’t require
that much incremental expense. One way to look at it is that we mostly prioritize our resources to
make their use more effective.” So PV would be seen as generating a positive return on
investment as long as the incremental benefits from employing the PV approach exceeded the
incremental costs. The management team believed this could be ensured by selecting the most
promising villages and also managing costs carefully.
The PV model had not been around for long enough to allow precise determination of
performance based on historical data. Therefore, a particular challenge in establishing a
business case was that the PV approach involved upfront investments with pay-offs that would
only be realized in the longer term. It was also uncertain as to when and how much additional
investment might be needed (for example, for refurbishing playgrounds or toilets). While bearing
in mind that any costs and benefits estimates for PV were therefore sensitive to the assumptions
made, Unilever managers did explore some financial projections expected for a typical village-
and found these to support a clear business case for pursuing PV.
Social impact of PV also appeared strong. Tri remarked “On PS toothpaste in the first round we
did not get it right. So we worked on improving it, and in the second round we saw that 70% of
people do remember to brush their teeth at night”. Convinced that lives have significantly been
improved due to Unilever’s intervention through PV, she added, “When we teach the
communities programs like handwashing or brushing teeth, I can feel we’re impacting their lives.
At the same time that we help the community, we also see our business quickly improve as well.
This is what keeps us all excited about the project.”
Going Forward?
While the early results certainly provided cause for celebration, Unilever management also
recognized that challenges might lie ahead. PV was still new, with a 2015 spending that was just
1.5% of Unilever’s overall Euro 57 million brand marketing budget for rural Vietnam. There was a
concern about how to maintain momentum within existing villages at the same time as scaling
up to reach new villages, and how to ensure that there will continue to be equally strong synergy
between government investments and Unilever’s PV spending.
Hoai noted, “The biggest challenge is how we scale up with the same level of efficiency and
effectiveness. Doing 400 villages is already tough, doing 1,000 will be much harder. It will require
a lot of coordination and monitoring.” Remarking on the learnings from the experience thus far,
he added, “The biggest lesson has been about follow up and commitment. If we do a sanitation
programme or a hygiene campaign for a school, we need to keep on investing so that things do
not downgrade. That requires work, dedication and resources.”
Another potential risk was whether and by how much the cost per village might go up as the PV
project was scaled up. Unilever might also face unexpected challenges on parameters that were
still unknown, “Over the years, there will likely be diminishing returns. As we go to more villages,
there will be fewer households, and they will be more difficult to access. How much will that
affect the model? We do not know yet.” However, J.V. Raman’s view was that the model would
remain viable as long as the above diminishing returns could be compensated for by increased
revenues from rising rural income levels and further efficiency gains through learning, scale
economies and sharing of costs through partnerships.
Overall, the management team was committed to resolving the challenges and excited about
ensuring a successful scaling up. Van summed up the situation, “I know that the scale is still
small, but I just have to remind myself that we have grown from nothing to the biggest FMCG
company in Vietnam in 20 years. The passion of the organization is for this to be something big.
After all, it delivers exactly what we believe is sustainable business – positive social impact
through a growing, profitable business. We are just in the second year, and are still figuring out
how to create a robust repeatable model. But I am confident we will get there.”
There was also the issue of competition. PV was getting a lot of publicity within Vietnam, so
competitors might get induced into trying to set up similar programs. What mitigated this threat
was the fact that Unilever was significantly ahead of its competitors in terms of scale as well as
government relationships, making it harder for others to justify similar investments.
The Global Perspective?

As Alex reviewed the PV numbers from Vietnam again, he could not help but think that the
initiative was still just a blip relative to the scale at which Unilever normally did things. The
number of villages the Vietnam team was targeting even for as far out as 2020 was only 1,000. If
they really wanted this to be a key engine for growth and a platform for making a huge impact at
a global scale, shouldn’t they be setting targets much more aggressively?
By aligning Unilever’s commercial goals with USLP-related targets, PV did on the whole seem
like a “win-win”. Alex also recognized there were choices to be made at the level of individual
villages. As a leader in the sustainability space, could Unilever really say no to launching PV in
villages in dire need of development but with limited potential for Unilever’s business? And if
Unilever did decide to be more open in choosing the villages, what would they do if profitability
suffered and the shareholders complained?
More importantly, what could senior management do in helping PV scale beyond India and
Vietnam? In its first iteration, PV had been rejected by countries like Indonesia and Thailand.
Instead, they had chosen to continue focus on cities through a variant they called the ‘Perfect
City’. Cities just seemed easier and more profitable at least in the short run, and the Customer
Development function could still embed some of the USLP agenda into their go-to-market
strategy (for example when going into slums). The learnings from PV might still be relevant, so
Alex wondered whether it was okay to let this flexible ‘Perfect Communities’ (PC) blossom in
ways each country saw fit. Or should he insist on PV-like rural agenda for all emerging markets
with a significant rural BOP population in need of more development?
Beyond Asia, one continent where a lot more needed to be done was Africa. However, neither
PV specifically nor PC more generally had worked there so far. The challenge was in figuring out
a viable financial model, as Africa was a poorer continent - with more limited purchasing power
and worse infrastructure. Unilever’s businesses in African countries were too small to pull off
projects like PV at scale on their own. But Alex was convinced that the basic idea did make
sense even for Africa. Perhaps the way forward there was to work through partnerships with not
just governments but also NGOs and development agencies active on the ground?
Alex’s thoughts shifted to his specific agenda for the conference as he boarded the plane. How
aggressively should he try to make a business case for other countries to adopt the model?
Should
it be PV or PC? Was there anything obvious he was missing that would prevent the model from
having success beyond Vietnam? Maybe he could try establishing specific criteria for deciding
which markets should execute PV or PC, but he wasn’t sure what these should be. But maybe it
was too early for all of this. Maybe the key was to first ensure that the Vietnam model was
definitely scalable and repeatable, and only then try to expand beyond Vietnam. He hoped the
long flight would give him time to think this through and decide what his recommendations
should be at the conference.
Exhibit 1
Selected Financial Data for the UNILEVER Group
Source: Unilever Financial Statements (2014)

13
Unilever Sustainable Living Plan (USLP) Exhibit 2
Source:.www.unilever.com
Copyright © INSEAD
Exhibit 3
Unilever’s Emerging Market Presence (2012)
Source: http://www.hul.co.in/Images/Winning-in-DandE_tcm114-354369.pdf
Exhibit 4
USLP Targets for Unilever in Vietnam
Source: Unilever
Exhibit 5
Vietnam Government’s New Rural Development (NRD) Program
As per its Decision 491/QD-TTG on 16 April 2009, the Vietnamese Government established a national
framework based on 19 specific “New Rural Development” (NRD) criteria for measuring progress towards
rural development. In end-2014, as many as 785 (about 9%) of the 9,000 or so overall communes met all
the NRD criteria, and another 1,285 (about 15%) met at least 15 of the 19 criteria. The approximate
percentage of communes meeting each respective criterion was as follows:
[Planning criteria]
1. Planning (97%)
[Eco-Socio criteria]
2. Transportation (23%)
3. Irrigation (45%)
4. 7E6le%ct)ricity (
5. School (31%)
6. Culture (18%)
7. Trading place and market (45%)
8. Post office (86%)
9. House (50%)
[Economic aspects]
10. Income (45%)
11. P36o%or)rate (
12. Labor (72%)
13. Production form (65%)
[Culture-Socio-Environment]
14. Education (61%)
15. Health (54%)
16. Culture (57%)
17. Environment (27%)
[Politic system]
18. Politic-Socio organization system (68%)
19. Social security (91%)
Source: http://ap.fftc.agnet.org/ap_db.php?id=407
Exhibit 6
The Perfect Village Business Model
Source: Unilever
Exhibit 7
Implementation of Perfect Village in Vietnam
Source: Unilever
I. Unilever in Vietnam Case
A. Case Overview
The case tells about Unilever's new business model for rural markets called Perfect Village.
The PV program initiative in Vietnam is aimed to create sustainable living for the people in
rural areas by giving them access to Unilever products and services.
● The PV program involved working with local communities to implement the initiative
and activities through retail support, market creation, and community development.
● Other programs such as “Perfect store” and “Activating” the village are done to give
stable distribution and education sessions, health, beauty, and hygiene workshops.
While the PV program is a success some countries have rejected the Perfect Village (PV)
program and choose to focus on Perfect City. How should Alex as Unilever’s Chief Customer
Officer push the business case for other countries to adopt? Is it PV or PC? and would there
be challenges that prevent the model from further success beyond Vietnam?
B. Case Analysis
Challenges for Unilever:
● Maintaining the effectiveness on the existing village while scaling up to reach new
villages
● High costs since there is no parameters and difficult access
● Competitors might interest to try similar programs
Pestle Analysis:
● Politics:
○ Political stability is important in order to maintain business development globally.
○ The policies and regulations of each country are really impacted to Unilever
sustainability.
○ Relationship between Unilever and related countries.
● Economics:
○ Focuses on developing countries
○ The GDP and economic growth are influencing the demand for USLP to be
implemented in the countries.
○ Market potential and business opportunities.
● Social:
○ Gain youth in participating in the PV initiative.
○ Local communities interest
○ Attitudes towards sustainability, hygiene, education, and economic development
in these communities.
● Technology:
○ Advanced technology is necessary in making an efficient process of
implementing the USLP.
○ Know the needs of the area concerned.
○ Develop innovation of implementation in different countries.
● Environment:
○ Identify the lifestyle background
○ Climate change risks and their potential impact on the initiative's objectives.
○ Incorporating environmentalism into its strategic goals
● Legal:
○ Unilever needs to conduct based on the law and regulations regulated in each
country.
○ The USLP should be done based on the contracts agreement with the government.
○ The USLP should be run based on health & safety regulations.
Identify PV or PC:
● PV: The countries that have compatibility in rural areas, in low economic condition,
and the environmental area is in worrying condition.
● PC: The countries that have some developed areas, well educated communities, and
advanced technology.
C. Recommendations
● Based on option: PV by considering; the country has a significant number of rural
communities, the engagement of community to participate in PV, and the trend of
GDP and economic growth.
Terms Recommendations
Short-term Community Engagement: Creating strong relationships with local

communities and involving local government and organizations to do
some research about the basic needs and daily problems of local
communities.
Diverse Product: Trying to explore some broad ways to create diverse

products by doing some research about the unique characteristics of
different villages.
Enhancing PV Strategies: Developing the PV model to improve its

productivity and potency. The strategies include reducing cost, enhancing
resources allocation, and creating better selection criteria for certain
villages.
Long-term Global Expansion: Researching the similar villages in other countries like
Vietnam and expanding their PV strategies. Assessing the effectiveness
of the PV strategies in other villages based on previous experiences in
Vietnam and revising the strategies according to the characteristics of
villages.
Sustainability Integration: The business objectives should consider

sustainability as the strategy for the company to expand globally.
Sustainability is the aspect that the company embedded in their business
objectives all across the world.
Proper Planning: Creating well-planned strategies to execute PV,

assessing the risk and challenges of doing PV. Finding the right strategies
to generate return and potential revenue from rising rural income level.
D. Trigger Question
Corporate Social Sustainability initiative

Responsibility
Sanitation Facilities
Provide hygiene education Provide long term goals in creating sustainable development
program in rural areas
Engage with government, Through PV model it does bring awareness to Unilever

local communities, and product but the main goal it to make lasting changes in the
NGOs communities
Women empowerment Reduce environment footprint and meet social impact goals
In light of the "Unilever in Vietnam: The Perfect Village Initiative" case, it prompts us to
ponder upon the correlation and divergence between Corporate Social Responsibility (CSR)
and sustainability. Does the Perfect Village (PV) model resemble more to typical CSR
projects or sustainability initiatives? To what extent? CSR focuses on short-term projects and
volunteer work while sustainability initiatives focus on long-term and address to environment
and social issues.The program does use both CSR and sustainability initiatives, but the main
goal is to create sustainable impact to the communities. The PV model is more close to
sustainability initiatives.
● The case suggests that Indonesia opted for city-focused initiatives like the 'Perfect City,'
rather than endorsing the PV model. However, considering that a significant portion of
Indonesia's impoverished population resides in rural areas, why hasn't Unilever
considered village development as a means of creating a substantial impact?
○ Prefer to focus on slums than in villages: Based on BPS statistics, more than half of
the population in Indonesia live in cities (56.7%). Rather than focusing on villages,
Unilever would be preferable to integrate part of the USLP objectives into visiting
the slums.
○ Focus on educating the public: There are still many city people who are not aware of
knowledge and adoption of product categories and Unilever products therein in
hard-to-reach communities.
○ Based on Danone's vision, it will be more suitable to run the program in the village
since it will be closer to nature.
● Scholars have criticized these straw man approaches as being inappropriate for ethical
decision-making in multinational enterprises. How do these criticisms relate to the
Unilever Vietnam case, and in what ways might any of these approaches be connected to
it?
○ Strawman Approaches:
■ Cultural Relativism: Unilever does not relate the cultural differences in Vietnam
as a criteria of building PV initiatives in Vietnam. It is only stated that the
company does partnership with local communities to meet consumer demand.
● Prove: “You have the blessings of the government, things obviously move
faster and it open.”ns the doors to make things happen”
■ Righteous Moralist: Unilever's strategies to conduct PV initiatives in Vietnam
align with the home country standards but also adapt the ethical and
sustainability standards from the home country.
● Prove: “What we believe is sustainable business – positive social impact
through a growing, profitable business?”
● Second prove: “As Unilever’s Chief Customer Officer, Alex von Behr had
formulated a comprehensive go-to market strategy to embed USLP’s
sustainability goals into the way that his team conducted business.”
○ Naive Immoralist: A manager of MNE sees firms from other nations not following
ethical norms in the host nation, that manager should not either.
○ Friedman Doctrine: USLP as a bold commitment to finding new, more sustainable
ways to do business the sustainable business approach also provided an opportunity
to drive business growth, build trust and reduce costs and risks.
● In his book (Chapter 5), Hill introduces various philosophical approaches to ethics.
Which of these ethical frameworks aligns with the Unilever Vietnam case, and how does
it apply in this context? Please provide an in-depth explanation.
○ Utilitarian: By implementing these initiatives, Unilever Vietnam aims to create
positive outcomes and uplift the quality of life for a significant number of
individuals in the targeted villages. The company's actions are driven by the belief
that by improving the well-being of the community, it can maximize overall
happiness and utility.
○ Righteous Moralist: Uniilever Vietnam can demonstrate a high degree of cultural
sensitivity and respect for the community's values. This approach can help build
trust and foster a sense of ownership among the local population, leading to more
sustainable and impactful outcomes.
For the exclusive use of P. Ng, 2022.
SHENZHEN AT 40: CHINA’S SILICON HBSP No.: NTU205

VALLEY OF HARDWARE (1978-2018) Ref No.: ABCC-2018-021
Date: 12 September 2018
Boon-Siong Neo, Dolly Leow,
Wee-Kiat Lim and Coco Wang
China’s economic liberalisation, which started in the late 1970s, transformed Shenzhen, a sleepy
rural neighbour to Hong Kong, into the country’s leading manufacturing and export hub by the
1990s. More recently, the city has evolved further to become the “Silicon Valley of Hardware”. In
this case, we examine the development of Shenzhen through three key phases of its economic
journey that span almost 40 years, beginning with a bold experiment in the form of Special
Economic Zone status. In the course of our analysis, we identify factors that have promoted its
evolution and push towards innovation. The analysis will cover four interrelated factors of national
comparative economic advantage, namely: firm strategy, structure and rivalry; related supporting
industries; demand conditions; and factor conditions. Lastly, we describe the threats that
Shenzhen may face in sustaining its growth.
INTRODUCTION
“It is not a question of control effectiveness; it is a question of our policy.”
Deng Xiaoping, November 1977

during his inspection of Guangdong province, upon learning that
large groups of Chinese people had fled to Hong Kong in search of a better life
Deng Xiaoping, the chief architect of China's economic reform and opening up, spoke these words during
his seminal tour of Guangdong province. Instead of advocating tougher border controls and remaining
closed to the world, he believed in improving the standard of living of his people through enterprise and
economic development. This push changed the political climate in China and ushered in sweeping reforms
for Shenzhen and other coastal cities in the country. In December 1978, Deng launched a barrage of
economic reforms; four months later, Shenzhen was designated a municipality. In August 1980, the city
was granted Special Economic Zone (SEZ) status. While economic development for the rest of the country
continued to be tightly reined in by the government, Shenzhen, Zhuhai, and Shantou were granted the
autonomy to pursue market-oriented policies.
Professor Boon-Siong Neo, Senior Research Scientist Dolly Leow, Senior Research Fellow Wee-Kiat Lim and Coco
Wang prepared this case based on published sources. This case is intended for class discussion and learning, and not
intended as source research material, or as illustration of effective or ineffective management.
COPYRIGHT © 2018 Nanyang Technological University, Singapore. All rights reserved. No part of this publication may
be copied, stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written
consent of Nanyang Technological University.
The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue,
Singapore 639798. Phone: +65-6790-4864/6552, E-mail: asiacasecentre@ntu.edu.sg
This document is authorized for use only by Ping Sum Sammy Ng in MBA 661, Summer 2022 taught by CHEN LIU, Trinity Western University from Jun 2022 to Dec 2022.
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ABCC-2018-021
The year 2018 marks the 40th anniversary of China's reform, which brought on rapid economic
development in Shenzhen and other parts of China. How did Shenzhen evolve from its humble roots as a
little market town into a dynamic and innovative city? What made it so attractive to aspiring entrepreneurs?
What were the threats that it faced in its journey?
BACKGROUND
Shenzhen followed an export-led model that minimised economic restrictions and gave companies
preferential tax rates. It rapidly established itself as the “Factory of the World” by the early 90s. It particularly
flourished in the production of electronic and electrical goods as well as components, watches and clocks,
toys, garments and textiles, and plastic products. It was a successful experiment in bringing central planning
together with capitalism and market forces.
Today, Shenzhen has evolved further into China’s “Silicon Valley of Hardware” and a technology and
innovation powerhouse. The Chinese Corporate Innovation Report, 1 presented by HSBC China in
partnership with Yicai Media Group and Zhejiang University, found that companies based in Shenzhen
were the most competitive in terms of their “innovative power” (see Exhibit 1).2 In 2017, Clarivate Analytics
included 27 Guangdong-based enterprises in their ranking of China’s top 100 innovators; of these, 16 were
based in Shenzhen. 3 BYD, Coolpad Group, Huawei Technologies, TCL, Tencent, and ZTE are a few
companies that have been given special mention by the global research company.
SHENZHEN SPECIAL ECONOMIC ZONE: 1980 TO 1992 (see Exhibit 19)
Strategy, Structure, and Rivalry
“[The Party] has no money so we will give you a policy that allows you to charge ahead and cut
through your own difficult road.”4
Deng Xiaoping, November 1977

in a motivational speech to Guangdong leaders during his visit
Deng Xiaoping’s political resolve and active advocacy nationwide led to sweeping reforms in China’s
economy. In the 1980s, reforms pertaining to the price control system, labour contract system, cadre and
personnel system, wage system, land use rights, and housing were initiated (see Exhibit 2).
Deng reformed the hukou 5 household-responsibility system to improve each household’s income and
agricultural output. After a household fulfilled the government’s required agricultural output quota, it was
allowed to sell the remaining surplus in the private market. Agricultural production increased 25% between
1975 and 1985, setting a precedent for liberalising other parts of the economy. 6 In October 1984, a dual
1
HSBC China. (2017). Chinese corporate innovation report 2017. Retrieved from http://www.business.hsbc.com.cn/-
/media/library/markets-selective/china/pdfs/chinese-corporate-innovation-report-2017-cn.pdf
2
“Innovative power” refers to the amount a company spends on R&D, its innovative efficiency (how well the company’s R&D
investment translates into sales and how novel its business models are), and the number of patents filed.
3
Clarivate Analytics. (2017, November 7). China’s 100 most innovative companies in 2017. Retrieved from
https://clarivate.com/blog/news/china-accounts-six-ten-patents-published-world-wide-innovation-shifts-electronics-hi-tech-
industry-automotive-domestic-appliances-electric-power-generation-innovation-qu/
4
How Guangdong gave birth to reforms and opening-up. (2014, August 20). China Daily. Retrieved from
http://www.chinadaily.com.cn/china/2014-08/20/content_18455710.htm
5
Hukou is a system of household registration in China. A household registration record officially identifies a person as a resident of
an area, and includes identifying information such as name, parents, spouse, and date of birth. The system descends in part from
ancient Chinese household registration systems. Source: Miller, T. (2012). China's urban billion: The story behind the biggest
migration in human history. London: Zed Books.
6
Hunt, M. H. (2016). The world transformed: 1945 to the present. New York: Oxford University Press.
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ABCC-2018-021
price system was introduced, in which an official price coexisted with a market price that emerged in non-
official markets. 7 In the state sector, wage reforms saw the introduction of two salary components for
workers: a take-home monetary wage and a non-monetary wage comprising various welfare-related goods
provided by state-owned enterprises (SOEs).8
The country was opened to foreign investment and private businesses were allowed to operate. Enterprises
enjoyed preferential tax policies (such as lower tax rates, tax holidays, duty-free imports, and exemption
from export taxes) and easier repatriation of capital investments and corporate profits. With fiscal reforms
in the form of profit tax substituting for profit remittance in 1980, enterprises had more incentive to produce
and sell goods and services.9
Each SEZ was relatively free of bureaucratic regulations and interventions. Under this decentralisation of
state control, local provincial leaders experimented with ways to increase economic growth and privatise
the state sector. Government administration was also drastically simplified to make the business
environment more conducive for commerce. Even SOEs were reformed: an industrial-responsibility system
that was similar to the household-responsibility system was set up in the 1980s to promote the development
of SOEs by allowing individuals or groups to take up contracts to manage the enterprises.
Thousands of Hong Kong manufacturers shifted their operations up north to Shenzhen, forming the first
wave of enterprises that set Shenzhen on the path to being a production and manufacturing hub. As
observed by the Hong Kong government in its 1991 budget debate:
“What we see is the Government’s high land price policy and unreasonable labour measures which
have made it impossible for many factories of small and medium size to continue production in Hong
Kong, thereby forcing the factory operators to relocate their factories to Shenzhen and Dongguan
for reprocessing of products… the substantial relocation of manufacturing activities across the
border was related in no small part to the strong push for further opening up of the Mainland
sometime after Mr Deng Xiaoping’s visit to Guangdong…”10
By the late 1980s, high-tech multinational corporations (MNCs) were attracted to Shenzhen’s favourable
business environment. These included Huawei Technologies (in 1987) and Foxconn (in 1988), which made
components for Dell, HP, and Apple. By end 1985, a total of 4,696 contracts had been signed with foreign
businesses; Shenzhen saw US$1.384 billion in foreign capital inflow and 929 foreign-funded enterprises
founded. Competing head-to-head with these MNCs were local firms which had emerged under the same
favourable business conditions. These included ZTE, China's largest listed telecoms equipment company,
which was founded in Shenzhen in 1985, and Mindray, one of the leading global providers of medical
devices and solutions, which was founded in 1991 and headquartered in Shenzhen. 11
Demand Conditions
If a product says “Made in China”, chances are that the product, or parts of it, came from the Pearl
River Delta.12
Shenzhen exported competitively-priced products, including many OEM items, for global markets. Main
categories of export products included micro-computers, colour TV sets, electronic units, cameras, electric
7
Li, K. (2001). The two decades of Chinese economic reform compared. China & World Economy. Retrieved from
http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN002826.pdf
8
ibid.
9
ibid.
10
Hong Kong Legislative Council Secretariat. (N.D.). Relocation of the manufacturing sector outside Hong Kong in the 1980s and the
early 1990s. Retrieved from http://www.legco.gov.hk/yr98-99/english/sec/library/98901.pdf
11
Mindray. (N.D.). Profile. Retrieved from http://www.mindray.com/en/about.html
12
Skidmore, Owings & Merrill. (2016, October 27). Lessons from the world’s largest megacity. Retrieved from
https://medium.com/@SOM/lessons-from-the-worlds-largest-megacity-9d36d66eb4f9
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fans, telephone sets, watches, bicycles, garments, fabric, and plastic products such as toys. 13 In its first five
years as a SEZ, Shenzhen’s industrial output grew at an annual average rate of 91% (see Exhibit 3). By
the end of 1985, Shenzhen had a gross industrial output value of RMB 3.188 billion, of which exports
accounted for RMB 860.3 million (or 32.25% of the total). Exhibit 4 shows the overall export value for
Shenzhen in USD from 1980 to 1992. Between 1981 and 1985, the annual average growth rate of exports
was a massive 118.8%. Major export trade partners included Hong Kong, Singapore, Japan, the United
Kingdom, Germany, Italy, the United States, and Canada.14
Shenzhen also gained infamy as the “Capital of Shanzhai”,15 as many of its factories were making clever
imitations and copies of simple products such as electrical appliances, apparel, watches, and toys. 16 The
process of creating shanzhai goods involved reverse engineering and rapid duplication of products at low
cost and reasonable quality.
Factor Conditions
Upon being designated as a SEZ in 1980, Shenzhen worked quickly to attract investments and manpower,
establish industrial zones, and develop the necessary infrastructure to support logistics and businesses.
This was done with the aim of developing an export-oriented economy. An ecosystem surrounding this
industrial framework also emerged quickly, particularly for the electronics industry.
The Shekou Industrial Zone was the first industrial zone in Shenzhen, and the first in China to open up to
the world. One slogan – the first of many to follow – coined by the people of Shekou was “Time is Money,
Efficiency is Life”. It inspired Shenzhen pioneers to work hard to demonstrate the possibility of building a
thriving and promising city to the rest of the nation.
During his second tour of Guangdong in 1992, Deng Xiaoping was taken to the revolving restaurant at the
top of the International Trade Building, which was constructed at the rate of one storey every three days;
that breakneck pace of construction was maintained for 53 storeys. 17 This resonated with a term that Deng
coined earlier to describe the construction of Shenzhen University, “Shenzhen speed”. The students of
Shenzhen University had designed and built their own campus, in what Deng proudly felt was a
demonstration of the SEZ’s patriotism and national commitment to succeed.
In its early days, the city thrived in part due to its proximity to Hong Kong, a global financial hub that offered
easy availability of funding and foreign capital. It was also supported by the best seaports in the world in
Hong Kong and Guangzhou, which gave it an edge in logistics and exporting.
The Shenzhen Stock Exchange was established in 1990. To date, the Shenzhen and Shanghai Stock
Exchanges are the only two stock exchanges in the Chinese mainland. The opening of the Shenzhen
Bao’an International Airport in 1991 marked the birth of the city’s modern network of integrated sea, air,
and land transportation infrastructure.
13
Shenzhen Municipal Bureau of Statistics. (2017). Shenzhen statistical yearbook 2017. Beijing: China Statistics Press.
14
Guangdong Statistics Bureau. (N.D.). 广东统计信息网 (Guangdong Statistics Bureau information portal). Retrieved from
http://www.gdstats.gov.cn/
15
Shanzhai refers to the culture of producing knock-off consumer goods which look very similar to those created by other brands
(and usually trademarked), but produced at a lower price and quality.
16
There are multiple speculations on the how the term “shanzhai” (山寨) came about. One is that the term originated from Hong Kong
in the 1970s, where there were many cottage industries. Such home-based workshops were called “shanzhai”. In Cantonese, the
vernacular in Hong Kong and much of Guangzhou, “zhai” connoted seedy business outlets and cottages, rather than its formal,
more oft-used definition in standard Chinese (Mandarin) as a fortress.
17
O’Donnell, M. A. (2013, April 27). On Shenzhen speed. Retrieved from https://shenzhennoted.com/2013/04/27/on-shenzhen-
speed/
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In 1980, Shenzhen’s registered population was 320,000. 18 The new rules implemented in its first phase of
economic reform allowed some freedom of movement for people under China’s hukou registration system.
This resulted in graduates and other migrants from all over China flocking into Shenzhen, enhancing its
talent pool. By 1992, the migrant population in Shenzhen was 1.9 million, while the population of registered
Shenzhen residents was 800,000. 19
Despite this, Shenzhen-based manufacturers grappled with labour shortages and high wages (see Exhibit
3) that came with the meteoric rise of its economy. In the first five years of Shenzhen’s development as a
SEZ, employment grew at an annual average growth rate of 17%, while yearly wages grew 20%.
Manufacturers quickly realised that it was less profitable to maintain small-scale factories, and that they
would have to either relocate to cheaper places or move up the value chain to survive. This realisation
paved the way for further strategic adjustments to the city’s economic development. In 1985, low-skill
manufacturing started to give way to more skill-intensive industries such as the emerging high-tech sector.20
In particular, local enterprises, which used to rely heavily on imported parts and know-how, started
leveraging on their experience accumulated in producing shanzhai goods to create their own products.
Related Supporting Industries
Following the approach taken by Japanese and Korean manufacturers in the past, about 90% of Chinese
home appliances enterprises made products under foreign brand names as OEM manufacturers,
particularly for home appliances such as microwave ovens, air-conditioners, and refrigerators.21,22 Under
China’s classification of industrial structure, secondary industries in Shenzhen employed close to 70% of
the labour force as at 1990,23 and light industries contributed 75% of the city’s gross output value. 24 There
were close to 20,000 registered enterprises, with three-quarters of them being domestically-funded. 25
Together, these workers and factories were responsible for manufacturing the bulk of products that were
“Made in China” and sold around the world.
It was also during this first phase of Shenzhen’s development that the original Huaqiangbei Market (see Box
1) was established in 1988.26 Nestled within an industrial park in the remote Futian subdistrict, the market was
located in an office building together with a number of electronics assembly factories.27 The other operators
in the building essentially served as an electronics component supply and support facility. As such, the market
offered a great variety of electronic components at very competitive prices.28
18
19
ibid.
20
O’Donnell, M. A., Wong, W., & Bach, W. (2017). Learning from Shenzhen. Chicago: The University of Chicago Press.
21
Chen, X. (2007, July). Is China the factory of the world?. Retrieved from
https://www.apu.ac.jp/rcaps/uploads/fckeditor/publications/workingPapers/RCAPS_Occasional_Paper_07-4.pdf
22
ibid.
23
Manufacturing is classified under “secondary industries”. Source: Shenzhen Municipal Bureau of Statistics. (2017). Shenzhen
statistical yearbook 2017. Beijing: China Statistics Press.
24
“Light industries” refers to the sectors that produce consumer goods. Source: ibid.
25
ibid.
26
Wu, Q. & Liu, Z. (2011, January). Analyzing the value chain of China’s knock-off handset industry. China Economist. Retrieved
from http://www.chinaeconomist.com/index.php/2016/07/22/analyzing-the-value-chains-of-chinas-knock-off-handset-industry1/
27
Chen, Q. (2018, February 11). Huaqiangbei: More than an electronics marketplace. Global Times. Retrieved from
http://www.globaltimes.cn/content/1089226.shtml
28
ibid.
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Box 1: Huaqiangbei (华强北) Market

Huaqiangbei Market, located in the subdistrict of Futian in Shenzhen, supports the city’s operations
as a major electronics manufacturing hub. Its sprawling electronics marketplaces have earned
Shenzhen the nickname of “China's Silicon Delta” and the “Silicon Valley of Hardware”. The area is
reported to be the largest electronics market in China and possibly one of the largest in the world.
The first market building was built in 1988. It was torn down and subsequently rebuilt in 1997 as part
of its expansion. Presently, there are over 20 shopping malls which collectively make up about 70
million square metres of commercial area in the market, generating annual sales of over RMB 20
billion and employing 130,000 people.
The main malls are:
SEG Electronic Market – a 10-floor building selling cables, tools, electronic parts, personal
computers, laptops, GPS devices, and other gadgets such as wearables fitness trackers and
smart watches;
Huaqiang Electronic World – this area comprises several multi-floor buildings selling electronic
parts (new and used), electronics repair services, tools, chips, LEDs, cables, and consumer
electronics;
Yuanwang Digital Mall – this mall features mobile cell phones, computers, gadgets, iPhone and
iPad cases, and drones and related accessories; and
Cyber Digital Mall – this is the go-to mall for cameras and brand name electronic gadgets.
Photos were taken by authors on site. Source: Shenzhen Shopper
DEEPENING MARKET REFORMS: 1992 TO 2006 (see Exhibit 20)
The first phase of China’s economic reform and opening up saw Shenzhen’s transformation from a little
market town to a modern industrialised city. Its development and adoption of a market economy drew no
lack of criticism. In 1992, Deng Xiaoping expressed his support for Shenzhen during his second visit to the
South:
“A planned economy is not just about socialism as there is also planning under capitalism; a
market economy is not just about capitalism as there are also markets under socialism.”29
Deng Xiaoping, January 1992, during his second visit to the South
29
How Guangdong gave birth to reforms and opening-up. (2014, August 20). China Daily. Retrieved from
http://www.chinadaily.com.cn/china/2014-08/20/content_18455710.htm
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In October 1992, the 14th Chinese Communist Party Congress officially reaffirmed China’s commitment to
deepen the same reforms and development programmes which had directed its economic policies since
1978,30 sending a clear signal to the world that China was open for business.
Further adjustments to macroeconomic policies were made to modernise market systems and the financial
sector, promote enterprise development, and advance the use of technology. For example, the 1995 Central
Bank Law introduced institutional and structural changes to the finance sector,31 allowing state-owned banks
to behave and compete like any commercial bank.32 The Shenzhen Capital Group was set up in August 1999
to drive enterprise development by providing venture funds and private equity.
Reforms were deepened in the wage and labour system, the price system, land rights, legal framework,
governmental administration, and the management of state-owned enterprises. SOEs restructured their
shareholding through limited liability, joint stock, or listed companies, 33 even as the state continued to pump
national resources into elite SOEs to develop them into flagship conglomerates. 34
From 1992 onwards, Shenzhen concentrated its efforts on the cultivation of the automobile and parts, fine
chemicals, and high-end equipment manufacturing industries. By 1995, its large- and medium-sized
enterprises spanned more than 30 industrial clusters and churned out an industrial output value of RMB
45.9 billion. The city’s modern manufacturing factories produced thousands of products such as home
appliances, textiles and garments, electronics, and optical-mechanical-electronic integrated components.
As China developed and its domestic industrial structure changed, Shenzhen also transitioned into its next
phase; this was characterised by the birth of many high-tech and knowledge-intensive enterprises in the
city, fuelling its technological development and industrial upgrading. BYD was established in 1995,
specialising in IT, automobiles, and new energy. The firm is currently the largest supplier of rechargeable
batteries in the world and has the largest market share for nickel-cadmium batteries, handset Li-ion
batteries, cellphone chargers, and keypads worldwide. 35 Tencent, the Chinese web giant which offers
everything from online and mobile games to search, software development, e-commerce, and instant
messaging, was founded in Shenzhen in 1993. In addition, large-scale foreign investments continued to
flow into Shenzhen (see Exhibit 5) from international conglomerates like IBM, Philips, Compaq, Olympus,
Lucent, and Thomson.36
Demand Conditions
China experienced rapid economic growth averaging 10% a year from 1980 to 1985.37 During this phase,
its per capita income grew from RMB 464 to RMB 5,074 (see Exhibit 6), while average national wages
increased from RMB 762 to RMB 5,500. These twin factors lifted its people out of poverty, resulting in a 10-
fold increase in household consumption expenditure, from RMB 238 to RMB 2,330 during that period.
China’s manufacturing industries started shifting inwards to satisfy domestic demand from its booming
30
Full text of Jiang Zemin’s report at 14th Party Congress. (2011, March 29). Beijing Review. Retrieved from
http://www.bjreview.com.cn/document/txt/2011-03/29/content_363504_3.htm
31
Li, K. (2001). The two decades of Chinese economic reform compared. China & World Economy. Retrieved from
http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN002826.pdf
32
ibid.
33
ibid.
34
ibid.
35
He, H. (2015, April 20). Top 5 tech giants who shape Shenzhen, 'China's Silicon Valley'. South China Morning Post. Retrieved from
http://www.scmp.com/lifestyle/technology/enterprises/article/1765430/top-5-tech-giants-who-shape-shenzhen-chinas-silicon
36
Hong Kong Trade Development Council. (2015, March 24). Shenzhen High-tech Industrial Development Zone. Retrieved from
http://hkmb.hktdc.com/en/1X09WO9R/hktdc-research/Shenzhen-High-tech-Industrial-Development-Zone
37
World Bank. (N.D.). The World Bank in China. Retrieved from http://www.worldbank.org/en/country/china/overview
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population of 1.2 billion. In 1995, the demand for consumer products amounted to RMB 2.06 trillion, 38 rising
11.65% to RMB 2.3 trillion by 2000.39
China became a member of the World Trade Organization (WTO) on 11 December 2001. 40 With its entry,
China was officially integrated with the rest of the global economy, enabling it to attract more foreign
investments and export more goods and services. More importantly, its WTO status meant that reforms in
China’s laws, trade policies, and business regulations had to be kept up, ensuring that the process of
change and development did not stop.
Factor Conditions
The Shenzhen High-Tech Industrial Development Zone (HIDZ), which was set up in 1996 in the Nanshan
District, covered an area of 11.5 square kilometres and housed major industries such as electronics,
information technology (IT), biology, optical-electrical-mechanical integrated components, pharmaceuticals,
and other high-tech industries.41 Huawei, ZTE, Skyworth, IBM, Philips, and Compaq were headquartered
in the HIDZ, 42 and the park was a mere 30 minutes away from the city centre, Shenzhen Bao'an
International Airport, and Shenzhen Port. 43 In 2012, the park realised a gross industrial output of RMB 486.5
billion, while its value-added industrial output hit RMB 131.5 billion in 2012, accounting for 26% of
Shenzhen's total industrial output.44
The introduction and emergence of more MNCs and local enterprises have added pressure on the
employment situation in Shenzhen. Talent has continued to flow into the city, drawn by the international
reputation of tech heavyweights and MNCs like Huawei and Apple supplier Foxconn as well as the
innovativeness of local companies such as Tencent and ZTE. Over a period of 15 years (from 1991 to
2005), the average growth rate for year-end total employment in Shenzhen stayed high (close to 12%),
while average yearly wages climbed by 15% (see Exhibit 3).
The number of Shenzhen-registered enterprises grew from 839 in 1980 to 20,000 in 1990 45 and more than
100,000 in 2000.46 The number of private enterprises grew from zero to 43,000 over the same period.
Equity and debt financing was sorely needed to support these companies, especially as government funds
preferred infrastructure investments and lower-risk industries. 47 As such, Shenzhen Capital Group Co.
(SCGC) was founded by the Shenzhen municipal government in August 1999 as a professional domestic
venture capital (VC) firm.48
Since its inception, SCGC had been steadily developing the private sector and stimulating the city’s
economic growth with investments in emerging industries and companies. The VC primarily invested in
SMEs, innovative high-tech enterprises, and enterprises in emerging industries at different growth stages:
whether they were newly established, experiencing rapid growth, or transforming and reorganising
themselves into mature outfits. 49 Its main industries of interest included IT, internet, new media,
biopharmaceuticals, new energy, environmental protection, chemical engineering, new materials, high-end
38
National Bureau of Statistics. (N.D.). National Bureau of Statistics of China. Retrieved from http://www.stats.gov.cn/english/
39
ibid.
40
World Trade Organization. (N.D.). China and the WTO. Retrieved from https://www.wto.org/english/thewto_e/countries_e/china_e.htm
41
Hong Kong Trade Development Council. (2015, March 24). Shenzhen High-tech Industrial Zone. Retrieved from
http://hkmb.hktdc.com/en/1X09WO9R/hktdc-research/Shenzhen-High-tech-Industrial-Development-Zone
42
ibid.
43
ibid.
44
ibid.
45
46
ibid.
47
Ahlstrom, D., Bruton, G. D., & Yeh, K. S. (2007, September). Venture capital in China: Past, present and future. Asia Pacific Journal
of Business, 24(3), pp. 247-268.
48
Shenzhen Capital Group Co. (N.D.). SCGC. Retrieved from http://www.szvc.com.cn/english/Home/index.shtml
49
ibid.
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equipment manufacturing, consumption goods, and so on. 50 These sectors were typically supported by
national policies.
By the end of March 2018, SCGC was the top VC in the country, based on the number of portfolio
companies and the number of listed portfolio companies: 859 portfolio companies, 138 of which had been
listed in 16 capital markets worldwide (see Exhibit 7), and investments totalling RMB 35.2 billion. 51
While manufacturing contributed substantially to the city’s Gross Domestic Product (GDP) (see Exhibit 8),
there was a shift towards high-end manufacturing industries, which included industrial clusters such as
consumer appliances, textiles and garments, IT and optical–mechanical-electronic integrated components. In
many factories, this meant robots and automation replaced human labour (see Exhibit 9).
In the mid-1990s, a time where personal computers became popular around the world, the businesses at
Huaqiangbei Market added consumer electronics to their original component offerings. 52 In 1997, the
original Huaqiangbei Market building was torn down and rebuilt for expansion. Factories that were based
in that area in the first phase moved out to create space for retail shops.53 The area remained China’s top
electronics street, hawking anything in any size and shape, from circuit boards, LEDs, bolts, screws,
batteries, screens, memory cards, chips, to hard drives that went into every conceivable electronic gadget.
Huaqiangbei Market was in turn supported by an ecosystem of factories that used the retail spaces for
sales and business development.
In addition, migrants from other parts of China were drawn to Huaqiangbei Market, resulting in a great influx
of entrepreneurs and new businesses.54 Meanwhile, the shanzhai spirit prevailed, and duplication as well
as reverse engineering capabilities were “upgraded” to blatant copying of high-end equipment and
innovative consumer products such as mobile phones and personal laptops. This trend was particularly
prevalent at Huaqiangbei Market.
SHENZHEN AS AN INNOVATION HUB: 2006 TO TODAY (see Exhibit 21)
Around the start of the 21st century, countries around the world experienced a technological revolution with
the rise of high-tech industries that disrupted many countries’ traditional production means and industrial
structures. Similarly, for China and Shenzhen, the ability to ride this wave of new technology was key to its
future economic prosperity. Amongst the country’s numerous initiatives crafted under its 11th five-year plan
(for 2006 to 2010), the acceleration of the development of the high-tech industry was top on the list.55
In December 2012, after Xi Jinping took over the reins of the Chinese Communist Party, he made Shenzhen
the first stop of his tour in Guangdong, a move that was evocative of Deng Xiaoping’s iconic visits in 1977
and 1992.56 His strong commitment to developing the area was further reinforced in March 2016, when
President Xi put forth the country’s 13th five-year plan (for 2016 to 2020): innovation would be the primary
50
Shenzhen Capital Group Co. (N.D.). SCGC. Retrieved from http://www.szvc.com.cn/english/Home/index.shtml
51
ibid.
52
53
ibid.
54
ibid.
55
China's National People's Congress. (2006). China: 11th five-year plan (2006-2010) for economic and social development.
Retrieved from https://policy.asiapacificenergy.org/node/115
56
Kor, K. B. (2012, December 8). Xi Jinping: Chinese leader makes Shenzhen first stop in south tour. The Straits Times. Retrieved
from http://www.straitstimes.com/asia/xi-jinping-chinese-leader-makes-shenzhen-first-stop-in-south-tour
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driver of China’s economic development, and the central government would continue to promote Shenzhen
as a city of industry and innovation.
“We will support the Pearl River Delta as it leads [our national efforts in] opening up, innovation,
transformation and upgrading, and accelerate[s] the development of science and technology
centres and industrial innovation centres in Shenzhen.”57
National reforms were developed to support and promote high-tech industries in the country. These reforms
were a testament to China’s compliance with WTO rules that mandated further reform and restructuring.
To attract foreign capital, the central government vowed to promote investment opportunities extensively
and to improve the quality of service for foreign investors. 58 To create a favourable environment for new-
and high-tech industries, it accelerated the construction of High-Tech Industrial Parks as well as startup
and incubator spaces.59
Shenzhen’s economic blueprint aimed to develop six strategic rising industries: bioindustry, internet, new
energy, new materials, cultural innovation, and next generation information technology.60 The city continued
to introduce and attract other heavyweight innovative enterprises. BGI, founded in 1999 in Beijing with the
vision of using genomics to benefit the human race and at present the world’s largest genomics organisation,
moved its headquarters to Shenzhen in 2007, joining the ranks of high-tech enterprises such as ZTE, BYD,
and Tencent. Founded in 2006, Da-Jiang Innovations (DJI) produces a range of drones and drone-related
products for amateur and professional use, including unmanned aerial vehicles (drones), flying platforms,
flight controllers for multi-rotor aerial vehicles, helicopter accessories, aerial and handheld gimbals, and
ground stations. Established in 2012, Royole develops novel flexible display technologies and VR headsets,
and has a production facility in Shenzhen.
Today, high-tech industries remain the key economic driving pillar for Shenzhen, accounting for 60% of its
total industrial output (see Exhibit 8).61 Exhibit 10A shows Shenzhen’s impressive intellectual property
output statistics over the last 15 years – a testimony to the city’s innovativeness. Shenzhen alone accounts
for close to 20% of all patent applications in China (see Exhibit 10B). Its enterprises also file more
international patents than those in France or Britain (see Exhibit 10C).62 Estimates put Shenzhen at nine
months ahead of anywhere in the world or any hardware company in terms of developing innovative new
products.63 Exhibit 10D shows 10 enterprises in China with the most international patent applications in
2016 – six of which are based in Shenzhen.
Demand Conditions
China recorded a population of 1.3 billion in 2015 64 and 430 million households in 2014. 65 Average wages
and household consumption expenditure have continued to increase with the country’s GDP since it opened
up to the world (see Exhibit 6). With a rising per capita disposable income and a growing middle class,
consumer demand has boomed, particularly for electronic products (see Exhibit 11). However, the increase
57
China's National People's Congress. (2016). The 13th five-year plan for economic and social development of the People’s Republic
of China. Retrieved from http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf.
58
China's National People's Congress. (2006). China: 11th five-year plan (2006-2010) for economic and social development.
Retrieved from https://policy.asiapacificenergy.org/node/115
59
ibid.
60
He, H. (2014, January 23). Hi-tech industry helps Shenzhen beat GDP goal. South China Morning Post. Retrieved from
http://www.scmp.com/business/economy/article/1411321/hi-tech-industry-helps-shenzhen-beat-gdp-goal
61
O’Donnell, M. A., Wong, W., & Bach, W. (2017). Learning from Shenzhen. Chicago: The University of Chicago Press.
62
Shenzhen is a hothouse of innovation. (2017, April 8). The Economist. Retrieved from https://www.economist.com/news/special-
report/21720076-copycats-are-out-innovators-are-shenzhen-hothouse-innovation
63
Lowe, A. (2017, September 17). In Shenzhen, tech entrepreneurs chase the Chinese dream. Channel News Asia. Retrieved from
https://www.channelnewsasia.com/news/asiapacific/in-shenzhen-tech-entrepreneurs-chase-the-chinese-dream-9171776
64
National Bureau of Statistics. (N.D.). National Bureau of Statistics of China. Retrieved from http://www.stats.gov.cn/english/
65
China ranks first in the world for number of households with 430 million households. (2014, May 14). China News. Retrieved from
http://www.chinanews.com/gn/2014/05-14/6171563.shtml
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in affluence has also led Chinese consumers to become more demanding, expecting more sophisticated
products that match those of global brands while costing less.
China’s huge population size has also supported innovations in two ways: idea generation, and the rapid
testing and commercialisation of these ideas. A large population has given innovators a seemingly endless
supply of problems to solve and needs to cater to. Rapid innovation calls for a spiralling cycle of continuous
development, testing, roll-out, improvements, and refinements. One cycle typically takes six months, but in
China, this may take only about six to eight weeks.
In Shenzhen, many innovations are fuelled by consumer-facing industries and the growth of internet access
and usage, due to the rise of smartphones, e-commerce, and online services. OnePlus, a two year old
Shenzhen-based smartphone startup, launched its first model in 2014 and sold 1.5 million sets. 66 By relying
on Shenzhen’s hardware and software ecosystems, coupled with an open-source environment, it was able
to build cheaper phones that matched the designs and features of leading global brands. Tencent’s WeChat,
a social media platform, added e-commerce features which allowed users to shop on the platform,
published an app that enabled on-the-go taxi booking, and, in 2013, started to support mobile payments.
Operating within Shenzhen’s hardware ecosystem, drone startup DJI became one of the largest
manufacturers of unmanned aerial vehicles in the world, making Shenzhen the world’s first drone capital
with a 70% market share of the global consumer drone market and more than 300 companies dedicated to
the business of unmanned aerial vehicles alone. 67
Factor Conditions
New as well as repurposed buildings in the Nanshan district in Shenzhen house countless incubators and
startups (see Exhibit 17C), with each building hanging large banners emblazoned with the slogan “Follow
Our Party, Start Your Business” (see Exhibit 12). Conveniently located within this concentration of startups
and incubators is a supportive ecosystem of government agencies, software companies, universities
offering MBA programmes, cafés, co-working spaces offering discussion and meeting venues, and other
related facilities and services. High-Tech Industrial Zones similar to the Shenzhen High-Tech Industrial
Development Zone were established in other areas such as Longhua Banxuegang, Baolong, Kuichong
Dapeng, and University City. 68 The Nanshan Robotics Industrial Park commenced operations in 2014. 69
To ensure a steady flow of talent, Shenzhen’s municipal government offered a series of initiatives and incentives
to attract skilled Chinese workers, entrepreneurs, and startups. Graduates (from universities, professional
schools, or polytechnics) who were registered as Shenzhen residents and started their business there would
receive various rebates and incentives, including discounted official rental, startup grants, and even special
grants of up to RMB 200,000 for specific emerging industries such as new materials, renewables, life sciences,
and next generation telecommunications.70,71 In fact, to commemorate China’s 30th anniversary of opening up,
two local slogans dominated the Shenzhen cityscape: “改革创新是深圳的根，深圳的魂”(“Born Through
Reform, Driven by Innovation”) and“鼓励创新，宽容失败”(“Encourage Innovation, Fear No Failure”).
66
McKinsey Global Institute. (2015, October). The China effect on global innovation. Retrieved from
https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Innovation/Gauging%20the%20strength%20of%20Chinese%2
0innovation/MGI%20China%20Effect_Full%20report_October_2015.ashx
67
68
Invest Shenzhen. (2014, August 11). High-tech industry zone. Retrieved from http://en.szinvest.gov.cn/pr/encyclopedia/hightech/
69
China Daily. (2016, October 26). Shenzhen Nanshan Robotics Industrial Park. Retrieved from
http://www.chinadaily.com.cn/regional/2016-10/26/content_27181113.htm
70
Shenzhen Municipal Commission of Human Resources and Social Security. (N.D.). 创业扶持 (Business support). Retrieved from
http://www.szhrss.gov.cn/ztfw/cjjy/cyfw/cybt/
71
Shenzhen Municipal Commission of Human Resources and Social Security. (2016, May 12). 深圳市人力资源和社会保障局深圳市
财政委员会关于印发《深圳市自主创业扶持补贴办法》的通知 (Notice of the Shenzhen Municipal Commission of Human
Resources and Social Security on printing and distributing the measures for supporting subsidies for self-employment in Shenzhen).
Retrieved from http://www.szhrss.gov.cn/ztfw/jycybt/jycyzcfg/201509/t20150930_3245052.htm
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Skilled and talented engineers, many of whom have undergone apprenticeships at Shenzhen’s OEM
factories or at Huaqiangbei Market (see Exhibit 13), populate the city. Established in 2014 with an office in
Shenzhen, SenseTime, China’s leading artificial intelligence company, employs 140 Ph.D. holders. In
addition, Shenzhen has more than 6,000 design companies that employ more than 100,000 people and
are involved in various design fields such as graphic design, industry design, interior and architectural
design, fashion design, toy design, jewellery design, crafts, and so on. 72
“The passion of people who had been restrained for many years under the planned economy
system exploded in this city.”73
Zhou Luming, Deputy Director General
Shenzhen Bureau of Science, Technology and Information
The city’s culture encourages its youth to innovate and be entrepreneurial. 74 Because of its reputation, a
constant stream of ambitious millennials and entrepreneurs continues to flow into the city, transforming it
into one of the world’s most youthful hubs of innovation and enterprise. 75 Close to 75% of the city’s
population is in the age group of 15-44 years.76 Local statistics also show that the average age of residents
in Shenzhen is 28.65 years, and people aged 20 to 29 make up 35.77% of the city’s population. 77 More
importantly, the culture, passion, and enthusiasm among these young talents are highly infectious. Many
MNCs – Apple, Microsoft, and Facebook, for instance – have opted to locate their offices in the city so as
to stay close to the latest trends as well as these “bright sparks”.
Since 2013, Shenzhen has spent over 4% of its annual GDP on R&D (see Exhibit 14A),78 with most of the
funds coming from private companies (see Exhibit 14B).79 Green Pine Capital, another Shenzhen-based
VC, was established in 2007 (see Box 2).Chinese internet giants Baidu, Alibaba, and Tencent (collectively
termed “BAT”) have also launched funds in recent years to serve the strategic development of various
enterprises; for example, Baidu invests primarily in AI-related tech while Tencent invests in media and
social network projects. According to data from the Shenzhen Chamber of Investment, the total amount of
investment from the top 100 Shenzhen VC funds in 2016 was RMB 58 billion, up 40% compared to 2015. 80
Shenzhen boasts four achievements among its enterprises during this third phase of growth:81
1. Over 90% of R&D centres in Shenzhen were located in enterprises
2. Over 90% of researchers in Shenzhen worked in enterprises
3. Over 90% in R&D funding in Shenzhen was from enterprises
4. Over 90% service-invention patents in Shenzhen came from enterprises
72
UNESCO Creative Cities Network. (N.D.). Shenzhen. Retrieved from https://en.unesco.org/creative-cities/shenzhen
73
Naturejobs.com. (2007, September 26). Spotlight on Shenzhen. Retrieved from
http://www.nature.com/naturejobs/science/articles/10.1038/nj0181
74
Jenna [@jl22] (2017, December 26). Shenzhen, China: where tech dreams come true. Hacker Noon. Retrieved from
https://hackernoon.com/shenzhen-china-where-tech-dreams-come-true-718cf13a6913
75
76
Coresight Research. (2017, June 18). Deep dive: Shenzhen — An international hub of hardware innovation. Retrieved from
https://www.fungglobalretailtech.com/research/deep-dive-shenzhen-international-hub-hardware-innovation/
77
China.org.cn. (N.D.). Shenzhen: Paradise for young people. Retrieved from http://www.china.org.cn/english/1548.htm
78
79
80
81
The Central People’s Government of the People’s Republic of China. (2006, March 19). 深圳落实科学发展观 “4 个 90%” 显自主创
新 3 大亮点 (Shenzhen realises “four 90% achievements” in scientific development, highlighting three learning points from pursuing
independent innovation). Retrieved from http://www.gov.cn/jrzg/2006-03/19/content_230821.htm
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Box 2: Green Pine Capital
Green Pine Capital Partners, a venture capital firm, was established in Shenzhen in 2007 and has operated
in the city ever since. In 2017, its war chest reached RMB 8 billion yuan (about US$1.3 billion) across 18
funds, investing in more than 240 projects nationwide.82 The company and its founders, Li Wei and Luo
Fei, consistently make it to Forbes’ rankings of the top VC firms and venture capitalists in China.
Green Pine Capital directs their investments toward high-growth innovative startups, particularly in the
internet, IT, life sciences, medical services, electronics, and optics sectors. 83 Judging by its investment
track record, it does not shy away from funding startups in angel (20%) and Series A rounds (65%), and
prefers startups that are building “killer” products and services that position them to be leaders in their field.
The veteran VC firm goes beyond studying the technical capabilities of the startups in which it invests. It also
aims to identify management teams that possess strong business acumen to succeed in China’s cutthroat
startup scene. Green Pine’s focus on teamwork cannot be overemphasised; founder Li Wei once remarked that
a leader could be a powerful lion, but still be vulnerable to a pack of hyenas. “In business competition today, the
advantage gained from teamwork is much higher than the advantage gained from technology. Technology is
only a primer and what ultimately determines success or failure is the team.”84
Over the years, Green Pine Capital achieved notable success. It backed 52 startups that exited in one way
or another, including 15 listed on the SME board of the Shenzhen Stock Exchange.85 One of their success
stories was BGI, a genetics sequencing startup established in 1999 that went public on the Shenzhen Stock
Exchange in 2017, at a listing price of RMB 13.64. Its share price was RMB 169.30 as of 4 April 2018.
Huaqiangbei Market has evolved over time from an electronics component marketplace to a consumer
electronics marketplace, and then to its present form: an ecosystem for electronics manufacturing that enables
rapid prototyping, scaling up of innovative products, and getting goods to market speedily.86 At Huaqiangbei
Market, one can not only acquire the necessary hardware for development, but also technology expertise:
some vendors are able to support the entire value chain from conceptualisation, design, software development,
prototype development, and testing to production. It is every maker’s dream one-stop shop.
Talent attraction is key to the success of Huaqiangbei Market. Those who came to Shenzhen earlier and
cut their teeth on technology and production during the prior eras of shanzhai would have already honed
their capabilities in reverse engineering and rapid duplication, and be primed to do well in design,
prototyping, and product development.
“...shanzhai is a powerful force behind Shenzhen’s design success. Through constantly tweaking
and testing knockoffs, the industry ended up inventing entirely new products…”87
82
Peng, D. (2017, December 11). 南派 PE 大佬：低调的松禾资本与 19 个 IPO 的项目 (Southern private equity: Underdog VC Green
Pine Capital and its 19 IPO projects). Ex-Shares. Retrieved from https://mp.weixin.qq.com/s/n7IZVwKk7hRNZS04plXBMA
83
ibid.
84
Liu, Q. (2016, September 27). 松禾资本厉伟：当家 9 年掌管 90 亿，一位南派 PE 大佬背后的“流金岁月” (Li Wei of Green Pine
Capital: Controlling 9 billion yuan in 9 years, the story behind a leader in Southern private equity). PE Daily. Retrieved from
http://news.pedaily.cn/201609/20160927403476_all.shtml
85
Peng, D. (2017, December 11). 南派 PE 大佬：低调的松禾资本与 19 个 IPO 的项目 (Southern private equity: Underdog VC
Green Pine Capital and its 19 IPO projects). Ex-Shares. Retrieved from https://mp.weixin.qq.com/s/n7IZVwKk7hRNZS04plXBMA
86
87
Cormier, B. (2017, March 22). Shenzhen moves beyond its manufacturing past, embraces design future. Metropolis. Retrieved
from https://www.metropolismag.com/cities/shenzhen-moves-beyond-manufacturing-embraces-design/
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At Huaqiangbei Market, there are more than 3,000 enterprises that are able to offer design services,
software, and hardware for mobile phones alone.88 Adopting a “shop in front, factory at the back” (前店后
厂) retail concept, nearby Dongguan provides much of the manufacturing and factory assembly capacity
needed for enterprises in Shenzhen. Today, Dongguan’s economy is driven by export-oriented
manufacturing, much like Shenzhen in its early days (see Exhibits 15A and 15B).
Shenzhen makers use open source hardware and software, and share information online related to their
inventions. Open source aligns with the deeply entrenched Chinese culture of shanzhai. When others are
free to leverage and ride on the information to further improve their products and innovations, the pace of
technology advancement and adoption is accelerated. This open sharing mindset is what sets Shenzhen
apart from other technology hubs. In the West, innovations are often constrained and delayed by legal
issues due to an obsession with protecting intellectual property. In Shenzhen, the going philosophy is that
“it is not stealing ideas; it is sharing ideas”. 89 David Li of Shenzhen’s Open Innovative Lab has this to say
about the “Maker Movement” in Shenzhen:
“…the copycats have since morphed into a powerful ecosystem of collaborative, fast-learning
suppliers and factories. Anybody can come to Shenzhen with an idea and get it prototyped, tested,
made and put on the market at a decent price. Silicon Valley is obsessed with rich-world problems
but Shenzhen’s open innovators work on affordable solutions for the masses on everything from
healthcare to pollution to banking.”90
SHENZHEN: MOVING FORWARD (see Exhibit 21)
“In only thirty years, Shenzhen has exploded into a technological nirvana created by the perfect
confluence of supply and innovation that the city has built itself around.”91
Modern day Shenzhen is arguably the most successful city in the Pearl River Delta (PRD) experiment (see
Exhibit 16A). It consistently records the highest GDP per capita in the last 20 years, signalling growth, a
productive workforce, and a high standard of living. The city is also the leading SEZ of the three created
within Guangdong by Deng Xiaoping (see Exhibit 16B). Will it be able to continue travelling along this
trajectory? What challenges might it face in the foreseeable future?
Ever since the new generation of leaders headed by President Xi Jinping rose to power in 2012, China’s
economic development has been enriched with new strategies and ideas. In addition to Shenzhen, other
innovation cluster cities have been created – most notably Beijing and Shanghai. Each plays a different
role in the country; each also competes with one another for resources such as talent and VC funds.
While Shenzhen is China’s mecca of hardware technology and internet startups, Beijing is the country’s
centre for software and Shanghai is the life sciences hub. Beijing is home to tech firms like Xiaomi and
Baidu, and VCs such as IDG Capital and Sequoia Capital. The world’s top three global pharmaceutical
companies, Johnson & Johnson, Roche, and Pfizer, are based in Shanghai, where one can find the largest
88
Wu, Q. & Liu, Z. (2011, January). Analyzing the value chain of China’s knock-off handset industry. China Economist. Retrieved
from http://www.chinaeconomist.com/index.php/2016/07/22/analyzing-the-value-chains-of-chinas-knock-off-handset-industry1/
89
Jenna [@jl22] (2017, December 26). Shenzhen, China: where tech dreams come true. Hacker Noon. Retrieved from
https://hackernoon.com/shenzhen-china-where-tech-dreams-come-true-718cf13a6913
90
91
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concentration of life sciences firms in China. 92 Exhibit 17A shows the per capita GDP growth rate for the
three innovation clusters in recent years. Despite the three cities’ diverse specialisations, the adverse
consequences of rising competition are starting to show, with Shenzhen’s per capita GDP growth rate going
on the decline while that of the other two cities continues to rise.
Certain industries appear to be “protected” in China by being granted a unique favourable operating
environment. This is typically effected via government legislation, with the twin aims of maintaining social
order and safeguarding national security. For example, top global internet players are absent in China,
arising from an extensive system of censorship created by the central government which blocks thousands
of websites and popular platforms like Facebook, Google, Instagram, and YouTube. Meanwhile, Chinese
versions of similar platforms have been allowed to propagate within the country, namely WeChat and Baidu,
which have an entire captive local market to cater to.
This “advantage” of serving only the China economy, however, works against companies when they attempt
to expand beyond the local market. Having met the needs of the Chinese market for the past 30 years,
especially in the consumer arena (i.e. home appliances, TVs, mobile phones, personal computers, and
online services), these companies may not have the necessary capabilities to gain significant market share
and succeed on the global platform. For example, in 2015, Chinese automobile manufacturers had a mere
20% market share in the global car market.93 State-owned SAIC, an automotive design and manufacturing
company, was only able to manage a lowly 7th rank worldwide in 2016 based on sales. 94
Demand Conditions
China’s population is expected to peak at 1.4 billion in 2025. 95 Its growing population and their increasingly
sophisticated needs, driven by greater affluence and higher educational levels, inevitably add pressure on
enterprises to innovate at a faster rate. The first wave of manufactured goods may have been “good
enough”, but to thrive in the next stage, companies will need to offer better design and functionality in their
products, while ensuring affordability and price competitiveness.
While Shenzhen’s copycat products have always been frowned upon by Western countries, the shanzhai
experience of Chinese manufacturers in their home market could potentially give the latter an edge over
global players, particularly in meeting the needs of low-income and middle-income consumers (especially
in developing countries) with rapidly-designed low-cost innovations.
Factor Conditions
While makers in Shenzhen gain from operating within an efficient ecosystem, innovators in Beijing benefit
from being in the capital – close to government ministries. In a survey conducted by Renmin University of
China in 2016, Beijing was voted China’s best environment for startups (see Exhibit 17C). 96 Beijing’s
Zhongguancun Science Park (also known as “China’s Silicon Valley”) is also close to two top tertiary
educational institutions, namely Peking University and Tsinghua University. As such, it comes as no
92
Based on revenue. Source: Statista. (N.D.). 2018 ranking of the global top 10 biotech and pharmaceutical companies based on
revenue (in billion U.S. dollars). Refer to: https://www.statista.com/statistics/272717/top-global-biotech-and-pharmaceutical-
companies-based-on-revenue/
93
Statista. (N.D.). China’s share of the global car market in 2010 and 2011 with a forecast up to 2025. Retrieved from
https://www.statista.com/statistics/225123/chinas-share-of-the-global-car-market/
94
Statista. (N.D.). Leading auto and truck manufacturers worldwide in 2016 based on sales. Retrieved from
https://www.statista.com/statistics/269034/leading-car-companies-worldwide-based-on-revenue/
95
Population of the World. (N.D.). Projections of population growth of China (2025). Retrieved from
https://www.livepopulation.com/population-projections/china-2025.html
96
Chen, C. & Abkowitz, A. (2016, March 4). Beijing has China’s best environment for startups, new survey says. The Wall Street
Journal. Retrieved from https://blogs.wsj.com/chinarealtime/2016/03/04/beijing-has-best-environment-for-startups-new-survey-
says/
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surprise that Beijing companies secured the largest investments from Chinese angel investors in 2015 (see
Exhibit 18).97
Shanghai is also well supported in terms of having institutes of higher education and a skilled population
(see Exhibit 17B). As the financial hub of China, Shanghai is an attractive choice for startups, especially
those in the field of financial technology (also known as “fintech”). As one of the most international and
cosmopolitan cities in China, it is a natural magnet for startups wishing to collaborate with MNCs. 98
To compete with these Tier 1 cities, Shenzhen needs to ramp up its capacity to innovate and create original
products and services, provide more support for scientific research and development, and improve its
institutes of higher learning to provide the necessary talent (see Exhibit 17B).
In 2017, VCs and the local government became more cautious about supporting new projects. 99 Startups
tend to raise funds continuously within a short funding period of six to 12 months. 100 In addition, most
Chinese VC funds prefer to back Chinese entrepreneurs as they believe one needs to be from China to
understand the local market.101 That being said, China’s VC investment in 2017 reached US$40 billion, a
15% increase from the year before, according to global audit and consulting firm KPMG. In fact, five of the
global top 10 VC investments in Q4 2017 took place in China. 102 In March 2018, Shenzhen’s municipal
government launched an angel seed fund with several partners and an initial sum of RMB 5 billion (about
US$793 million), in a bid to catalyse development in strategic emerging industries and transform its
manufacturing base.103
According to a report by the World Bank, East Asia experienced significant urban expansion from 2000 to
2010.104 More than 80% of this urban expansion took place in China, whose urban areas make up two-
thirds of total urban land in the region. In fact, the Pearl River Delta (PRD) region has already overtaken
Tokyo as the largest metropolitan area in East Asia. As with rapid urbanisation and economic progress
seen elsewhere, the PRD has grappled with issues of labour mobility and job scarcity, affordable housing,
public transportation, access to health and educational services, and environmental pollution which affects
quality of life.
As Shenzhen becomes more integrated with Hong Kong, Macao, and several other Guangdong cities as
part of China’s PRD Greater Bay Area initiative, the city is poised to maintain its status as an innovation
powerhouse for a long time to come.105 The population of Shenzhen is expected to grow to 12.67 million in
2030. 106 Policies created to proactively support the city’s growth with the provision of land, housing,
infrastructure, and services are important “soft” factors that make Shenzhen attractive to top talent.
Reforming China’s unique hukou registration system would also improve citizen mobility.
97
Lin, J. (2015, September 12). Zhejiang overtook Shenzhen; New third board facilitated booming angel investment exits. PE Daily.
Retrieved from http://en.pedaily.cn/Item.aspx?id=220667
98
Where should you base your startup in China? Five expat entrepreneurs weigh in. (2015, May 12). Technode. Retrieved from
https://technode.com/2015/05/12/where-should-you-base-your-startup-in-china-five-expat-entrepreneurs-weigh-in/
99
100
ibid.
101
ibid.
102
Xie, Y. (2018, January 19). Venture capital investment in AI doubled to US$12 billion in 2017. South China Morning Post. Retrieved
from http://www.scmp.com/business/banking-finance/article/2129576/venture-capital-investment-ai-doubles-us12-billion-2017
103
深圳市天使投资引导基金揭牌 (Shenzhen Angel Investment Guided Fund unveiled). (2018, March 26). Shenzhen News.
Retrieved from http://www.sz-qb.com/html/2018-03/26/content_95650.htm
104
World Bank. (2015). East Asia’s changing urban landscape: Measuring a decade of spatial growth. Retrieved from
https://www.worldbank.org/content/dam/Worldbank/Publications/Urban%20Development/EAP_Urban_Expansion_full_report_we
b.pdf
105
Wong, H. (2017, December 26). Commentary: The magnificent new global city cluster in China’s Pearl River Delta. Channel News
Asia. Retrieved from https://www.channelnewsasia.com/news/business/commentary-the-magnificent-new-global-city-cluster-in-
china-s-9498040
106
Statista. (N.D.). China: Population of Shenzhen from 1995 to 2030 (in millions). Retrieved from
https://www.statista.com/statistics/466986/china-population-of-shenzhen/
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EXHIBIT 1: THE CHINESE CORPORATE INNOVATION REPORT RANKS

SHENZHEN AS THE MOST INNOVATIVE CITY
Source: HSBC China
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EXHIBIT 2: ECONOMIC REFORMS FOR SHENZHEN – 1979 TO 1990
Reforms Year
Price system 1979
Labour system
1980
Labour wage system
Housing system
Capital construction system/tendering and bidding system 1981
Cadre and personnel system
Establishing stock exchange 1983
Establishing foreign exchange regulation centre 1985
Ownership reform of State-Owned Enterprises 1986
Public auctions of land use rights 1987
Source: Shenzhen Museum
EXHIBIT 3: ANNUAL AVERAGE GROWTH RATE OF ECONOMIC INDICATORS

FOR SHENZHEN – 1981 TO 2015
Annual Average Growth Rate

Five-Year Period Gross Output Value Year-end Total
Average Yearly Wages
of Industry Employed
1981-1985 91.3 17.0 19.8
1986-1990 46.9 27.3 12.2
1991-1995 36.9 22.3 23.3
1996-2000 20.8 9.7 13.2
2001-2005 24.7 3.9 7.4
2006-2010 14.8 5.6 9.2
2011-2015 7.8 3.6 9.9
Notes:
“Industry” refers to the material production sector which is engaged in the extraction of natural resources
and processing and reprocessing of minerals and agricultural products including: (1) extraction of natural
resources; (2) processing and reprocessing of farm and related products; (3) manufacture of industrial
products; and (4) repair and renovation of industrial products.
Source: Shenzhen Municipal Bureau of Statistics
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EXHIBIT 4: SHENZHEN’S TOTAL EXPORTS – 1980 TO 1992
Year Total Exports (USD) Annual Average Growth Rate (%)

1980 11,240,000
1981 17,450,000
1982 15,970,000
1983 62,300,000 118.8
1984 265,390,000
1985 563,400,000
1986 725,520,000
1987 1,413,540,000
1988 1,849,490,000 39.7
1989 2,174,280,000
1990 8,151,650,000
1991 9,862,400,000
1992 12,000,190,000
EXHIBIT 5: FOREIGN-FUNDED ENTERPRISES IN SHENZHEN – 1992 TO 2005
Year Foreign-funded enterprises

1992 7,639
1993 11,802
1994 14,767
1995 16,765
1996 18,011
1997 17,093
1998 16,161
1999 17,997
2000 18,151
2001 19,175
2002 19,461
2003 21,883
2004 22,728
2005 24,252
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EXHIBIT 6: NATION-WIDE ECONOMIC INDICATORS OF GROWTH – 1980 TO 2005
Per Capita GDP Average Wages Household Consumption Expenditure (in

Year
(in RMB) (in RMB) RMB)
1980 464 762 238
1985 860 1,148 440
1990 1,654 2,140 831
1995 5,074 5,500 2,330
2000 7,902 9,333 3,721
2005 14,259 18,200 5,771
2010 30,876 36,539 10,919
2015 49,992 62,029 19,308
Source: National Bureau of Statistics
EXHIBIT 7: SHENZHEN CAPITAL GROUP PORTFOLIO OF 138

COMPANIES THAT HAVE BEEN LISTED
Source: Shenzhen Capital Group
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EXHIBIT 8: COMPOSITION OF GDP BY THREE INDUSTRIES FOR SHENZHEN – 2011 TO 2016
Composition (out of 100%)

Year
Primary Industry Secondary Industry Tertiary Industry
1990 4.1 44.8 51.1
1995 1.5 50.1 48.4
2000 0.7 49.7 49.6
2005 0.2 53.4 46.4
2010 0.1 46.2 53.7
2011 0.1 46.3 53.6
2012 0.1 44.1 55.8
2013 - 43.2 56.8
2014 - 42.6 57.4
2015 - 41.2 58.8
2016 - 39.9 60.1
Notes:
“Three Industries” refers to the following industrial classification: agriculture and resource extraction are
classified under “Primary Industry”; manufacturing is classified under “Secondary Industry”; technology and
services are classified under “Tertiary Industry”.
Source: Statistics Bureau of Shenzhen City
EXHIBIT 9: INVESTMENT IN FIXED ASSETS FOR THE MANUFACTURING

INDUSTRY IN SHENZHEN – 1990 TO 2005
Investment in Fixed Assets

Year
for the Manufacturing Industry (RMB)
1990 1,748,760,000
1995 2,205,380,000
2000 9,820,950,000
2005 25,736,460,000
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EXHIBIT 10A: PATENT STATISTICS FOR SHENZHEN – 2001 TO 2016
Number of
Number of Number of
Number of Patent International Number of
Year Invention Patent Invention Patents
Applications Patent Patents Certified
Applications Certified
Applications
2001 6,033 1,033 - 3,506 7
2002 7,917 1,846 - 4,486 91
2003 12,361 3,526 - 4,937 276
2004 14,918 4,751 331 7,737 864
2005 20,940 8,327 789 8,983 917
2006 29,728 14,576 1,661 11,494 1,361
2007 35,808 19,198 2,170 15,552 2,257
2008 36,249 18,757 2,709 18,805 5,409
2009 42,279 20,520 3,800 25,894 8,132
2010 49,430 23,956 5,584 34,951 9,615
2011 63,522 28,823 7,933 39,363 11,826
2012 73,130 31,075 8,024 48,662 13,068
2013 80,657 32,208 10,049 49,756 10,987
2014 82,254 31,077 11,639 53,687 12,040
2015 105,481 40,028 13,308 72,120 16,957
2016 145,294 56,336 19,648 75,043 17,666
Source: Statistics Bureau of Shenzhen City
EXHIBIT 10B: PATENT STATISTICS: SHENZHEN VS. CHINA – 2012 TO 2016
Number of Patent Shenzhen as Number of Invention Patent Shenzhen as a

Applications a Proportion Applications Proportion of
Year
of China China
China Shenzhen (%) China Shenzhen (%)
2012 489,945 73,130 14.9 176,167 31,075 17.6
2013 560,918 80,657 14.4 205,146 32,208 15.7
2014 630,561 82,254 13.0 239,925 31,077 13.0
2015 638,513 105,481 16.5 245,688 40,028 16.3
Source: National Bureau of Statistics; Statistics Bureau of Shenzhen City
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EXHIBIT 10C: INTERNATIONAL PATENT STATISTICS: SHENZHEN VS. FRANCE AND

THE UNITED KINGDOM – 2011 TO 2016
25,000
19,648
20,000
15,000 13,308
11,639
10,049
10,000
7,933 8,024
7,406 8,261 8,421 8,208
7,802 7,905
5,000
5,268 5,290 5,496
4,876 4,917 4,848
0
2011 2012 2013 2014 2015 2016
Shenzhen France UK
Source: World Intellectual Property Office
EXHIBIT 10D: INTERNATIONAL PATENT APPLICATIONS OF

TOP 10 ENTERPRISES IN CHINA IN 2016
Source: World Intellectual Property Office
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EXHIBIT 11: NATION-WIDE PER CAPITA DISPOSABLE INCOME AND

CONSUMPTION EXPENDITURE – 2013 TO 2015
25,000
21,966
20,000
20,167
18,311
15,000 15,712
14,491
13,220
10,000
5,000
0
2013 2014 2015
Per Capita Disposable Income (in RMB) Per Capita Consumption Expenditure (in RMB)
Source: National Bureau of Statistics
EXHIBIT 12: BANNER SLOGAN AMIDST TOWERING BUILDINGS

AT SHENZHEN’S NANSHAN INNOVATION DISTRICT
Source: Photo was taken by authors on site.
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EXHIBIT 13: NUMBER OF SCIENTISTS AND ENGINEERS IN SHENZHEN – 2009 TO 2016
400,000
345,387
350,000
283,887 293,258 293,416
300,000 267,527
246,797 239,929
250,000
186,607
200,000
150,000
100,000
50,000
-
2009 2010 2011 2012 2013 2014 2015 2016
Scientists & Engineers in Shenzhen
EXHIBIT 14A: R&D EXPENDITURE AS A PERCENTAGE OF SHENZHEN’S GDP – 2013 TO 2016
4.4
4.32
4.3
4.2 4.18
4.1
4.01 4
4
3.9
3.8
2013 2014 2015 2016
% of Shenzhen's GDP
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EXHIBIT 14B: ENTERPRISE FUNDS AS A PERCENTAGE OF SHENZHEN’S

R&D EXPENDITURE – 2010 TO 2016
94.74
95 94.34
93.86 93.92 94.08
94
93
91.52 91.77
92
91
90
89
2010 2011 2012 2013 2014 2015 2016
% of Shenzhen's R&D Expenditure
Notes:
“Enterprise Funds” refers to funds raised by enterprises or received by universities or research institutions
from enterprises for scientific or technical development projects. It excludes funds from government
agencies, financial institutions, and foreign institutions.
EXHIBIT 15A: NUMBER OF INDUSTRIAL ENTERPRISES IN SHENZHEN

AND DONGGUAN – 2000 TO 2015
Number of Industrial Enterprises

City
2000 2005 2010 2011 2012 2013 2014 2015
Shenzhen 1,834 5,214 8,249 5,692 5,835 6,523 6,355 6,539
Dongguan 1,663 4,504 5,899 4,243 4,526 5,361 5,377 5,688
Source: Guangdong Statistics Bureau
EXHIBIT 15B: NUMBER OF INDUSTRIAL ENTERPRISES THAT MANUFACTURE COMMUNICATION

EQUIPMENT, COMPUTERS, AND OTHER ELECTRONIC EQUIPMENT IN SHENZHEN AND
DONGGUAN – 2008 TO 2015
Number of Industrial Enterprises that Manufacture Communication Equipment,

City Computers, and other Electronic Equipment
2008 2009 2010 2011 2012 2013 2014 2015
Shenzhen 2,007 1,922 1,912 1,545 1,629 1,863 1,877 1,968
Dongguan 896 860 929 762 818 962 980 1,022
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EXHIBIT 16A: PER CAPITA GROSS DOMESTIC PRODUCT (IN RMB) OF CITIES IN THE PEARL
RIVER DELTA (PRD) – 1994 TO 2015
Per Capita Gross Domestic Product (in RMB)

City
1994 2000 2005 2010 2015
Shenzhen 17,990 32,800 60,801 96,184 157,985
Guangzhou 15,487 25,626 53,809 87,458 136,188
Zhuhai 16,720 27,770 45,320 78,030 124,706
Foshan 14,422 20,231 42,066 79,902 108,299
Zhongshan 10,605 15,077 36,435 60,888 94,030
Dongguan 11,06 13,679 33,287 53,193 75,616
Huizhou 7,248 13,877 21,909 38,650 66,231
Jiangmei 7,596 12,851 19,546 35,622 49,608
Zhaoqing 5,281 7,422 11,890 28,052 48,670
EXHIBIT 16B: PER CAPITA GROSS DOMESTIC PRODUCT (IN RMB) OF SPECIAL ECONOMIC
ZONES (SEZ) LOCATED IN GUANGDONG PROVINCE – 1994 TO 2015
Per Capita Gross Domestic Product (in RMB)

SEZ
1994 2000 2005 2010 2015
Shenzhen 17,990 32,800 60,801 96,184 157,985
Zhuhai 16,720 27,770 45,320 78,030 124,706
Shantou 5,021 9,741 12,883 21,330 33,732
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EXHIBIT 17A: PER CAPITA GROSS DOMESTIC PRODUCT GROWTH RATE COMPARISON:
SHENZHEN, BEIJING, AND SHANGHAI – 2011 TO 2016
Year Per Capita GDP Growth Rate Per Capita GDP Growth Per Capita GDP Growth
for Shenzhen (%) Rate for Beijing (%) Rate for Shanghai (%)
2011 7.3 3.8 5.0
2012 9.0 4.9 5.7
2013 9.6 5.2 6.2
2014 7.6 5.2 6.0
2015 5.2 5.5 6.9
2016 3.7 6.3 7.0
Source: National Bureau of Statistics; Shenzhen Municipal Bureau of Statistics
EXHIBIT 17B: MULTI-CITY COMPARISON: SHENZHEN, BEIJING, AND SHANGHAI – 2015
Indicator Shenzhen Beijing Shanghai

Population 11,378,700 21,710,000 24,150,000
GDP (in billion RMB) 1,750 2,301 2,512
Per capita GDP (in RMB) 158,000 106,497 103,796
Average yearly wages (in RMB) 81,034 111,390 109,174
Higher Education:
No. of tertiary institutions 12 91 67
Enrolment 90,112 603,557 511,623
Graduates 23,397 154,449 128,711
Research & Development:
R&D expenditure (in billion RMB) 73,238 24,408 47,424
Full-time R&D personnel 173,764 50,773 94,981
No. of patent applications 105,481 20,024 21,725
No. of invention patent applications 40,028 10,281 10,740
No. of international patent applications 13,308 4,490 1,060
Notes:
Institutes of higher education include full-time universities, independent colleges, technical colleges,
professional colleges, and other similar institutions, and refer to educational establishments set up
according to government standards as well as evaluation and approval procedures.
Source: National Bureau of Statistics; Shenzhen Municipal Bureau of Statistics; State Intellectual Property Office of the P.R.C.
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EXHIBIT 17C: NUMBER OF STARTUPS IN SHENZHEN, BEIJING,

AND SHANGHAI – 2015 TO 2017
10,000
8,746
9,000
8,000
7,000 6,167
6,000 5,270 5,254
5,000
3,791
4,000
3,000 2,185
3,276
2,000
2,069 2,306
1,000
0
2015 2016 2017
Shenzhen Beijing Shanghai
Notes:
The number of firms categorised or certified as high-tech companies has been used as a proxy for the
number of startups. This certification allows companies to enjoy tax rebates and is subjected to review
every three years.
Source: Shenzhen Science and Technology Innovation Committee; Beijing Municipal Science and Technology Commission; Shanghai
Science and Technology Commission
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EXHIBIT 18: GEOGRAPHICAL DISTRIBUTION OF CHINESE ANGEL INVESTMENTS FROM

JANUARY TO NOVEMBER 2015 (BY NUMBER OF DEALS)
Source: PE Data
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EXHIBIT 19: SHENZHEN DEVELOPMENT PHASE 1: 1980 TO 1992
Source: Created by authors.
EXHIBIT 20: SHENZHEN DEVELOPMENT PHASE 2: 1992 TO 2006

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EXHIBIT 21: SHENZHEN DEVELOPMENT PHASE 3: BEYOND 2006
II. Silicon Valley Hardware Case
A. Case Overview
The study case is about Shenzhen economic transformation over the past 40 years. There are
three phases of Shenzhen development:
● Phase I (1980 to 1992): The beginning of SEZ and establishment of Shenzhen Stock
Exchange
● Phase II (1992 to 2006): Market reforms
● Phase III (2006 to today): Innovation era
Shenzhen success is based on its firm strategy, related supporting industries, demand
conditions, and factor conditions (favorable location and infrastructures).
In the journey of Shenzhen success they also face several challenges (rising cost of labor and
land, environmental issues, and rapid urbanization).
B. Case Analysis
Related Theories:
● Porter’s Theory:
○ Factor Endowments:
■ Infrastructure: supported by the best seaport that is located in Hong Kong and
Guangzhou. In 1991, Shenzhen Bao’an International Airport opened
■ Skilled labor: graduates and other migrants in Shenzhen enhance its talent pool.
○ Demand Conditions: exporting competitively-priced products and domestic demand
because of China’s big population.
○ Related and Support Industries:
■ In 1988, the Huaqiangbei market was established
■ In 1997, the original Huaqiangbei market was torn down and rebuilt
■ Currently, the Huaqiangbei market has transformed into one stop service
generating profit over RMB 200 billion and employing 130.000 people
○ Strategy, Structure, Rivalry: increase rivalry since MNCs are also attracted to
Shenzhen’s favorable business environment. Establish the economy reform policy,
such as lower tax rates, wage system, land use rights, etc.
● New Trade Theories
○ Economies of Scale: China's population has continuously increased with a
population of more than 1,3 Billion in 2015. This population has increased the
demand especially for electronic products. With this demand, a lot of the electronic
industry started to produce a massive number of products. This large output can be
associated with unit cost reductions associated. The industry in China may produce a
product with low cost and reasonable quality.
○ Product Differentiation: Shenzhen is known for its innovation-driven economy.
Many companies in the city focus on creating cutting-edge technologies, such as
electronics, telecommunications, artificial intelligence, and biotechnology.
● Product Life-Cycle Theory
○ The local government in Shenzhen gives a lot of incentives so that they can enjoy
preferential tax policies (such as lower tax rates, tax holidays, duty free imports, and
exemption from tax rates so that foreign investors are attracted to invest in the
country.
○ Hong Kong manufacturers and many high tech MNCs are moving their
manufacturing operations to Shenzhen.
○ As there is a lot of demand from locals, the local enterprises started to make clever
imitations and copies of simple products such as electrical appliances with low cost.
○ Due to its large population, the local enterprises are given an innovative idea to
solve an endless supply of problems and the support from the central government to
promote Shenzhen as a city of industry and innovation.
C. Recommendations
Porter’s Diamond Suggested Actions

(Challenges)
Factor Shenzhen: As an innovation Policymakers could consider to pay attention

Conditions hub to factor conditions, such as education and
● Lack of higher education training programs, to develop the necessary
institutions to support human resources Policymakers could consider
locals research and investing in related and supporting industries,
generate needed talent such as real estate and transportation, to
● Need to address urban support the growth of the city
expansion issues (land,
housing, traffic
congestion)
Strategy Shenzhen: As an innovation The local company should try to expand
and hub globally and enter into new markets outside of
Rivalry ● Protected Local Market China. They could try to export their product
by central Government and services.
● Enterprises Lack
Capabilities to succeed
globally since they had
served the local market
for the past 30 years
Key Points Protected Local industries by The strategy adopted by Shenzhen in order to
the government protect local enterprises is implementing
protection against global companies and
restricting some industries to enter China’s
market. Ex: thousands of websites like
Facebook, Google, etc. are blocked. Websites
like Wechat are the substitutes for those
websites.
Demand Shenzhen: As an innovation The local enterprises should try to improve on

Conditions hub their quality and do some innovations.
● Increasing affluence of Investing in research and development will
China population drove help enterprises to meet local demand and
local demand and create high quality products
increase consumer
expectations
Shenzhen : As an innovation The policy makers should make a regulations

Hub to protect intellectual property
● There is no protection to
intellectual property
Lack of investment from Build more institutes of higher educations to

investors generate skilled talent
D. Trigger Question
SEZ Gresik:
● Suggestion to Government:the objectives that the government needs to achieve to
develop the area for SEZ Gresik
○ Build an electronic market hub so there is not only production but also creates
trading activities and utilizes the facilities that are already available.
○ Improve its institutes of higher learning to provide the skilled workforce (build more
universities within the area).
○ Collaboration with nearby top University (e.g Airlangga University) in research and
development and creation.
W21225
WALMART–FLIPKART DEAL: IN SEARCH OF STABILITY 1
Neera Jain and Amogh Bansal wrote this case solely to provide material for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.
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Copyright © 2021, Management Development Institute Gurgaon and Ivey Business School Foundation Version: 2021-05-13
In May 2018, the Indian e-commerce industry was highlighted when multinational US retail giant Walmart
Inc. (Walmart) gained a controlling stake of 77 per cent in India’s biggest e-commerce platform, Flipkart
Internet Private Ltd. (Flipkart) for US$16 billion. 2 Despite being the leader in the industry, Flipkart had
been continuously losing market share to Amazon.com, Inc. (Amazon), which had entered the Indian
market in 2013 3 and was rapidly spreading its footprint in the country. This was made evident by the growth
in Amazon’s market share, which reached 31 per cent in 2018, 4 at which point Flipkart’s share was reduced
to 32 per cent (see Exhibit 1). With a rapid increase in debt and a continuous loss of market share, Flipkart
was in a vulnerable position and looking for support from a deep-pocketed investor. This created an
opportunity for Walmart to enter the Indian e-commerce industry, bypassing the restrictive rules and
regulations required to run operations from overseas. However, this was not the end of Flipkart’s worries.
In December 2018, the government of India proposed modified foreign direct investment (FDI) norms,
which imposed various restrictions on the operations of e-commerce companies. 5
In January 2019, Indian conglomerate Reliance Industries Ltd. (Reliance) announced its entry into the e-
commerce industry through an omnichannel venture, Jiomart.com (JioMart). JioMart began limited operations
in April 2020 and then expanded to more than 200 cities and towns across India, 6 to take on heavyweights
such as Flipkart.7 Current FDI rules did not apply to Reliance’s operations, and Reliance enjoyed
incomparable reach via Reliance Retail and Reliance Jio; the company was set to disrupt the industry. At the
same time, due to the coronavirus (COVID-19) pandemic, India went into a nationwide lockdown, and this
also had a significant impact on Flipkart’s business, which was expected to recover when the lockdown orders
ended in June 2020 and restrictions were eased.8 In light of these developments, would Walmart divest itself
of Flipkart and abandon its aspiration to become one of the largest e-commerce companies in India? Or would
Walmart and Flipkart overcome these challenges together and emerge as winners?
E-COMMERCE IN INDIA: GROWTH AND CHALLENGES
The Indian e-commerce industry had grown exponentially since its beginnings in 2013, when it represented
$12.6 billion worth of market share. By 2017, the industry was worth $38 billion, and this was estimated to
increase by a further 30 per cent annually to a value of $200 billion by 2026. 9 India’s online retail market
was among the top global economies, having witnessed a 53 per cent compound annual growth rate between
This document is authorized for use only in Prof. Piyush Sharma's SM - II 2022-23 at Great Lakes Institute of Management - Gurgaon from Jul 2022 to Jan 2023.
Page 2 9B21M052
2013 and 2017. 10 The key driving factors in its rapid growth were vigorous discounts, advanced delivery
infrastructure, and enhanced smartphone reach and data usage. 11
Despite the rapid growth in market size, India ranked eighth in terms of its online retail reachability rate,
which, at a mere 5 per cent, was low compared to that of other countries. For example, the rate of online
retail reachability in China was 20 per cent, and in the United States it was 12 percent.12 In India, online
penetration varied across different segments: the consumer electronics division had the highest online
reach—a percentage of the category’s e-commerce sales across all retail stores—of 17 per cent, the online
reach in the apparel and footwear sector was 9 per cent, and that in the beauty and personal care category
was 1 per cent. The food and grocery sector had one of the lowest online reaches, 0.1 per cent, with total
retail sales of approximately $530 billion in 2017. 13
However, despite the explosive growth of the e-commerce industry, companies in India’s crowded online
marketplace faced many challenges: for example, online sellers made costly mistakes by launching businesses
without being equipped with adequate knowledge to run the ventures successfully. Companies also faced
difficulty in choosing ideal, popular, and unique products in an extremely exhaustive market, where all
product categories had fierce competition and constantly decreasing profit margins. Then there was the
necessity of maintaining proper inventory levels to avoid delays in shipping, which might cost companies
their customers, who preferred the fast delivery of goods. Further, the number of orders returned and cancelled
by customers had increased exponentially and now occurred as frequently as once out of every 10 orders
shipped. 14 A lack of working capital among micro, small, and medium-sized enterprises, and customers’
preference for cash on delivery—which, for various reasons, might have led to a refusal to accept products at
the time of delivery 15—added to the companies’ problems. However, Flipkart had an opportunity to learn
from Walmart’s expertise in retail, logistics, and supply chain management. If Walmart’s previous experience
could be replicated in India, this could allow Indian e-commerce to become a profitable venture.
THE RISE OF AMAZON IN INDIAN E-COMMERCE
In 2013, Amazon, which was arguably the world’s largest online shopping store, entered the Indian e-
commerce industry with the expectation that the developing markets of the present would become the
growth drivers of the future. Since then, it had invested approximately $10 billion in its Indian operations
and was expected to continue its investing spree, dedicating at least $1 billion yearly to initiatives such as
upgrading its Prime Video program, which already had 12 million viewers in India. 16
Due to its tremendous growth in a limited time, by 2018 Amazon had taken the second spot in the Indian
e-commerce industry, which had previously been dominated by Flipkart. Online sales of electronics and
related products were a substantial part of Amazon’s total revenue generation. Amazon also offered mobile
application-based services and digital offerings such as Amazon Music and Amazon Prime Video. 17 What
set Amazon apart from other incumbents was the higher success rate enjoyed by local sellers when
competing with big brands on the Amazon platform, and this led to an increase in the rate of seller
onboarding. In terms of pricing, Amazon focused on providing affordable prices and a broad selection of
products for customers. In terms of delivery experience, it expanded its reach to every corner of the country
and had one of the most efficient fulfillment and logistics networks. 18 With the introduction of Amazon
Prime, it gained more of its customers’ trust and established itself as the platform that was both the starting
point and the destination for online shopping.
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THE GROWTH OF FLIPKART: OPPORTUNITIES AND CHALLENGES
Flipkart was founded by Binny Bansal and Sachin Bansal (who were not related) in 2007. Initially, it
focused on selling books, but it later entered other product segments, such as fashion and lifestyle products
and consumer electronics. Flipkart’s significant dominance in the sale of apparel was further strengthened
after it acquired the clothing shopping platforms Myntra and Jabong.com. 19 Flipkart also owned several in-
house brands, including DigiFlip, which sold electronics and accessories; Citron, which sold home
appliances; and Flippd, which sold apparel. 20 In 2017, Flipkart introduced additional brands, including
MarQ, for large appliances; Smartbuy, which successfully replaced DigiFlip for electronics accessories;
and Billion, for smartphones. 21 Along with these brands, Flipkart also owned a mobile payment service
platform, based on the Unified Payments Interface, known as PhonePe, which was used as an additional
safe payment option for consumers. 22 Flipkart also had its own customer assistance team, which consisted
of call-centre executives who handled incoming and outgoing calls and email queries.
In July 2019, Flipkart announced the opening of its first furniture experience centre in Bengaluru, the first
step toward establishing an omnichannel marketplace. 23 The centre would provide a touch-and-feel
experience to buyers in the rapidly advancing online furniture industry. Adarsh Menon, the vice-president
of Flipkart’s furniture, electronics, and private-label segment, explained, “As a customer-focused
organization, we understand the requirements of customers, and hence . . . the idea behind the FurniSure
Experience Zone is to allow customers to explore Flipkart Furniture’s offerings in a new and innovative
fashion.” 24 Flipkart also partnered with Google LLC (Google) to improve buyers’ viewing experiences by
integrating Google’s image recognition technology Google Lens at the experience centres. Customers could
use their smartphones to scan Flipkart’s furniture images and explore information about the furniture’s
features in the product catalogue at the experience centre.25
In June 2020, Flipkart’s grocery division introduced a voice assistant 26 that was expected to help customers
discover and buy products easily by providing voice instructions in Hindi and English. According to
Flipkart, the voice assistant would enhance grocery shopping by adding a more personal experience. 27
Technology for Supply Chain Management
Flipkart’s inbound logistics were majorly dependent on the company’s suppliers, who transferred goods to
its seven major warehouses in India. After a product arrived from the suppliers, it underwent a scheduled
quality check and was then scanned and entered into the inventory maintained on the information
technology (IT) systems. Once this input was complete, the system generated a record of shelves of
corresponding products, known as a “put-list.” 28 Flipkart used its own enterprise resource planner to execute
orders and pursue the important details of all the required transactions. Using available and accurate
forecasting technology, Flipkart reduced the number of items that had to be returned to its suppliers. This
systematic, technologically driven procedure contributed to the fast and accurate delivery of the products
ordered by the customers and played a major role in ensuring high customer satisfaction. 29
Buyers’ orders were fulfilled via either just-in-time production or inventory procurement, according to the
availability of the products. 30 First, the order was checked in the inventory; if a product was unavailable in
a local warehouse, this triggered a search of the nearest warehouses and then those further afield. If the
product was not available anywhere, the order was transferred to the regional procurement team for just-
in-time sourcing from local sellers. 31 If the regional procurement team could not find it, the order was
forwarded to the central procurement team as the final alternative. 32 After sourcing, the order was wrapped
and transported to the customer through the most appropriate warehouse. Flipkart also offered free returns
within 30 days of the product being received by the customer, 33 and this had significantly increased the
Page 4 9B21M052
company’s consumer base. 34 Flipkart used technology to manage information systems, reconciliation, and
order tracking. Its inventory of goods was replenished as soon as the level for an item went lower than the
reorder point (see Exhibit 2).
Flipkart used various discounts, price reduction techniques, and suggested product mixes to attract customers.
In order to offer free delivery based on single-transaction behaviour, Flipkart adopted interactive shipping and
parcelling price calculations; and by mandating delivery by its logistics partners, ensured efficient and affordable
delivery options. It also ran various marketing campaigns, such as the Big Billion Days campaign, where
products were advertised with maximum discounts to maintain brand visibility among customers. 35
Acquisitions by Flipkart
Flipkart acquired many different start-ups between 2007 and 2017. Its first acquisition, in 2010, was
weRead, a social media platform for book enthusiasts based on book reviews and recommendations, which
entered the market in 2006 and had approximately 3 million customers and 60 million titles by 2010. 36 With
this acquisition, Flipkart instantly expanded its customer base. Later, Flipkart acquired Chakpak Media Pvt.
Ltd., which provided content related to Telugu, Tamil, and Bollywood films, including reviews, news, and
movie release information. In this acquisition, Flipkart added approximately 50,000 ratings, 10,000 movies,
and 40,000 filmographies to its portal by taking over rights to content generation. The acquisition also
enabled Flipkart to provide user-generated and editorial content on a huge variety of Indian movies. 37 In
2014, Flipkart took 100 per cent control of Myntra, India’s leading fashion and lifestyle portal, for $370
million. 38 This move strengthened Flipkart’s apparel portfolio. Later, in 2016, Flipkart added PhonePe,
which was expected to improve the offline and online digital payment experience for millions of Indian
users through innovation, as an independent business unit. 39 The acquisition through Myntra of Jabong.com
for about $70 million further increased Flipkart’s reach in the fashion world; Jabong.com brought in Indian
ethnic fashions, designer and sport labels, and 1,500 high-quality brands from more than 1,000 sellers and
contributed to maintaining the company’s leadership position in the industry. 40 Through these acquisitions,
Flipkart established itself as a one-stop destination for books, multilingual films, news, fashion products
and apparel, and its own payment gateway.
FLIPKART’S CHALLENGES
Flipkart’s revenues grew from less than $1 million in fiscal year (FY) 2008–09 to around $3 billion in FY 2016–
17. 41 However, the rate of revenue growth declined to 29 per cent in FY 2016–17, compared to 50 per cent in
the prior fiscal year, 42 and the losses the company incurred increased significantly (see Exhibit 3). For example,
in FY 2016–17, Flipkart recorded a net margin of −44 per cent due to its loss of $1.3 billion. The driving factors
behind this negative operating margin were aggressive pricing and discounts due to intense competition in the
industry. 43 These continued losses resulted in Flipkart burning through close to $7 billion of capital it had raised
from investors, 44 which posed a threat to its survival as a stand-alone company. As cash-rich Amazon was
aggressively capturing the market, it was making Flipkart’s financial situation miserable.
By 2018, the Indian e-commerce industry had witnessed a shift towards omnipresence, and companies
started establishing hybrid models that combined both an online and offline presence to increase their
customer bases. For example, Amazon partnered with Project Udaan, and through this partnership had
“stores in semi-urban markets, . . . its own dark stores for its hyperlocal grocery delivery platform Amazon
Now, and . . . a stake in Shoppers Stop” 45—all of which strengthened its offline presence. However, with
no prior experience in offline platforms, Flipkart faced difficulties in establishing a similar hybrid model
and was in dire need of support from a retail giant with expertise in driving down costs and managing
Page 5 9B21M052
logistics and supply chains; such expertise could assist Flipkart in optimizing how it offered daily household
items and in competing with other offline stores in the Indian retail market. 46
THE GROWTH OF WALMART: OPPORTUNITIES AND CHALLENGES
Walmart was created by Sam Walton in 1962 and became a publicly traded company in the United States on
October 31, 1969. 47 In 2007, it forayed into Indian markets, and it started its own Indian operations from May
2009, opening its first store in Amritsar, in the state of Punjab. Later, in 2014, Walmart India became the
wholly owned subsidiary of Walmart Inc. 48 In India, Walmart owned and operated 28 business-to-business
(B2B) cash-and-carry stores in nine different states across the country under the banner of Best Price Modern
Wholesale Stores (Best Price), along with one fulfillment centre in Lucknow, in the state of Uttar Pradesh. 49
Walmart India operated a membership-based business model and had more than 1 million members, mainly
small resellers and grocery stores (i.e., “Mom and Pop” stores). Its members also included institutions,
offices, restaurants, hotels, and other business segments. 50 Walmart India provided its members with a wide
range of goods and services, including electronics and durable products; fruits and vegetables; poultry,
meat, and fish; apparel and accessories; fast-moving consumer goods (FMCG) foods; and home appliances.
Along with the cash-and-carry business, Walmart also had Walmart Labs, a technology centre and global
sourcing centre in Bangalore, in the state of Karnataka. 51
Technology for Supply Chain
The suppliers handled inbound logistics by providing materials in real time according to requirements. To
further add to this efficiency, Walmart developed a code of conduct for its suppliers and managed long-
term relationships with them by presenting the potential for bulk purchases. Leveraging its financial
influence and size, Walmart was able to secure lower-priced products from suppliers, and it then transferred
that margin to the customers. 52
One of Walmart’s core inventory management techniques was a supply chain strategy called “cross docking.” 53
In this technique, the inbound products from the suppliers were first sent to distribution centres and then delivered
to the storehouses. This led to lower transportation and inventory costs, while effectively reducing the time
needed for transportation, thereby eliminating inefficiencies. Hence, Walmart stores had a merchandise
replenishment cycle of 48 hours, which was processed by an efficient flow-time cycle (see Exhibit 4).
Walmart operated under the slogan “Save money. Live better.” This indicated that its pricing strategy
played an important part in its marketing strategy. The “everyday low price” tactic assisted Walmart in
building an image of offering the best prices, and this gave it an edge over incumbents. Walmart also
focused on marketing, which included advertising and promotions through several traditional and digital
advertising channels. It also used social media and promotional videos to promote its brand. Customer
service also served as an integral segment of its strategy and helped Walmart develop a positive brand
image and better recognition among its customers. 54
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Acquisitions by Walmart
From the last decade of the twentieth century, Walmart had started expanding its footprint worldwide. In
1994, it officially created Walmart Canada by acquiring 122 stores from the Woolworth Canada division
of the F.W. Woolworth Company. 55 After this acquisition, Walmart introduced the concept of Supercentres,
which encompassed a variety of products from every category in full-service supermarkets and discount
stores. This strategy contributed to the success of Walmart in Canada, allowing it to serve 1.2 million
customers daily. In 1997, Walmart forayed into Germany, acquiring 95 storehouses of a supermarket chain
in 1997. 56 At that time, the German market was mainly an oligopoly, with high competition that was
operating on a low-price strategy like that of Walmart. Such a market eventually yielded no competitive
advantage to Walmart, and consequently, in July 2006, Walmart announced its exit from Germany due to
sustained losses. Another failure for Walmart occurred when, in 1999, it took over the Leeds-based
supermarket chain Asda Stores Ltd. (Asda). 57 Initially, the deal aimed to provide Asda with access to
additional capital to expand its store portfolio and to give Walmart a route into the United Kingdom’s retail
industry. However, Asda witnessed minimal growth despite more than doubling its number of stores.
In 2007, Walmart started a joint venture in India with Bharti Airtel Limited, which aimed to set up and run cash-
and-carry superstores under the banner “Best Price Modern Wholesale.”58 As associates, the companies together
built 20 superstores in different prime cities. However, cultural differences, the challenges of working together,
and differences in values eventually led to the termination of the partnership in 2013. 59 After the separation,
Bharti Airtel Limited acquired Cedar Support Services Ltd. from Walmart and showed that it was committed to
developing a high-quality operation and would continue its investment in the retail segment through the retail
brand Easyday. Walmart, meanwhile, continued to run its 20 superstores without any partners, as it had in place
a supplier-development system, a direct farm program, and a supply chain infrastructure that would help it
provide sufficient returns to shareholders and make high-quality investments. 60
Challenges from Amazon
Walmart’s total revenue in 2017 was more than $500 billion, and it had a net income of $20 billion, whereas
Amazon’s net sales were a mere $177.9 billion and its net income was $3 billion. But despite having
comparatively low income and revenue, in 2018 Amazon became one of the five top companies worldwide
in terms of market capitalization, with a market capitalization of $780 billion. Walmart’s market
capitalization, in contrast, was just over $250 billion by 2018. 61 The US stock market valued Amazon over
Walmart because Amazon was viewed as the company with more growth potential and a more robust future,
as it contributed 70 per cent of the $62.47 billion growth in US online retail in 2017 and about 35 per cent of
the $127 billion growth in the overall retail segment. 62 Walmart had also spent the past few years establishing
itself in the e-commerce sector by acquiring Jet.com—a direct adversary of Amazon—for $3.3 billion in late
2016; however, the venture did not succeed.63 As such, Walmart was in dire need of an e-commerce platform
with a sophisticated supply chain and enormous consumer base in order to compete with Amazon.
FLIPKART’S ACQUISITION BY WALMART
After 10 years of rigorous efforts to establish itself in the Indian e-commerce industry, Walmart understood
that it would be unrealistic to assume that the government of India would allow it to expand in the country.
However, on May 9, 2018, Walmart found an opportunity to do so in Flipkart, the current market leader in
the industry; Walmart bought a controlling stake of 77 per cent in Flipkart for $16 billion. 64 Walmart’s
investment, which included new equity funding worth $2 billion, resulted in the complete exits of Flipkart
Page 7 9B21M052
investors SoftBank Group Corp., Naspers Limited, eBay Inc., and co-founder Sachin Bansal, and it led
others, such as Tiger Global Management LLC (Tiger Global), to reduce their stakes. 65 The unexpected
outcome was the exit of Bansal, who had co-founded the company with Indian Institute of Technology
Delhi college-mate Binny Bansal. Sachin Bansal decided to sell his 5.5 per cent stake in the company for
$1 billion. 66 Sachin’s exit resulted from a conflict between him and the company’s board: while he had
demanded a better role in the functioning of the evolved entity, stronger shareholder rights, and the
introduction of strategic investment into the company, these demands were resisted by the company’s board
and by Lee Fixel of Tiger Global, one of the company’s major backers.67 Later that year, Binny Bansal—
the co-founder, who held a 3.52 per cent stake in Flipkart and was the head of Walmart’s Flipkart Group—
resigned following an internal probe into “serious personal misconduct.” 68 This departure was related to
Binny’s failure, while negotiating with Walmart, to disclose the allegations or the fact that he had employed
private security personnel to deal with it. 69 Walmart later increased its stake in Flipkart to 81.3 per cent.70
With millions of customers visiting Walmart stores every day, and Flipkart’s gross merchandising value of
more than $1 billion, Walmart’s investment aimed to contribute to Flipkart’s customer-focused mission to
revolutionize Indian e-commerce through technology. Taking into account Walmart’s core strength in the
food and grocery industry, Flipkart and Walmart planned a new supply chain investment to strengthen their
back-end operations by including farmers and small and medium enterprise (SME) suppliers in the food
and grocery sector, which occupied approximately 66.30 per cent of total retail sales 71 (see Exhibit 5).
Hence, in December 2019, Flipkart strategically invested in the agricultural technology start-up Ninjacart
to add strength to its farm-to-stores delivery chain. 72
Flipkart later acquired Shadowfax Technologies Pvt. Ltd., which it could leverage to connect with
organized small stores and kirana (small grocery or general) stores to develop its supply chain.73 In the
future, Flipkart might also utilize Walmart’s warehouses to expand its pilot FarmerMart program, which
ensured the delivery of fresh fruits and vegetables from farms to modern retail stores and local shops. This
would also benefit farmers, who were suffering from inefficient logistics and warehousing that resulted in
a significant percentage of fruits and vegetables getting spoiled. With more investments and modern
technology, Flipkart might overcome the specific problems related to the delivery of products to rural
areas. 74 This might lead Flipkart to increase its demand capacity, which would further increase its profits.
GOVERNMENT POLICIES AND FOREIGN DIRECT INVESTMENT NORMS
In December 2018, the government of India proposed new FDI rules for e-commerce that restricted
companies from trading products exclusively on their online platforms. In the inventory-based model,
online entities with foreign investments were no longer allowed to display products sold by suppliers in
which they had controlling equity stakes. The stock of a retailer would be considered to be controlled by a
company’s marketplace model if more than 25 per cent of its products were bought from the marketplace
entity or its wholesale unit. The rules also prohibited e-commerce behemoths such as Flipkart and Amazon
from obtaining 25 per cent or more of their products from a single supplier, giving preferential treatment to
any supplier, offering deep discounts, or manipulating product prices. 75 These rules were meant to improve
enforcement of a policy presented in 2016 76 and to address complaints that platforms were violating the
guidelines to offer discounts through their group logistics and wholesale entities. 77
On one hand, this move could appease brick-and-mortar retailers, who had faced long-term damage from
e-commerce companies’ use of deep discounts to win over customers. On the other hand, the rules could
cause difficulties for brand launches, exclusive sales, cashbacks, and preferential services offered by e-
commerce companies, such as Flipkart Plus and Amazon Prime.
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Due to these tightened FDI norms, Walmart, which had invested in the online marketplace Flipkart, was no
longer allowed to sell its inventory heavily on Flipkart’s website. This acted as a roadblock in Walmart’s
plan to leverage its low-cost prices to attract more consumers toward Flipkart’s platform. “The impact on
e-retailers would be largely in the electronics and apparel segments, which account for a bulk of their
revenues,” said Anuj Sethi, senior director at analytics company CRISIL. A report by CRISIL estimated
that 50 per cent of Flipkart’s revenue came from this category, so the new FDI rules threatened to lead the
Walmart–Flipkart duo towards “meaningful disruption and top-line pressure.” 78 Financial services
company Morgan Stanley reported that the new guidelines might require Flipkart to withdraw as much as
25 per cent of its goods from its portal—including smartphones and electronics, which made up the bulk of
its sales. Altogether, this action threatened both Flipkart and Amazon with losses of up to 40 per cent in
revenues ($5.0 billion–$5.7 billion) by 2020. 79
To ensure compliance with the new FDI norms, Amazon reduced its stake in the companies whose products
were sold on the platform and allowed other ventures to increase their stakes in these companies. It also
removed the products of sellers in which it had major equity investments; for example, products from sellers
such as Appario Retail Private Limited and Cloudtail India Private Limited—which had both received
major equity funding from Amazon—were removed from Amazon’s online marketplace. Further, Amazon
products such as the Amazon Echo range of smart speakers were removed, but these were later added to
the platform via suppliers such as Hariom Communication LLP. 80
Considering Walmart’s vision and Flipkart’s market presence in the Indian e-commerce industry, there
were two options available for Walmart in tackling this unprecedented policy change: it could either divest
from Flipkart or “overcome these challenges.” 81
RELIANCE’S ENTRY
Eyeing the rapid growth of the e-commerce industry, in January 2019 Reliance announced that it would
launch the world’s biggest online-to-offline modern e-commerce platform. By combining the offline retail
network of Reliance Retail—which had a footprint of 10,415 stores in more than 6,600 cities, with 500
million annual footfalls—and Reliance Jio, which had 300 million subscribers, 82 Reliance aimed to
establish an omnichannel platform to scale up its current network of 15,000 digitized retail stores to more
than 5 million by 2023. 83 As Reliance was a home-grown company, the e-commerce regulation and people’s
sentiments were in its favour, and Reliance could potentially disrupt the Indian e-commerce industry. 84
According to Satish Meena, a senior forecast analyst at Forrester Research, “Reliance’s history of launching
operations via massive discounts” would trouble the Walmart−Flipkart duo -as well as Amazon. 85 For
example, when Reliance launched the Monsoon Hungama tariff plan with its entry in 2003, it reduced tariffs
on voice calls from ₹2.00 86 per minute to ₹0.40 per minute; this was followed by Reliance Jio’s 4G plan
launch in 2016, which dropped data rates from ₹250 per gigabyte to ₹50 per gigabyte. 87 This type of
discounting could disrupt any industry, and an equivalent situation was possible in the grocery space after
Reliance’s launch. Reliance’s behaviour had the potential to cause significant trouble for Flipkart, which
was already operating with a significant debt.
As the changes in the FDI policy in India caused a setback for the Walmart–Flipkart duo, Reliance’s entry
was expected to make the situation more intense by potentially putting pressure on Flipkart’s financials,
which could in turn be reflected in its operations. In an extreme case, this could lead to Walmart’s exit from
Flipkart altogether. 88
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COVID-19 CRISIS
In February 2020, COVID-19 caused a worldwide pandemic, and to contain its spread, most countries,
including India, were placed under mandatory lockdowns. In the wake of the nationwide lockdown that
started in India on March 25, 2020, the Indian e-commerce industry witnessed challenges such as the limited
availability of workers for warehouse and delivery functions and a ban on the sale of non-essential items
for almost two months. This ban was partially lifted during the third phase of lockdown (from May 4, 2020),
and e-commerce companies were again allowed to deliver non-essential items in areas of the country that
were only slightly or moderately affected by COVID-19. Even then, sales of non-essential item on e-
commerce platforms in the first week of May were less than they had been in the previous year. 89
However, during the pandemic, numerous consumers were reluctant to step out of their homes, and this
caused a significant change in their behaviour; they moved out of their comfort zones and increasingly
opted for e-commerce platforms for purchases of essential items, including groceries, in order to avoid
crowds and adhere to social distancing rules. Naturally, one of the most positively affected segments in e-
commerce was the grocery segment, since many consumers had opted to buy from companies such as
Grofers India Pvt. Ltd. and Amazon India. However, the government of India, citing regulatory issues,
rejected Flipkart’s proposal to enter the food retail sector. 90
Expecting a major bounce-back in demand following COVID-19, the Walmart–Flipkart duo decided to take
advantage of this surge of new customers by providing the best customer experience and developing
authentic bonds with shoppers on the platform. They planned to contract almost 93,000 square metres (1
million square feet) of space across major cities such as Coimbatore, Lucknow, Ahmedabad, Pune,
Hyderabad, the Mumbai Metropolitan Region, and Bengaluru. 91 The Walmart–Flipkart duo also made a
series of partnerships with leading FMCG companies and brick-and-mortar retailers during the COVID-19
pandemic in order to increase its product range in its weakest business segment, essentials. It expanded its
food and grocery segment reach from just five areas to 300 areas and, with special clearance from the central
government, transformed its existing warehouses to store products. 92 In April 2020, the Walmart–Flipkart
duo partnered with Spencer’s Retail Limited, which would act as a supplier on Flipkart’s platform and
provide specific packages of FMCG and staples, which would be transported via Flipkart’s last-mile
delivery network. The pilot started in Hyderabad that month. 93 The duo then partnered with Vishal Mega
Mart Pvt. Ltd. for doorstep delivery of essential items across 26 cities in India. This association involved
the development of a Vishal Mega Mart Essentials store on the Flipkart platform. 94 Customers could order
essential products such as beverages, pulses, oil, rice, and flour directly from Vishal Mega Mart Pvt. Ltd.’s
365 stores and get home delivery from Flipkart. This partnership was expected to offer real-time clarity
about the essentials available in consumers’ regions and to add value through timely doorstep delivery. 95
THE WALMART–FLIPKART DUO: THE WAY FORWARD?
Walmart’s chief financial officer, Brett Biggs, when discussing the changes to India’s FDI norms following
Walmart’s acquisition of Flipkart, said, “When you make an investment in India, note that things are going
to change. . . . We will have legislation changes.” 96 Walmart and Flipkart had to make modifications to face
these changes: “It is disappointing that you have a law like that changed that quickly, but we have made the
adjustments and we are moving forward.” 97 As the Walmart–Flipkart duo was already facing modified FDI
norms, the unprecedented growth of Amazon, and the entry of Indian conglomerate Reliance, the COVID-
19 pandemic became an even bigger roadblock to the duo’s efforts to conquer the Indian e-commerce
industry. Amid these unexpected challenges, would the Walmart–Flipkart duo emerge as a winner, or would
Walmart’s dream of capturing the Indian e-commerce industry come to a disappointing end?
Page 10 9B21M052
EXHIBIT 1: MARKET SHARE OF COMPANIES IN THE INDIAN E-COMMERCE INDUSTRY

(APRIL 2018)
Companies % Market Share in April 2018

Flipkart 32%
Amazon 31%
Paytm Mall 6%
Myntra 5%
Jabong 2%
Snapdeal 2%
Pepperfry 2%
Shopclues 2%
Bigbasket 2%
Others 16%
Source: Created by case authors based on data from Nishant Sharma, “This Is Why Amazon Hasn’t Beaten Flipkart in India
Yet,” The Quint (blog) Bloomberg, March 30, 2018, accessed July 2, 2019, www.thequint.com/news/business/this-is-why-
amazon-hasnt-beaten-flipkart-in-india-yet.
EXHIBIT 2: FLOW-TIME ANALYSIS OF A FLIPKART SALE
Notes: IT = information technology; RPT = regional procurement team; JIT = just in time; CPT = central procurement team
Source: Created by case authors based on data from Neetu Kapoor, “A Case Study on Supply Chain Management by Flipkart,”
Episteme 5, no. 3 (December 2016), accessed July 3, 2019, http://episteme.net.in/web.content/d.73/content/410/attachments/10-
A_case_study.pdf.
Page 11 9B21M052
EXHIBIT 3: FLIPKART’S OPERATING HISTORY
Year 2008– 2009– 2010– 2011– 2012– 2013– 2014– 2015– 2016–
2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue (in Million Dollars) 0.87 4.22 10.98 104.38 251.10 485.57 1,676.89 2,355.10 2,932.20
Net Income (in Million Dollars) (0.32) (1.05) (2.19) (22.96) (51.83) (120.00) (316.36) (798.6) (1,295.30)
Net Margin (%) (37.50) (25.00) (20.00) (22.00) (20.64) (24.71) (18.80) (33.91) (44.18)
Source: Created by case authors based on data from Aswath Damodaran, “Walmart’s India (Flipkart) Gambit: Growth Rebirth or Costly Facelift?,” Musings on Markets (blog),
May 22, 2018, accessed July 3, 2019, http://aswathdamodaran.blogspot.com/2018/05/walmarts-india-flipkart-gambit-growth.html.
EXHIBIT 4: FLOW-TIME ANALYSIS OF A WALMART SALE
Source: Created by case authors based on data from Clara Lu, “Walmart’s Successful Supply Chain Management,” QuickBooks Commerce, October 4, 2018, accessed July
2, 2019, www.tradegecko.com/blog/supply-chain-management/incredibly-successful-supply-chain-management-walmart.
Page 12 9B21M052
EXHIBIT 5: FOOD AND GROCERY’S MARKET SHARE OF TOTAL E-COMMERCE SALES
Retail Segment % of Contribution in

Total Retail Sales
Food and Grocery 66.30%
Jewellery 8.00%
Apparel 8.70%
Consumer Durables and IT 5.20%
Furniture and Furnishings 3.60%
Pharmacy 2.70%
Footwear 1.20%
Others 4.30%
Note: IT = information technology

Source: Created by case authors based on data from Sunny Sen and Josey Puliyenthuruthel, “Why Walmart, the World’s
Largest Company, Wants to Gobble Up Flipkart,” Factor Daily, April 30, 2018, accessed July 3, 2019,
https://factordaily.com/why-walmart-gobble-up-flipkart.
Page 13 9B21M052
ENDNOTES
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Walmart Inc., Flipkart Internet Private Ltd., or any of their employees.
2
Alnoor Peermohamed, “Flipkart Cash Burn at $1 Billion under Walmart,” Economic Times, June 17, 2019, accessed July 1, 2019,
https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/flipkart-cash-burn-at-1-billion-under-
walmart/articleshow/69797676.cms. All dollar amounts in the case are in US dollars.
3
Alnoor Peermohamed, op. cit.
4
Ibid.
5
Government of India, “Review of the Policy on Foreign Direct Investment (FDI) in e-Commerce,” Ministry of Commerce and
Industry, Department of Industrial Policy & Promotion, December 26, 2018, accessed October 24, 2020,
https://dipp.gov.in/sites/default/files/pn2_2018.pdf.
6
Manish Singh, “Flipkart Buys Walmart’s India Wholesale Business to Reach Mom and Pop Stores,” Tech Crunch, July 23, 2020,
accessed July 31, 2020, https://techcrunch.com/2020/07/23/flipkart-buys-walmarts-india-wholesale-business-to-reach-mom-and-pop/.
7
P. R. Sanjai and Jeremy Diamond, “The Tiny Deals behind Mukesh Ambani’s Bid to Take on Amazon,” Economic Times,
April 8, 2019, accessed July 1, 2019, https://economictimes.indiatimes.com/industry/services/retail/the-tiny-deals-behind-
mukesh-ambanis-bid-to-take-on-amazon/articleshow/68771126.cms?from=mdr.
8
Express Web Desk, “Unlock 1.0: What Changes for You in Malls, Religious Places from Today,” Indian Express, June 8,
2020, accessed September 11, 2020, https://indianexpress.com/article/india/unlock-1-0-coronavirus-guidelines-malls-
religious-places-6447443/.
9
Soumya Gupta, “India’s E-Commerce Market to Hit $200 Billion by 2026: Morgan Stanley Report,” Livemint, October 13,
2017, accessed July 1, 2019, www.livemint.com/Industry/9iUxlQZ4iHwPiXRKscx3LK/Indias-ecommerce-market-to-grow-30-
to-200-billion-by-202.html.
10
TNN, “India Is Fastest Growing E-Commerce Market: Report,” Times of India, November 29, 2018, accessed September
15, 2019, https://timesofindia.indiatimes.com/business/india-business/india-is-fastest-growing-e-commerce-market-
report/articleshow/66857926.cms.
11
Ibid.
12
Ibid.
13
Ibid.
14
Rajkaran Singh, “15 Biggest E-Commerce Challenges in India and How to Overcome Them,” Online Selling India, accessed
September 15, 2019, https://onlinesellingindia.com/e-commerce-challenges-in-india/.
15
Ibid.
16
Katie Arcieri, “Flipkart Is No. 1 in India but Faces Formidable Foe in Amazon, Say Experts,” S&P Global Market Intelligence,
October 10, 2019, accessed January 17, 2020, www.spglobal.com/marketintelligence/en/news-insights/latest-news-
headlines/54083920.
17
Hitesh Bhasin, “7 Top Flipkart Competitors,” Marketing91, December 17, 2017, accessed September 15, 2019,
www.marketing91.com/top-7-flipkart-competitors/.
18
Anirban Sen, “Amazon Fastest Growing E-Commerce Firm in India,” Livemint, November 29, 2018, accessed October 2,
2019, www.livemint.com/Companies/ThVHFdwfVfNM1Gz5trdf7I/Amazon-fastest-growing-ecommerce-firm-in-India.html.
19
Techseen Bureau, “A Timeline of Flipkart’s Acquisitions,” Techseen, April 10, 2017, accessed October 2, 2019,
https://techseen.com/2017/04/10/flipkart-acquisition-ebay-weread/.
20
BI India Bureau, “Flipkart is Likely to Re-launch Its Own Private Label Business, This Time with Some Tweaks,” Business
Insider, June 28, 2016, accessed July 3, 2019, https://www.businessinsider.in/flipkart-is-likely-to-re-launch-its-own-private-
label-business-this-time-with-some-tweaks/articleshow/52951780.cms.
21
Binu Paul, “Flipkart’s Private Label Strategy May Not Leave a MarQ on Large Appliances,” VC Circle, October 5, 2017,
accessed July 3, 2019, https://www.vccircle.com/flipkarts-private-label-strategy-may-not-leave-a-marq-on-large-appliances.
22
Techseen Bureau, op. cit.
23
PTI, “Flipkart Opens First Offline Center in Bengaluru,” Economic Times, July 28, 2019, accessed June 16, 2020,
https://economictimes.indiatimes.com/industry/services/retail/flipkart-comes-with-first-offline-presence-with-furniture-
experience-centre-in-bengaluru/articleshow/70421687.cms.
24
Ibid.
25
Ibid.
26
Peerzada Abrar, “Flipkart Starts Voice Assist in Multiple Languages to Make Shopping Simpler,” Business Standard, June
9, 2020, accessed June 16, 2020, www.business-standard.com/article/companies/flipkart-starts-voice-assist-in-multiple-
languages-to-make-shopping-simpler-120060900864_1.html.
27
Ibid.
28
Neetu Kapoor, “A Case Study on Supply Chain Management by Flipkart,” Episteme 5, no. 3 (December 2016), accessed
July 3, 2019, http://episteme.net.in/web.content/d.73/content/410/attachments/10-A_case_study.pdf.
29
Ibid.
30
Ibid.
31
Ibid.
32
Ibid.
33
Ibid.
Page 14 9B21M052
34
Ibid.
35
Binu Paul, “A History of Flipkart’s Many Big Billion Days,” TechCircle, May 9, 2018, accessed October 24, 2020,
www.techcircle.in/2018/05/09/a-history-of-flipkart-s-many-big-billion-days/.
36
Navin Bhatia, “These Are the Startups Acquired by Flipkart,” OfficeChai, April 24, 2017, accessed October 2, 2019,
https://officechai.com/startups/startups-acquired-by-flipkart/.
37
Ibid.
38
Ibid.
39
Ibid.
40
Ibid.
41
Aswath Damodaran and Harvest Exchange, “Walmart’s India (Flipkart) Gambit: Growth Rebirth or Costly Facelift?,” Yahoo
Finance, May 22, 2018, accessed July 3, 2019, https://finance.yahoo.com/news/walmart-apos-india-flipkart-gambit-181700070.html.
42
Ibid.
43
Ibid.
44
Ibid.
45
Radhika P Nair, “7 Reasons Why Flipkart and Walmart Want to Join Hands,” YourStory, April 11, 2018, accessed July 3,
2019, https://yourstory.com/2018/04/flipkart-walmart-deal.
46
Ibid.
47
Walmart Inc., Form 10-K: Annual Report for the Fiscal Year Ended January 31, 2019, Walmart Inc., 2019, United States
Securities and Exchange Commission, accessed July 3, 2019, http://d18rn0p25nwr6d.cloudfront.net/CIK-
0000104169/b23b2787-eb44-4e0b-82bd-fca01f140a3e.pdf.
48
“Overview,” Walmart India, accessed November 20, 2020, www.wal-martindia.in/about-us/our-business.
49
Ibid.
50
Ibid.
51
Ibid.
52
Clara Lu, op. cit.
53
Ibid.
54
“Our Business,” Walmart, accessed October 24, 2020, https://corporate.walmart.com/our-story/our-business.
55
Craig Patterson, “Walmart Marks 25 Years in Canada amid Challenges and Success,” Retail Insider, March 20, 2019, accessed
July 2, 2019, www.retail-insider.com/retail-insider/2019/3/walmart-marks-25-years-in-canada-amid-challenges-and-success-feature.
56
Phoebe Jui, “Walmart’s Downfall in Germany: A Case Study,” Journal of International Management, May 16, 2011, accessed
July 3, 2019, https://journalofinternationalmanagement.wordpress.com/2011/05/16/walmarts-downfall-in-germany-a-case-study/.
57
Ian King, “Why Walmart is Willing to Check Out of Asda in £13 Billion Sainsbury’s Merger,” Sky News, April 30, 2018,
accessed July 2, 2019, https://news.sky.com/story/why-walmarts-willing-to-check-out-of-asda-11353638.
58
Walter Loeb, “Walmart: What Happened in India?,” Forbes, October 16, 2013, accessed July 2, 2019,
www.forbes.com/sites/walterloeb/2013/10/16/walmart-what-happened-in-india/#767a4dcc7d1c.
59
Ibid.
60
Ibid.
61
Cole Buckley, Pete DeFina, and Lindsay Root, “Walmart vs Amazon” (Economist 2016 Investment Case Competition,
Shidler College of Business, University of Hawai’i at Manoa, 2016), accessed July 4, 2019,
www.economist.com/sites/default/files/shidler_college_of_business_ws.pdf.
62
Ibid.
63
Ibid.
64
Arun Kumar, Varsha Bansal, and Madhav Chanchani, “Sachin Bansal Quits Flipkart as Walmart Wanted Only One Founder
on Board,” Economic Times, May 10, 2018, accessed June 15, 2020, https://economictimes.indiatimes.com/small-
biz/startups/features/sachin-bansal-quits-flipkart-as-walmart-wanted-only-one-founder-on-board/articleshow/64103047.cms.
65
Ibid.
66
Ibid.
67
“Binny Bansal Says Co-Founder Sachin’s Exit from Flipkart was Because They Wanted ‘Different Things’: Report,” Business
Today, September 24, 2018, accessed July 25, 2019, www.businesstoday.in/current/corporate/binny-bansal-flipkart-co-
founder-sachin-exit-walmart/story/280033.html.
68
Shweta Ganjoo, “Flipkart Co-Founder Binny Bansal Sells $76 Million Worth Company Shares to Walmart,” India Today,
June 24, 2019, accessed July 25, 2019, www.indiatoday.in/technology/news/story/flipkart-co-founder-binny-bansal-sells-76-
million-worth-company-shares-to-walmart-1555067-2019-06-24.
69
Megha Bahree, “Flipkart CEO Binny Bansal Resigns after Probe into Personal Misconduct,” Forbes, November 13, 2018,
accessed July 25, 2019, www.forbes.com/sites/meghabahree/2018/11/13/flipkart-ceo-binny-bansal-resigns-after-probe-into-
personal-misconduct/#9590d7c5ac35.
70
“Walmart Raises Stake in Flipkart to 81.3%,” Hindu Business Line, November 20, 2018, accessed on September 20, 2020,
www.thehindubusinessline.com/companies/walmart-raises-stake-in-flipkart-to-813/article25550934.ece.
71
Sunny Sen and Josey Puliyenthuruthel, “Why Walmart, the World’s Largest Company, Wants to Gobble Up Flipkart,” Factor
Daily, April 30, 2018, accessed July 3, 2019, https://factordaily.com/why-walmart-gobble-up-flipkart/.
72
ETtech, “Walmart and Flipkart Jointly Invest in Ninjacart,” Economic Times, December 11, 2019, accessed October 24,
2020, https://economictimes.indiatimes.com/internet/walmart-and-flipkart-invest-in-ninjacart/articleshow/72468669.cms.
Page 15 9B21M052
73
Hemani Sheth, “Flipkart May Take Over Walmart’s Cash and Carry Business in India, Reports Say,” Hindu Business Line,
January 25, 2020, accessed June 15, 2020, www.thehindubusinessline.com/info-tech/flipkart-may-take-over-walmarts-cash-
and-carry-business-in-india-reports-say/article30651079.ece.
74
Nisha Biswal, “The Flipkart-Walmart Deal is a Game Changer,” Livemint, May 30, 2018, accessed July 5, 2019,
www.livemint.com/Opinion/H7oulz9d7i81Ck5Fp7PQEP/The-Flipkart-Walmart-deal-is-a-game-changer.html.
75
ET Bureau, “Govt Tightens Norms for ETailers, Bars Exclusive Deals,” Economic Times, December 27, 2018, accessed
July 5, 2019, https://economictimes.indiatimes.com/news/economy/policy/government-tighten-norms-for-e-commerce-
companies-for-sale-of-products/articleshow/67258251.cms?from=mdr.
76
Government of India, “Guidelines for Foreign Direct Investment (FDI) on E-commerce,” Ministry of Commerce and Industry,
Department of Industrial Policy & Promotion, March 29, 2016, accessed June 3, 2019,
https://dipp.gov.in/sites/default/files/pn3_2016_0.pdf.
77
ET Bureau, op. cit.
78
Pawan Kalyani, “FDI Directive 2019 and Impact on E-Commerce Market: A Case Study with Special Reference to Amazon,
Walmart-Flipkart and Others with New Entry Reliance into the Market,” Information Technology and Management 6, no. 1
(2019): 7–18, 15–16.
79
Ibid., 15.
80
PTI, “New FDI Rules: E-Biz Companies Re-Align Operations, Many Amazon Products Go Off Platform,” Economic Times,
February 2, 2019, accessed June 15, 2020, https://retail.economictimes.indiatimes.com/news/e-commerce/e-tailing/new-fdi-
rules-e-biz-companies-re-align-operations-many-amazon-products-go-off-platform/67802811.
81
ZeeBiz WebTeam, “Walmart to Exit Flipkart? How This New Policy May Have Hit E-Commerce in India—From Largest
Investment, to Thoughts of Sad Exit,” Zee Business, February 5, 2019, accessed November 20, 2020,
www.zeebiz.com/technology/news-walmart-flipkart-deal-exit-ecommerce-in-india-new-ecommerce-fdi-policy-india-amazon-
jeff-bezos-largest-investment-84161.
82
Malvika Gurung, “Reliance Will Make It Tough for Amazon, Walmart; Flipkart Will Open Offline Grocery Stores!,” Trak.in,
May 22, 2019, accessed July 29, 2019, https://trak.in/tags/business/2019/05/22/reliance-will-make-it-tough-for-amazon-
walmart-flipkart-will-open-offline-grocery-stores/.
83
“Reliance Entry to Digitise 5 Million Kirana Stores by 2023: Report,” Times of India, May 12, 2019, accessed July 10, 2019,
https://timesofindia.indiatimes.com/business/india-business/reliance-entry-to-digitise-5-million-kirana-stores-by-2023-
report/articleshow/69290236.cms.
84
Rebecca Bundhun, “Reliance’s Move into E-Commerce Set to Shake Up Huge Indian Market,” The National, May 5, 2019,
accessed July 10, 2019, www.thenational.ae/business/technology/reliance-s-move-into-e-commerce-set-to-shake-up-huge-
indian-market-1.857086.
85 IANS, “Reliance Retail Set to Disrupt Amazon, Walmart-Flipkart: Report,” Livemint, May 21, 2019, accessed July 29, 2019,
www.livemint.com/industry/retail/reliance-retail-set-to-disrupt-amazon-walmart-flipkart-report-1558420254384.html.
86
₹ = INR = Indian rupee; US$1 = ₹75.0963 on April 30, 2020.
87
IANS, op. cit.
88
Nishtha Gupta, “Walmart May Exit Flipkart Merger after the New FDI E-Commerce Regulations: Morgan Stanley,” India
Today, February 5, 2019, accessed July 10, 2019, www.indiatoday.in/business/story/walmart-exit-flipkart-merger-fdi-
ecommerce-rules-morgan-stanley-1448453-2019-02-05.
89
PTI, “Awaiting Advisory from States on Resuming Full Services: Flipkart,” Economic Times, May 18, 2020, accessed June
17, 2020, https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/awaiting-advisory-from-states-on-resuming-full-
services-flipkart/articleshow/75804716.cms.
90
“Govt Rejects Flipkart’s Proposal for Entry into Food Retail Business,” Business Standard, June 2, 2020, accessed June 17, 2020,
www.business-standard.com/article/companies/dpiit-rejects-flipkart-s-proposal-for-entering-food-retail-sector-120060100596_1.html.
91
Sobia Khan and Kailash Babar, “Amazon, Flipkart to Increase Warehouses,” Economic Times, May 4, 2020, accessed June 18, 2020,
https://economictimes.indiatimes.com/industry/services/retail/amazon-flipkart-to-increase-warehouses/articleshow/75523490.cms.
92 Writankar Mukherjee, “Flipkart-Spencer’s Retail Confirms Partnership; Flipkart Exploring More Alliances,” Economic Times,
April 9, 2020, accessed June 18, 2020, https://economictimes.indiatimes.com/industry/services/retail/flipkart-spencers-retail-

confirms-partnership-flipkart-exploring-more-alliances/articleshow/75070820.cms.
93
Ibid.
94
PTI, “Flipkart Partners Vishal Mega Mart for Home Delivery of Essentials,” Economic Times, May 19, 2020, accessed
June 18, 2020, https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/flipkart-partners-vishal-mega-mart-for-
home-delivery-of-essentials/articleshow/75822086.cms.
95
Ibid.
96
Sagar Malviya, “Walmart Disappointed with FDI Norm Change Soon after Flipkart Deal,” Economic Times, March 7, 2019,
accessed July 6, 2019, https://economictimes.indiatimes.com/industry/services/retail/walmart-disappointed-with-fdi-norm-
change-soon-after-flipkart-deal/articleshow/68295720.cms.
97
Ibid.
III. Walmart Flipkart Case
A. Case Overview
Walmart vs Amazon: Two major companies in the USA, Walmart and Amazon, made
substantial investments in India leading to intense competition for their presence within the
country. By 2018, Amazon has taken the second top e-commerce industry in India, this led to
Walmart needing to devise a strategy to establish a sophisticated supply chain and reach a
strong consumer base in order to compete with Amazon.
Flipkart’s acquisition by Walmart: Walmart bought a 77% controlling stake in one of India's
most popular e-commerce firms resulting in the complete exist of Flipkart investor and
co-founder Sachin Bansal reducing their stakes. Through investment, Walmart aimed to
contribute to Flipkart’s customer-focused mission to revolutionize Indian e- commerce
through technology.
Government policies and Foreign Direct Investment: In 2018, the Government of India
proposed new FDI rules that restricted e-commerce with foreign investment to display
products sold by suppliers in which they had controlling equity stocks. In result, Walmart was
no longer allowed to sell its inventory heavily on Flipkart’s website. This led to setback for
Walmart-Flipkart duo due to potential losses of up to 40% in revenue as the impact of the
new FDI norms.
B. Case Analysis
Changes in FDI: The Indian government’s new FDI (Foreign Direct Investment) rules for
e-commerce, introduced in December 2018, have had a major impact on the operations of
companies like Flipkart and Amazon. Those regulations aimed to achieve a level-playing
field for offline retailers while covering apprehensions pertaining to predatory pricing,
exclusive tie-up and control of inventory by e-commerce giants.
Impact on E-commerce Companies:
● Inventory Limitations: Walmart was restrained from heavy inventory push on Flipkart’s
platform. This prevented Walmart from executing its strategy of pricing products low to
drive traffic to the platform.
● Revenue Impact: A large part of Flipkart’s revenue, especially from electronics and
apparel segments, was in danger because of the cap. That posed a “real danger of severe
disruption and top-line impact” for the Walmart-Flipkart combine.
● Potential Revenue Loss: Reports said both Flipkart and Amazon could see revenue drops
of up to 40% by 2020, costing them billions.
● Walmart’s Dilemma with Flipkart: Walmart, which had invested significantly in Flipkart,
faced a unique challenge due to these new FDI rules.
Previous Strategies
● Entry Into Canada (1994)
○ Acquire 122 stores from Woolworth Canada
○ Introduced Supercentres concept
○ Success in Canada by serving 1.2 million customers daily
● Joint Venture in India (2007):
○ Partnership with Bharti Airtel Limited
○ Established “Best Price Modern Wholesale” superstores
○ Terminated in 2013 due to cultural differences
● Expansion into Germany (1997)
○ Acquired 95 storehouses
○ German market highly competitive but low-price
○ Exit in July 2006 due to sustained losses
● The strategy adopted by Walmart to enter foreign market are varies:
○ Acquisition in Canada: Success
○ Acquisition in Germany: Fail
○ Joint Venture in India: Fail
The results of the strategies
● The success in Canada due to the importance of adapting to local market needs and
preferences
● Fail to expand in German due to lack of competitive advantage in a highly competitive
market
● Joint venture faced cultural differences and challenges
Strategies to Implement
● Walmart’s lessons from its international expansion include the need for extensive market
research, cultural insight and flexibility.
● The effectiveness of international market entry strategies often relies on the alignment of
business models and local market dynamics
Theories Relations to the Case
● Internalization Theory: The Walmart-Flipkart partnership has raised concerns about FDI
regulations, market dynamics, and the rise of e-commerce. It shows from the stake
acquisition of Flipkart by Walmart which exceeds 67% from Letto-Gullies definition.
Both Walmart and Amazon faced significant challenges as a result of India’s new FDI
regulations for e-commerce, which required them to change their ownership structures as
well as certain important vendor connections and agreements before the regulations took
effect.
● Market Imperfection: The Walmart-Flipkart agreement in pursuit of stability is consistent
with the idea of market imperfections since it shows how government interventions and
regulatory reforms are made to alleviate market inefficiencies and foster competition.
The results to the FDI regulations changes in India requires Walmart to:
○ Compliance with the regulations: Lowering its equity position in a number of
Flipkart platform suppliers in order to abide by rules governing the ownership
structure of e-commerce platform
○ Adjust the business model: Walmart has to modify its strategy in order to maintain
fair competition and access for a wider variety of merchants on the Flipkart
marketplace.
○ Implement adaptive strategy: Walmart needed to adapt its strategies and operations
to navigate the evolving landscape effectively
● Monopoly Advantage: Walmart obtains entry to the Indian market through Flipkart, and
the acquisition enables Walmart to go further into several regions. These advantage
resulting from the success of Walmart in:
○ Increasing their fashion sales to 30% after acquiring Myntra in May 2014
○ Achieving 70% of fashion sales after combining market share of Flipkart Group and
Jabong
The FDI new regulations forces Walmart to reduce selling and limits their sales in the
online platform. These new regulations affect Walmart to reduce the dominant advantage
of foreign-funded e-commerce enterprises. Moreover, the new FDI regulations placed
limitations on a variety of actions, including exclusive tie-ups and inventory management
which affect Walmart’s ability to leverage its ownership advantages fully.
● Eclectic Paradigm
○ Ownership Advantage: Walmart’s ownership of Flipkart gave them access to the
Indian market through Flipkart, and the purchase enables Walmart to go farther into
other markets. This results in Walmart successfully acquiring 77% of stake in
Flipkart for $16 billion. The new FDI regulations placed limitations on a variety of
actions, including exclusive tie-ups and inventory management which affect
Walmart’s ability to leverage its ownership advantages fully.
○ Location-specific Advantage: Flipkart’s presence in India enables Walmart to
broaden its worldwide reach and dive more deeply into other regions. Walmart’s
capacity to fully capitalize on geographic advantages was hampered by the changes
of FDI regulations, which transformed the regulatory environment and imposed
limits on specific retail operations.
C. Recommendations
Challenges Recommendations
Cultural Customer The company had to ensure that the acquired

Differences Preferences company’s culture and values were aligned with
its own, and that the employees of the acquired
company were able to adapt to Flipkart’s culture
Competitor Amazon ● Educate consumers about the benefits of

Challenges purchasing from Flipkart, emphasizing its
Reliance Retail commitment to quality and compliance with
FDI Regulations
● Explore opportunities to expand into smaller
towns and rural areas where competition may
be less intense, and e-commerce adoption is
growing
Regulatory Changes in FDI ● Provide a variety sellers to improve the

Challenges Regulations marketplace at Flipkart
● Drive platform growth by inviting more small
to medium business to join for increased
product selection
● Expanding their categories of products
D. Trigger Question
Walmart-Flipkart Update Deals
To expand its stake in Flipkart, Walmart acquired Tiger Global’s (New York-based hedge
fund) remaining holdings of Flipkart shares for $1.4 billion and got Tiger Global’s 4% stake
in Flipkart in return. Although Tiger Global had previously sold most of its Flipkart shares,
they still made a significant gain of $3.5 billion on its initial investment of $1.2 billion and it
is demonstrating the success of their investment in Flipkart.
● Is the Strategy Success: Yes
○ 1st: Launching a co-branded credit card resulting positive feedback from customers
○ 2nd: The establishment of the Flipkart Samarth program, which aims to empower
small business owners and artisana by providing them access to over 150 million
Flipkart shoppers, benefiting communities of all sizes.
● Although the Flipkart deal has been deemed a success in various aspects, the investment
is still weighing on Walmart's financials. Despite these short-term financial setbacks,
Walmart's CEO, Doug McMillon, considers the investment in Flipkart a necessary
gamble, driven by the anticipated growth of India's e-commerce market, which is
expected to surge from $27 billion to $73 billion by 2022. Analyst Charles O’Shea from
Moody’s also views the Flipkart deal as an investment for the future, emphasizing the
significant growth opportunities that India presents in the long run. The answer could be
decided in 5 or 20 or maybe 20 years from now.
Rempang Issue:
Conflicts on Rempang Island began in 2001. At that time, the central government and BP
Batam issued Land Management Rights (HPL) to private companies. HPL then moved to PT
Makmur Elok Graha. In practice, the issue of land ownership status of the people who
already live in the area is increasingly complicated. The land conflict did not arise at that time
until several years later, because the company accepted that HPL had not yet entered into
managing parts of Rempang Island. Conflict began to emerge when the central government,
BP Batam, and the HPL holding company PT Makmur Elok Graha started working on a
project called Rempang Eco City, a project which was predicted to attract large investment to
this area.
● Land conflicts over Rempang Eco-city development plans: Local people refuse to be
relocated as a result of this project because they are worried about losing their living
space and history which lead to clashes.
● The Relocation of Rempang was carried out hastily: The relocation and construction of
Rempang Eco-City are seen as having been done too quickly from the perspective of the
locals because there was never a prior agreement between the government and the locals.
The government, however, refuted this claim and asserted that investments should be
made as soon as possible in order to foster investment competitiveness.
● Chinese investment is threatened with drifting: Investors are sensitive to issues of race
and religion that lead to conflict, this might affect the continuation of the giant
investment in the solar electric power panel factory. Since the money that is being
invested is almost half of the investment potential on Rempang Island.
What to do?
The government faced a dilemma regarding the FDI in Rempang Island. The investment
could contribute to significant investment amounting to approximately 300 million USD.
However, the government needs to navigate the social concerns that are raised in the island
related to the land use belonging to the local communities.
Challenges:
● Economic Losses: The potential loss arises from the investment value in Rempang which
exceeds more than Rp 300 Triliun.
● Damage to Investor Confidence: Indonesia will lose or be avoided by other major
investors in doing their investment in Indonesia.
● Missed Opportunities for Industrial Development: Loss of investment opportunities to
create 35,000 new jobs.
Government Dilemma: The Indonesia government faced a dilemma in navigating the
competing interests of economic development and social and environmental concerns.
Balancing investor confidence with addressing local opposition was a complex challenge.
Recommendations:
● Analysis: Economic Development or Social ImpactResults:
Options Analysis
Allow the ● The government could create the potential economic

Xinyl benefits of the FDI, including job creation and increased
Group industrial activity.
Project ● Involve the local communities to build the industry
● Relocate the local communities to the proper areas that
support their activities.
Reject the ● Government may not see the anticipated development

Investment benefits - such as FDI, job creation, corporate tax revenues,
and local growth multipliers.
● The inability to effectively launch this FDI project could
jeopardize Egypt’s image as an ideal country for foreign
investment and discourage potential investors.
● Results:
● Actions Needed: To mitigate these potential losses and address the challenges, the
government must adopt a balanced approach that prioritizes stakeholder engagement,
environmental responsibility, and transparent communication.
● Long-term Recommendations: The Government needs to conduct research before
determining the place to be built for investment projects. The research should be done
and determine the social impact that could be the risk for investment very carefully and
accurately to evaluate possible social impacts of the investment. Surveys, interviews, and
consultations are needed among the local community to measure their worries, demands,
and desires. We need to pay special attention to indigenous and other marginalized
communities.
IV. Guest Lecture
A. Case Overview
Global Strategies in Managing Differences - Indonesia’s Palm Oil Industry in a Global
Context: Lessons from the European Market
● European Perspective:
○ There is no EU legislation on palm oil labeling
○ "Palm Oil free" campaigns are an expression of the genuine environmental concerns
of consumers as well as manufacturers. Informed consumers (in the EU and
elsewhere) increasingly favor healthier, fairer and more-sustainable consumption
patterns. Preserving our planet is at the core of these patterns. Such concerns as a
perceived risk of deforestation, threats to biodiversity or the impact on climate
change influence consumers' purchasing decisions. The fact that some companies
label products as Palm Oil free reflects those consumer preferences. The same could
be said for organic, sugar-free or GMO-free labels on EU products.
○ Proper land use policies and enforcement could prevent environmental damage and
socioeconomic pressures on local communities, as well as improve EU perception
and market acceptance of palm oil.
○ The EU welcomes and supports Indonesia's efforts towards achieving 100%
sustainable palm oil by 2020. This calls for clear and well enforced standards to
protect local communities, ecosystems and carbon stocks, in line with the Paris
Agreement and Sustainable Development Goals (SDGs) 2030. Accountability,
traceability and independent monitoring could also help. The EU is ready to work
with Indonesia on how existing certification schemes could be further strengthened
and promoted.
○ The EU does not require sustainability measures to be commodity-specific. We are
committed to addressing all potential drivers of deforestation (e.g. soy, beef, cocoa,
coffee, timber etc). To be fully inclusive, a future "sustainable Palm Oil solution"
does not have to put the burden of certification on individual "small farmers” (>40%
of Indonesian production, and possibly more than 50% of production area). Group
certification and landscape approaches could also be explored.
● Indonesia Perspective
○ This happened due to the implementation of a downstream policy in the domestic
market (Indonesia) which proclaimed to increase exports of processed palm products
and reduce exports of CPO, on the other hand due to a negative CPO campaign from
Europe which prohibited the use of palm oil-based biofuels and included palm oil as
a high-risk commodity. caused deforestation.
B. Case Analysis
Pro-European Policies
● Issue: Palm oil is banned in Europe due to an attempt to decrease greenhouse gas
emission
● Facts:
○ The BU welcomes and supports Indonesia’s efforts towards achieving 100%
sustainable palm oil.
○ No trade barriers or discriminatory legislation towards palm oil.
○ Palm oil is the most commonly produced vegetable oil.
○ Palm oil-based biofuels actually have three times the climate impact of traditional
fossil fuels.
○ Requires producers to submit a due diligence statement and provide information that
they were not grown on lan deforested.
○ The European Union (EU) is one of the three biggest importers of Indonesian palm
oil.
○ EU tariffs (0 to 10.9%) are also low in comparison with other export markets.
○ Several European countries, as well as numerous multinational companies, have
already committed to only buying sustainably produced palm oil.
● Impacts:
○ Social Impact
■ Less conflict between communities and companies over rights to land.
■ Decrease concerns regarding forced labor.
■ Preservation of culturally important sites.
■ Palm oil is relatively high in saturated fats, therefore arising health concerns
(e.g. GMO-free products).
○ Economic Impact
■ Financial incentives from the European Union: This has helped to make
sustainable palm oil more affordable and accessible.
■ A measure to regulate palm oil price, supply, and demand in the EU.
■ Stimulate research and development effort to produce alternative oil that is more
environmentally friendly.
■ Can provide higher revenues for those who can meet the standard.
○ Environmental Impact
■ RSPO has helped to create a market for sustainable palm oil and has
incentivized producers to adopt sustainable practices.
■ Palm oil cultivation results in excessive deforestation and the use of harmful and
the useful of harmful biofuel feedstocks.
■ Without regulations, there may be increased pressure to convert a diverse
ecosystem into palm oil plantations, affecting landscapes.
■ Production of palm oil endangers the biodiversity of forests.
■ Less deforestation, lower pollution rate.
■ Avoid ecosystem disruption and degradation.
● Pro-Indonesian Policies
○ Supporting sustainable operation of palm oil industry
○ Standarisasi luas perkebunan + memfasilitasi pembangunan kebun masyarakat 20%
dari lahan tersebut: Standardization will ensure that the operations of the palm oil
industry will comply with the required global standards
○ Support and empower farmers to have ISPO certification: Reinforce the regulation
for minimum level of TTP (Traceability to Plantation)

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GLOBAL BUSINESS COMPILATION CASE ANALYSIS

By: Deqsha Novendra

Unilever’s Worldwide Business and Sustainable Living Plan 2

Tran Vu Hoai, VP of Communications and Sustainable Business, explained Unilever’s approach

The Global Perspective?

Source: Unilever Financial Statements (2014)

Short-term Community Engagement: Creating strong relationships with local

Diverse Product: Trying to explore some broad ways to create diverse

Enhancing PV Strategies: Developing the PV model to improve its

Sustainability Integration: The business objectives should consider

Proper Planning: Creating well-planned strategies to execute PV,

Corporate Social Sustainability initiative

Engage with government, Through PV model it does bring awareness to Unilever

SHENZHEN AT 40: CHINA’S SILICON HBSP No.: NTU205

“It is not a question of control effectiveness; it is a question of our policy.”

Deng Xiaoping, November 1977

SHENZHEN SPECIAL ECONOMIC ZONE: 1980 TO 1992 (see Exhibit 19)

Strategy, Structure, and Rivalry

Deng Xiaoping, November 1977

Related Supporting Industries

Box 1: Huaqiangbei (华强北) Market

The main malls are:

Photos were taken by authors on site. Source: Shenzhen Shopper

DEEPENING MARKET REFORMS: 1992 TO 2006 (see Exhibit 20)

Strategy, Structure, and Rivalry

Related Supporting Industries

SHENZHEN AS AN INNOVATION HUB: 2006 TO TODAY (see Exhibit 21)

Strategy, Structure, and Rivalry

Box 2: Green Pine Capital

Related Supporting Industries

SHENZHEN: MOVING FORWARD (see Exhibit 21)

Strategy, Structure, and Rivalry

EXHIBIT 1: THE CHINESE CORPORATE INNOVATION REPORT RANKS

Source: HSBC China

EXHIBIT 2: ECONOMIC REFORMS FOR SHENZHEN – 1979 TO 1990

Source: Shenzhen Museum

EXHIBIT 3: ANNUAL AVERAGE GROWTH RATE OF ECONOMIC INDICATORS

Annual Average Growth Rate

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 4: SHENZHEN’S TOTAL EXPORTS – 1980 TO 1992

Year Total Exports (USD) Annual Average Growth Rate (%)

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 5: FOREIGN-FUNDED ENTERPRISES IN SHENZHEN – 1992 TO 2005

Year Foreign-funded enterprises

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 6: NATION-WIDE ECONOMIC INDICATORS OF GROWTH – 1980 TO 2005

Per Capita GDP Average Wages Household Consumption Expenditure (in

Source: National Bureau of Statistics

EXHIBIT 7: SHENZHEN CAPITAL GROUP PORTFOLIO OF 138

Source: Shenzhen Capital Group

EXHIBIT 8: COMPOSITION OF GDP BY THREE INDUSTRIES FOR SHENZHEN – 2011 TO 2016

Composition (out of 100%)

Source: Statistics Bureau of Shenzhen City

EXHIBIT 9: INVESTMENT IN FIXED ASSETS FOR THE MANUFACTURING

Investment in Fixed Assets

Source: Shenzhen Municipal Bureau of Statistics

EXHIBIT 10A: PATENT STATISTICS FOR SHENZHEN – 2001 TO 2016

Source: Statistics Bureau of Shenzhen City

EXHIBIT 10B: PATENT STATISTICS: SHENZHEN VS. CHINA – 2012 TO 2016

Number of Patent Shenzhen as Number of Invention Patent Shenzhen as a

Source: National Bureau of Statistics; Statistics Bureau of Shenzhen City

EXHIBIT 10C: INTERNATIONAL PATENT STATISTICS: SHENZHEN VS. FRANCE AND

Source: World Intellectual Property Office

EXHIBIT 10D: INTERNATIONAL PATENT APPLICATIONS OF