Financial Analysis of Chinese Football Clubs

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  1.          Clubs

Clubs are the mainly subject of the leagues. The club’s core actors are players, coaches and investors. Generally speaking, star players’ and coaches’ salaries are the main cost of club operations. For example, from 2011 the salary of Super players increased tremendously, the gains in three years are more than 20%, in 2013 the growth was nearly 43%. Chinese football player’s average annual salary are nearly around 300 million or so (do not consider winning bonuses). In 2013 Hengda’s players pay were nearly 400 million yuan, of which 49% was composed wages; Super League and FA Cup bonus are respectively 19% and 32%. Coaches’ salary increases by $ 75 million over 2012.

At present, the vast majority of the clubs are still using private ownership (i.e. capital investment) model, investors basically are from China, with both of state-owned enterprises and private enterprises sponsors soccer clubs. Capital investment makes the Super League team in recent years to obtain foreign aid cases of high incidence, just like the formation of “arms race” situation.

According to the German website “transfer market” data, the winter transfer window relating to the 2016, 16 Super Club total investment are more than 300 million euros, beyond the Premiership to become the most frustrated winter league. However, the domestic professional football club is not yet profitable, almost all of the clubs are by investors continue to invest, loss of business. Indeed, there is a big gap between foreign league and CSL since there are a lot of distance in terms of income, profitability, revenue and expenditure structure.

Super League in the income scale, profitability, revenue and expenditure structure and foreign league there is a big gap. For the income scale, Super club in the total income and foreign league is almost not in the same order of magnitude. Until 2015, the total income of Super Club reached 2.5 billion, and as early as 2013, the Spanish league income has reached 14 billion yuan, the Bundesliga, Premier League income scale is more than 20 billion yuan, Japan J League income scale of more than 1 billion yuan.

From the perspective of the income, until 2015, the total income of CSL reached nearly 2,5 billion, and as early as 2013, the Spanish league income has reached 14 billion yuan, the Bundesliga, Premier League income scale is more than 20 billion yuan, Japan J League income scale of more than 1 billion yuan. In particular, relating the income structure: the income of Chinese sports events is usually based on commercial sponsorship, in comparison broadcast income is very low, such as 2013 and 2014, CSL copyright income accounted for only 9.73% and 8.86%(Picture 10).

Picture 10 – CSL overall income structure (2013 and 2014)

2013

2014

 

Broadcast costs are low for two reasons: First, the CSL itself is not as attractive as five European league; second, before 2016-2020 broadcast rights cycle, the market was not enough competitive. In 2012, CCTV through the setting up of a subsidiary with CSL company, successfully got freely access of broadcasting right, resetting an important income source.
Comparing revenue and expenditure, it is possible to notice that CSL clubs’ expenditure are higher than revenue. In 2013, the CSL overall loss account of 264 million yuan and a loss of 220 million yuan in 2014; In 2015, despite the explosive growth of income reaching a new high, but due to unreasonable revenue and expenditure structure, the overall loss reached 1.5 billion yuan, the loss has reached 60% of revenue(Picture 11).

Picture 11. 2010 – 2015 CSL total revenue and expenditure (亿元)

The spending structure of the Super Club in 2015 is also noticeable. CSL staff salaries and transfer costs summed up the labor costs have reached 75%, higher than the UEFA designated 70% of the red line.


Picture 12. Expenditure structure of CSL in 2015

Taking into account the CSL which is still in the market-oriented transition period, income has not yet entered the high-speed growth stage, so most of the expenditure are result of the strong investment. According to this logic, on the one hand,  stronger clubs are able to snatch players and coaches, thus develop quirkier respect those weaker financially, thus this imply a serious polarization inside the CSL.

League is still in the stage of burning money and development with costs higher than income, income structure imbalance, but the new broadcast cycle of high copyright fees may bring a turn for the situation. 8 billion revenue and new capital intervention is expected to change the status quo. At present, the Super Club is still highly dependent on commercial income. However, the Ti Ao Dong Li (体奥动力) with 8 billion won the Super League 2016 – 2020 full media copyright news, can be regarded as a huge impact on the original income structure, the proportion of broadcast rights revenue may rise sharply. Under the agreement, the entity(体奥动力) will pay the copyright fee of $ 1 billion in 2016 and 2017, respectively, and the net rights for the next three years will be $ 2 billion per year. The sharp increase in copyright income will bring the club dividend boost, or even the current 4-5 times.

From 2015 to 2016, the clubs with state-owned enterprises as a background reduce from one club Jiangsu Suning to 6, and downgrade and upgrade the four teams are with private enterprises background. In particular the clubs owned by state-owned enterprises decreased from 44% to  37%, while clubs owned by private enterprises increased from 56% to 63%.

  1.          Chinese Soccer Leagues

Compared with the mature five European football league business model, China’s football league started late, commercial operation is still in the initial stage, there is a big gap. We try to domestic commercialization of the most successful Super League of the regulatory structure, business model and the size and structure of the system to conduct a comprehensive analysis to seek the domestic football industry in the process of institutional restructuring is expected to relax the process of investment opportunities.

Chinese football leagues development

Historically, countries as Japan and South Korea have always driven Asian football, thanks to a regular presence of their own nationals at world championships, the export of numerous players to Europe and the dominance of continental clubs for clubs, results linked to the good organization of their own football movements. However, in recent years the role of Japan and South Korea has been slowly downplayed by the growth of other championships that have begun to create a system that can exploit enormous unexpressed potentials. Overall, the popularity of football in Asia is irregular, it is because the growth of championships is not always connected to the level of national movements and sometimes the competitiveness of clubs depends also by the will and investment of few people.

The Chinese Football Championship became a professional league only in 1994. The Super League has existed since 2004 and since the early tournaments many money has been invested in teams and sports facilities. Corruption, however, has been a big problem right now and  is still widespread today. In the last decade, corruption in Chinese football has involved players, presidents, referees and officials of the federation. In 2012, the country’s most famous football referee, Lu Jun, was sentenced to five and a half years in prison for Having made some matches. Only in the past six years there have been dozens of arrests between coaches, players and referees. For three years now, the situation seems to have improved in part, mainly thanks to the entry into the football of the richest companies in the country and to the interest of the government.

There is a particular team to which most of the merit can be attributed to the attention of Chinese football fans: Guangzhou Evergrande Taobao, China’s first club to win an Asian Champions League issue from 1990. Guangzhou’s history is very significant in the development of football in China. The club was founded in the mid-twentieth century and took part in China’s first professional championship in 1994: the following years did not really go well and Guangzhou played both in the first and second division. In 2007 the club became part of the Super League, but after only two seasons it was involved in one of the frequent bouts of corruption and was relegated.

After the relocation, the Evergrande Group, one of China’s most important real estate companies, acquired club quotas and began investing tens of millions of euros every year. Guangzhou was the first Chinese team to undertake a different market strategy: instead of taking famous players but arriving by the end of career, he began to buy good players unknown to the Chinese public but functional to the game of the team. In 2011 he bought Dario Conca from Fluminense, who had been the best player of the Brazilian championship the year before. Conca was bought for about 8 million euros and was offered a contract of 10.6 million a season, which at that time made him one of the top ten most paid footballers in the world. In 2012, Guangzhou hired Marcello Lippi, took Paraguay striker Lucas Barrios from Borussia Dortmund and Brazilian striker Elkeson for a total of around 15 million. The year after the club won the Asian Champions League: since then it is considered one of the strongest teams in the continent. In 2014, news was circulated that the club would risk bankruptcy due to the real estate bubble that had hit the Evergrande Group in particular: the bankruptcy danger was finally removed when Jack Ma, founder and owner of Alibaba Group, was the richest man China and the 29th in the world, bought fifty percent of the club’s odds.

The significant increase in money spent by Chinese teams over the last three years is mainly due to two reasons: the interest of the wealthiest companies in the country born of the Guangzhou victory in the Asian Champions League and the even stronger and recent interest from of the government for the role of football in society and the image of the country abroad. Before 2013, Chinese football was practically only supported by team owners. There was no solid organization and profitable and long-lasting sponsorship arrangements for both teams and leagues. In 2014, the year after Guangzhou’s Asian Champions League victory, the Super League raised about 50 million euros through new sponsorship agreements, while the agreements in previous seasons did not exceed five million. At the same time, other Chinese companies have been tightening up with multi-annual agreements with football teams for supplies and secondary sponsors. The profits of the two main leagues began to be regularly redistributed to the clubs: in 2014, the first division teams received three times the revenue collected in the previous two years. In addition to sponsors, spectators have also increased. In the penultimate season of the Super League, the number of spectators grew 16 percent from the previous year. The league matches were viewed by an average of 22,000 spectators and Guangzhou Evergrande recorded more than 45,000 spectators per game.[1]

Chinese Super League

The highest level of football in the Chinese football league system is the Chinese Super League (CSL) which was founded in 2004, it operates under the auspices of the Chinese Football Association(CFA), the current Chinese football national governing body[2].

At present, China’s football league system composed by four tier soccer league:

  1. The Chinese Football Association Super League (CSL),
  2. The Chinese football association division one (China league one)
  3. Chinese Football Association Division Two League(China league two)
  4. The Chinese Amateur Football League.

Super League is the highest level in mainland China professional football league (China Hong Kong, Macao and Taiwan have their own league), its predecessor for the Chinese Football League A.

Originally the league was composed by 12 teams, which differently, today there are 16 teams that are compete in it:

  1. Guangzhou Evergrande Taobao
  2. Hebei China Fortune
  3. Jiangsu Suning
  4. Shanghai SIPG
  5. Shanghai Shenhua
  6. Henan Jianye
  7. Tianjin Teda
  8. Beijing Guoan
  9. Liaoning
  10. Yanbian Funde
  11. Guangzhou R&F
  12. Chongqing Lifan
  13. Shijiazhuang Ever Bright
  14. Changchun Yatai
  15. Hangzhou Greentown
  16. Shandong Luneng Taishan

Generally, the CSL season runs from March to November, with each team playing 30 games.

From an attentive analysis, we found out some aspects of the most important teams that made up the Chinese Super League. Starting from the Guangzhou Evergrande, it is controlled by the homonymous real estate company, from it derives its name from the team; The Shanghai SIPG, an acronym for Shanghai International Port Group, is the biggest berth for Southeast Asian merchant vessels, owned half by the government; The Shanghai Shenhua Greenland, belonging to the Greenland Group, or a real estate group also for 50% owned by the Chinese government. Finally, Hebei Fortune belongs to a state-owned company, China Fortune Ltd, which builds industrial parks.

It is easy to guess from this short list, as behind the teams mentioned there is the support of the government or rich businessmen who also hold important positions within the PCC. According to Pavia’s president, Xiao Dong Zhu, owner of Shanghai Ping Investment, the government and the Chinese federation gather the money of sponsorships and trade partnerships and then distribute them to clubs, along with some state subsidies. A few figures: the main sponsor, Ping As Insurance (a bank) pays 50 million euros a year, Nike reaches 30, and the new TV deal signed with Ti’ao Power provides for a five-year payment of a sum of money that is about 1.2 billion euros.

The China League one and China League two are considered to be the second and third divisions. The current Chinese league system is composed by more than 100 individual leagues, with nearly more than 2.221 teams, connected to each other by the principle of promotion and relegation[3], where for example the worst teams from the Chinese Super League will be automatically replaced by the two best team at the end of each season. The above mentioned professional levels are all characterized by the promotion and relegation system, however, differently are for semi professional and amateur teams. The season usually starts in February to November or December approximately. During a season each club plays against other teams twice with one home and one away game.  The winner of the league together with those clubs that reached the second and third place, can be qualified to the AFC Champions League. The final two teams that ends at the bottom face relegation to the China League one. On the other hand, the winner and the runner-up of the League one can be promoted to the top tier. The China Amateur League is composed by 44 regional leagues. The majority of regional leagues are divided into two or more divisions, with each regional league having at least 12 clubs at top level. Winner of all regional clubs have the possibility to be promoted.

Level League
1 Chinese Super League

16 clubs

↓ relegate 2 teams

2 Chinese League One

16 clubs

↑promote 2 teams ↓ relegate 2 teams

3 Chinese League Two

24 clubs

↑promote 2 teams ↓ relegate 2 teams

4 Chinese Amateur Football League

The number of people composing the CSL team faces different restrictions. In each team, there are a limit of maximum of five foreign players, of which at least one of those players must be part of the Asian Football Federation. Moreover, no foreign goalkeepers are permitted to be registered, in order to improve the quality of home-grown players, such as Australia, Japan or Hong Kong. Only four overseas players are allowed on the pitch at the same time. Players from Hong Kong, Macau or Taiwan, in which have signed contracts before the 1st January 2016, are considered ‘non-foreign’ and are not involved in the teams’ foreign player limitations[4].

In the UK, institutions similar to the Chinese Football Association are “England Football Association”. The main difference between them is that the England Football Association is responsible for football promotion, FA Cup development and national team management, no right to ask the professional league.

Premier League football league has been basically independent from the Football Association. Responsible for the management of the league is the resulting company created by the alliance of the various clubs. The latter is independent from the Football Association, with the league’s business resources for development, sponsorship negotiations, the right to sell the right to broadcast. The shares of the affiliate are held by clubs in the league, with 20 clubs each holding a 5% stake in Premier League, and at the end of each season the relegated club transfers the equity to the upgraded club, thereby maintaining the original ownership structure.

In the earlier years, Super League was set up by the Super League Committee, while in this committee was set up by the Chinese Football Association. After the reform, the Super League organization mechanism will become more similar to the Premier League. In February 2016, the relevant person in charge of the Football Association said or will be established in December before the “China Professional Football League” is responsible for CSL, China league A and China league B. The new alliance status will be at the same level of the Chinese Football Association, so the Chinese football will eventually achieve the separation of management.
After the reform, CSL operating mechanism will form by three pillars, that is, China Professional Football League is responsible for the competition, CSL is responsible for the specific operation relating competition organisation and business development, the Chinese Football Association is responsible for supervision.

At present, Super League’s business resource development and operation unit belongs to Super League Company. Super League company funded by the Chinese Football Association 36%, 16 clubs funded 64% (4% each), the Chinese Football Association with its more than 1/3 of less than 2/3 of the equity ownership of the company, have the right to modify the companies regulation, change the nature of the company and its dissolution. The board of directors has nine directors, two of which are Chinese Football Association’s chairman and general manager, five representatives are chosen from the 16 clubs directors. Five members of the board of supervisors are composed by one member of Football Association, two clubs, two workers, the chairman of the board of supervisors by the club representatives. From the management structure design can be seen, the current Chinese Football Association of Super League stock company has absolute control.

Picture 13 – CSL company structure

  1.    Broadcast/Media

 

China’s media landscape is changing. The country has hundreds of television broadcast stations, 20 of which are operated by broadcast giant China Central Television (CCTV) with the rest either provincial or local city stations. It is also one of the world’s major advertising markets.

National matches are usually transmitted on CCTV 5 and CCTV-5+. CCTV5 is the state television broadcasting only sports broadcasts, including the Italian soccer championship with a direct on Sunday evening. The transmission is sponsored by FIAT. On Monday night, there is a 90-minute program where all services on the matches of the Italian soccer league are broadcast. GuangDong television is the GuangDong Province’s state television, one of the richest areas in China. He always sends the advance on Saturday night of the Italian championship and makes some services on the matches of our league. On Friday night there is a broadcast entirely dedicated to the predictions of matches in the Italian soccer championship. In China is played a Totocalcio tournament that includes matches in the Italian, French, German and Spanish championships.

In an era of technological change, a new wave of online media companies are emerging challenging the traditional media stations, for example the giant CCTV is al so affected by those competition threating its dominance of premium domestic and international sports rights. New competitors are increasingly incorporating the live streaming of sports into a suite of services including also  messaging platforms such as Tencent’s QQ, WeChat, Sina Weibo plus retail and e-commerce, smartphones and games. From a study of Nielsen the table below reports the most frequently used Chinese sports platforms to follow sports.

  1.    Sponsors

Highly attractive, powerful sporting events mean great exposure, which makes many businesses competing for sporting events. In general, it is possible to distinguish different type of sponsors:

  • Title sponsor is the occupies the highest level on the sponsorship scale, it is because usually they make the most significant contribution to in organizing or hosting an event. Generally, they have privilege position regard utilisation of players and coaches in order to conduct joint promotions, the presence at all official events dedicated to a sports event, placement of logos and banner.
  • General sponsor’s title is given to sponsors that makes one of the most important contributions which usually accounts more than 50% of all fund raised. They usually have the right to use the image of the competition as well as wide media coverage.
  • Official sponsor differently is a sponsor that usually contributes between 20-25% of the fund raised.
  • Technical sponsor differently, contribute to the sporting evets through the partial or full payment of goods and service such as fitness, organization of transportation and lodging or medical equipment’s.
  • Participating sponsor is a company that usually contribution do not exceed 10% of total raised funds.
  • Informational sponsor is company that instead of providing funds or goods and service, supports the sporting event through media coverage, conducting PR-actions, joint actions, etc.

For example, sports brand Adidas, since 1970 has been a sponsor of FIFA. Behind the huge investment is Adidas in the football-related business on the amazing scale of revenue. According to Peter Holman, a German sports marketing consultant in Cologne, Adidas’s soccer revenue for 2013 was $ 2.4 billion, and football revenues for the first quarter of 2014 grew 27 percent. Adidas CEO Herbert Hainer (Herbert Hainer) is expected in 2014, the Group’s football business revenue will reach 2 billion euros (about 2.7 billion US dollars).

 

  1.    Spectators

 

While China is increasingly demanding in European football, buying clubs and players at astronomical figures, it is also true that the same clubs in the Old Continent were the first to have a presence in the Asian country, considered among the major frontiers to colonize at marketing level. According to a study published by Nielsen, 31% of the Chinese urban population is concerned with football and, considering the extension, these are extremely important issues(Picture 14).

Picture 14 – Fan engagement

The most popular club is Real Madrid, which has 127 million “aficionados” in China, but surprisingly to complete the podium are the two Milan teams, Inter and Milan, coupled with 106 million fans.

The standings are especially surprising because in the top 3 there are no Premier League teams, which also has massively invested in its visibility in China.

This, according to Mundo Deportivo, was due to the fact that Serie A was the first European championship to be broadcast on Chinese TVs, anticipating both the Liga and the Premier League at the end of the 1980s. At present, the A-Series is still the second-best-ever championship in China, just behind the Premier League, and from the PPTV channel has reached a 660 million-euro deal for three years from 2019.[5]

For Real Madrid a touring is definitely due to having the most popular player in the game, Cristiano Ronaldo. The Merengues also have an international football school realized in collaboration with Guangzhou. Not to mention that Castilla – Real’s second team – has hired Chinese player Lin Liangming. Its growth and eventual debut could be a further fly[6].

Tory Widdowson, a marketing consultant who run sports events in China state that the Chinese top flight stadium have a capacity of 50.000 or more, but typically are often half-full. There are passionate local fans, but clubs should come up with new strategy to attract new supporters in order to build more intense fan culture and make any sort of financial returns. Moreover, he adds that Chinese fans lost hope in CSL years ago, thus in order to revitalize their enthusiasm is necessary to create an icon, a fan culture where individual heroes are needed. Indeed, behind the recent star players purchase there is a strategy focused mainly on raising the standard of play teaching the Chinese players the importance on being a point of fan engagement in order to get people into the stadiums.

 

  1.    Derivatives

 

Around the star of the portrait rights income, derivatives, as well as star jerseys, as well as authorized brand management to create a huge revenue return. The key to getting this part of the income is whether there are players who deserve to be promoted and have a great idol appeal in the fans.

 

  1.    Football lottery

There are many forms of legal gambling in China Mainland including lottery, sports betting, scratch cards, and many other. Chinese sports Lottery has a monopoly all forms of legal sports betting in Mainland China. Their major focuses are the sports basketball, football (soccer) and baseball. This includes nearly every league from all over the world. NBA basketball, MLB baseball, English Premier League (EPL) and Spain’s La Liga are major draws.

In China, there are two lottery companies that are both state-owned: the first one is the Chinese Sports Lottery (中国体育彩票), revenue generating from sports lottery represent an important proportion which in turn will flue the all sport industry. The other one is the China Welfare Lottery (中国福利彩票), differently from the former one, the revenue stream generally goes to the public welfare and amount that it has donated are very massive. Taking into consideration that the China welfare lottery has started in 1987, over its first 25 years have contributed RMB 253 billion (USD $40.3b) to designated charities and various relief efforts. Another important aspect is that while welfare lottery is more popylar for older Chinese the sports lottery tends to appeal to younger people. In 2012 the sports lottery generated RMB 110.5b (USD $17.6b) in profit and Welfare Lottery generated more at RMB 151b (USD $24.1b) in profit.

In 2016, Chinese sports lottery business is expected to growth due to a possible restart of online lottery sales. Major quadrennial sporting events as UEAFA European football championship, Copa America Centenario and 2016 Rio Olympics usually concentrated in the three months from June to August, could be consider the most profitable form the football lottery point of view. [7]

Match betting is the major category in the sports lottery business, indeed statistical data shows that sales in March and April of 2016 increased respectively 71% and 49%.

Moreover, considering the 2014 FIFA World Cup in Brazil, in June the Chinese match betting lottery sales increased of  384.3 per cent year on year to 9.62 billion yuan. This show how major sports events can boost Chinese sports lottery industry. However, in 2015 sales decreased 5,7% reaching 166.4 billion yuan due mainly for two reasons: the impact of the ban on online lottery and the lack of major sports events.

According to data from CaiTong Consulting, online lottery sales increase soaring before the ban action come into place, sales doubled reaching 85 billion yuan in 2014 and accounting for 22% of the all lottery sales. Of course the ban of the online lottery repressed the market’s development, experts affirm that there could be some possibility for Chinese authorities to restart online lottery.

On May 5 2016, the General Administration of Sport released the 13th Five-year Plan for China’s sports development. The principal purpose is to accelerate innovation into the sports lottery segment by outlining some lottery operation system. Considering that Chinese lottery market is highly regulated, this kind of supportive attitude can be translated into a gradual relaxation of the government intervention. Moreover, this positive intuition came from also from the consideration that the rising passion for China Super League (CSL) matches between famous football clubs could become an important source of money for Chinese sports industry.

Another important government policy is the “Circular on Properly Investigating and Punishing Unauthorised Online Lottery Sales” issued on May 24 of the same year. The circular announced clearly that lottery sale on internet must be managed centrally and should be controlled by the issuing entity on a real-time basis.

Yan said he believes the regulators were now adopting a cautious but open attitude towards online lottery sales, this consideration came from different aspects. Firstly, is important to notice that profitability of that activities. Secondly, the important lottery platform like Baidu, Alibaba and Tencent and vertically-integrated operators like 500.com will be more likely to obtain an online sales permit.

  1.    Reasons behind the Chinese football failure

The lagging behind of Chinese football comparing to other countries can be addressed into different reasons. Firstly, we should point out the problem of training. In China, the football schools are less important than foreign stars in terms of investment, since the number are low and it is not efficient enough to form new local talents. Moreover, many Chinese league players have not acquired the physical, technical and tactical techniques that is possible to find in Europe.

There are other reasons that depends on Chinese cultural characteristics that should be examined in order to understand the nature of the real challenges. There is no established football culture in many of the nations on the continent. Despite some success at individual and club level, Asian nations have not been able to carry it to the international level. Different aspects can be attributable to this scenario. Firstly , a lack of corporate and financial interest in local leagues is an important issue that affects local talent recruitment and their possible consideration of a career in football. Massive interest in European leagues such as Seria A, La Liga and Premier League is said to hamper development of domestic interest, and therefore, financing. Lack of competitive edge of the Asian Football Confederation (AFC) Champions League compared to its European counterparts such as the UEFA Champions League and Europa League also contributes to the failure of igniting local football fever on the continent. An illicit betting industry is another constraint for the development of Asian football. Moreover, one child-policy could be considered as important aspect. The policy came into force in 1979 and began to be formally phased out in 2015. This population planning policy was blamed from preventing the development of team work, team play and sharing, since the only child were usually under pressure for individual success creating a strong individuality. In fact, some critics claim that Chinese sportspersons are more successful in individual rather than team sports.  The instability of Chinese clubs do not encourage the development of a football culture. Since clubs frequently change of owners brings continuous change in names, cities of residence, change logo or other aspects.

Another important factor which could have affected the Chinese football is the educational system.

It is well known about the strictness and difficulty of Chinese high school education. Those three year are considered the most important journey that each single student should pursue in order to pass the Gaokao, the graduation exam. Many important university in China have a closed number selection process, which base on the mark that each single student get at the graduation exam. The possibility for student to be part of those few prestigious university is considered crucial on determining their future, therefore many families or student themselves, hardly leaves any time for sports. In particular, soccer is considered to be a distraction to education, which is also another important factor to blame. This prevents development of community-based football clubs like we often see in Europe. According to the Chinese Football Association(CFA), in China currently there are between 7,000 and 50,000 kids involved in football in a nation of 1.3 billion compared to around four million in the UK.

Therefore, youth and grassroots development in sports appears to be an important area that decision-makers will have to pay more attention to.

Also environmental concerns play its part in preventing grassroots development of football in the country. Parents usually avoid support their children to pursue outdoor sports or future careers for the air pollution problem that seriously impact the country.

Finally, another important aspect is the continuous corruption scandals. In 2009, China has started a large-scale fight against the corruption in football since accusation and scandals continuously came out involving referees, club officials, coaches and players which have been accused of participating in a vast system of match fixing and illegal betting. Consequently, different action were put in place, for example in 2012, two former presidents of the CFA were sentenced to ten years and condemns to pay a fine or nearly $26.000 for illicit activities as arrangement of games and receiving bribes. Other actors were involved, Wei Shaohui, the former director of the national team; Li DongSheng, the former head of Referees Committee of the Chinese Footbal Association. Moreover, also four former international players, Shen Si, Qi Hong, Jiang Jin and Li Ming, was sentenced to more than five years of imprisonment and a fine of 500,000 yuan (62,650 euros) for allowing their team to lose a game in 2003. They touched a total of 8 million yuan (1.1 million euros).

2.1.3.      Factors and reasons driving football development

In the political agenda of President of the People’s Republic of China, Xi JinPing, nothing is let to chance. According to an interview to Giorgio Cuscito, a editorial councillor of Limes stated that three are the main reasons behind the Chinese commitment to develop football.  “The first reason is quite economic, as we mentioned in the previous paragraphs the sport industry is still in its infancy, there is a bigger picture behind the birth of those political policy. Since the current leadership took office in 2012, the country has faced an enormous challenges of economic slowdown and restructuring, leading the government to look into new areas of growth. In particular, a lot of Chinese investment in the previous years has concentrated on property investment. However, when the industry faced an oversupply and stagnation of governmental policy, investors started to look elsewhere for more opportunities. This lead an increasing trend for Chinese company to acquire overseas assets. Chinese are trying to diversify their business and so businesses like Alibaba are investing in football, trying to gain profits and a positive image return. For example, China’s richest man Wang Jianlin’s Dalian Wanda Group pursued a strategy like this, they did not only moved some of their property portfolio overseas but they are in the middle of diversifying their assets into other industries most notably in sports and entertainment.

“The second reason relates to national unity. China prevails above all in individual sports. Football can be the collective sport that can unite the country. Especially in a delicate transition period like the present one. Beijing is facing a phase of social and economic transformation, in an attempt to lessen the Chinese economy’s dependence on exports and focus on the growth in domestic consumption. All this is likely to create instability and football can be a useful vent to national outflow and cohesion. [8]

The third reason is the soft power. Over the course of the twentieth century – and in a different way even in the past – the great powers have tried to present themselves in the international arena in the best of ways, hoping to gain greater influence and thereby gain a competitive advantage compared to competitors: we are talking about soft-power, opposed to the typical “hard-power” that a country can generate through the mere use of military force. This “game” undoubtedly reached the peak of programming during the Cold War when the United States and the Soviet Union did everything to prove their “way of life” was better than that of the adversary. It found expression in a myriad of fields: it could focus on the cultural or the scientific level (thus recalling the ride that in eight years brought man into space and the Moon), passing through Sports competitions, as is well explained in this paper titled “The Olympics, International Geo-politics and Soft Power,” to the field of art – just think the CIA, for example, used expressionist artists like Pollock And De Kooning in this “battle”. With the conclusion of the ideological conflict and with the emergence of a different geopolitical situation due to the fall of the Berlin Wall, this context has changed. The United States remained the only superpower of the international system, and the idea that it was necessary to culturally influence the rest of the world was overcome by other needs, also because the American model continued to self-drive without particular effort. This is especially apparent in the perception that people have of US institutions. From this, it is possible to understand how often the political choices of the North American nation do not share, in any case, they continue to appreciate many aspects, and the image Of the US in the world remains largely positive.

Today, due to the relative change and relative re-balancing of power in the international system, China’s emerging Chinese power is attempting to increase this influence. Far from the closed and backward state of the 1970s, the People’s Republic of China in the 2000s has embarked on the path of economic development, relative opening of markets, and the need to make its image more attractive (and less threatening) abroad.

The primary issue that the Chinese government might face in reflecting on the rest of the world a positive image of itself is – at least for countries with a solid democratic tradition behind them – the lingering elements of authoritarianism that it produces, and which do not seem to be destined to be abandoned. So what was the proposal on which the Politburo, pushed by the current President, has decided to work in order to change the picture?

First of all, it was decided to focus heavily on the historical and cultural component of China, which undoubtedly exerts some fascination on the wider world sections of the world, even in the West. Through the founding of the “Confucius Institute”, an institution created for the spread of Chinese language and culture in 140 states, this international campaign has started, not only to increase the knowledge of China under the slope Linguistic or traditions in general, but also to “influence” the thought of certain events in the past and / or present history of the country that relate in some way to China.
Just think how within such institutions an event otherwise known globally as the repression of Tiananmen Square in 1989 was eliminated by school curricula. Even a high official of the Chinese Communist Party admitted a few years ago as the moves described above could not be considered real propaganda actions. Further actions in the cultural sphere are noted with the attempt to acquire shareholdings in the Hollywood production houses (one of the major US soft-power engines) as well as traditional media within the United States.

Particularly interesting aspect is also obtained from attempts at sports to reach highly competitive levels. It is a few years ago the request from President Xi Jinping to lay the foundations for a strong development of football within the Republic, with the intention of succeeding in organizing the organization a World Championship before – and here it suffices Money and will – and to win it – while here it is necessary to create a widespread culture of sport on a competitive level.

This implies that, nevertheless the fact that the country has obtained acknowledgement in many disciplines as it is possible to observe from the Olympics result, the government wants to gain supremacy even in field that have an important commercial and prestigious impact on the worldwide base.

2.1.4.      Chinese Government Support

 

The development of China’s professional football system and its growing influence on the industry is mainly attributed to a strong top-down government promotion. The current Chinese President, Xi JingPing is a big soccer fan and since he becomes the general secretary, he has placed the development of the football on the agenda in order to build China as a great sports nation. A series of reforms have been taking place combining with an anti-corruption wave, in order to effect the higher level of government administrations, hoping to bring a new era of transparency, compliance and governance in the sport industry.

In October 2014, China’s State Council issued a national strategic polity titled “Some State Council Options On Hastening Development of the Sports Industry and Promoting Sports Consumption” (国务院关于加快发展体育产业促进体育消费的若干意见). The document principally announces the goal of the country to increase the value of its sport industry to Rmb 5 trillion (equivalent to approximately $815 billion) by 2025 and eliminate certain barriers which could hinder the industry’s rapid development encouraging private capital to invest in building facilities and providing related products and services. That is to say that comparing to the current market value of sports and fitness in China, which is approximately around Rmb 1.5 trillion ($216.8bn), the industry should grow more than threefold in order to reach this ambitious target. [9]

A year later an important plan were draft, the so called “Chinese football reform and development” (中国足球改革总体方案). The main objectives of this document were focused on improving football education across the country, raising awareness of health benefits and promoting widening participation. This document focuses its attention into the implementation of the “Three-step-strategy”, divided into short-term goal, mid-term goal and long-term goal. The short-term goal emphasizes the importance to improve the environment and atmosphere for the development of football, the creation of a football management model with Chinese characteristics and the optimization of the football management system. The mid-term goal shifts its focus in increase the youth football practice and to increase the level of competition of league organizations. Finally, the long-term goal aims at the realization of the comprehensive development of Chinese football, in trying to let it become a sport that is universally participated by the masses.

In April 2016, the official National football reform plan were released: “Chinese football mid-to-long term development plan 2016-2050” (中国足球中长期发展计划). The plan mainly reflects the three wishes of the president Xi JinPing: for China to qualify again for football’s FIFA World Cup; for China to host a World Cup; and for China to win a World Cup. In order to reach this ambitious goal, different interventions were highlighted. While it is no secret that Xi is a soccer fan himself, it is important to not attribute the Chinese national strategy only to its leader’s personal hobby. In many ways, the plan recapped the previous two reforms and through the approval of the State Council, has outlined three main period: short-term period until 2020, medium term period until 2030 and long-term period until 2050.

As a first step, the Chinese educational system was put under the spotlight, in particular were underlined the necessity to strengthen the base, since football in the schools has traditionally been the Achilles heel of the sport’s development pipeline. A possible reason could be addressed by the fact that historically there were a particular focus on competition and winning, rather than cultivate student interest in sports, leading to several restrictions of pool of players that choose specialized training.

The reform suggests to promote football at the primary and middle-school level, to increase the number of schools with specialized football programs, to increase female participation in school football and to improve the quality and number of coaches at the primary level. In fact, by 2020 around 20.000 speciality football training school will be established, enlisting 30 million elementary and middle(secondary) school students into the sport. Before going on, is important to have an understanding of the Chinese structural level of football. Differently from the west, we have:

  • Professional society: 12 are in the premier league and 14 in the a chinese championship. There is then a b series that is divided into groupings by regions and is only contested in summer (june-august).professional societies have almost all the youth sector since the age of 14. Some of these years also football school. Youth championships are very rare and practiced only in some cities.
  • Football school: there are many football schools in the country where children are sleeping and studying and playing football inside the facility. The boys are from 8 to 16 and the best are placed in the soles of the sport or in the football field youth sectors. The schools are private (the majority) and public and the annual cost varies from 1000 to 3000 euros.
  • Sport schools: they are schools belonging to the state in which the best athletes from all disciplines are selected, including football. It is from these schools that, predominantly, professional clubs draw footballers.
  • A social associations: are private companies that run football pitches that organize football courses within their organization. Normally, football courses are carried out during the weekend, as the boys during the week are engaged late in the schools.

Beyond expanding the youth participant, the plain aims for more than 50 million Chinese overall to be joining in the “The Beautiful Game” across 70.000 football pitches nationwide. The plan’s longer-term ambitions include developing China’s notoriously poorly performing men’s national team, which currently ranks 83rd in the world, into one of Asia’s best and for the women’s to rank among the top globally by 2030. By 2050 the plan intends for the men’s and women’s national teams to be globally dominant forces.  In combination, the country has planned to increase football field construction nationwide.

Simultaneously, the promotion of football aims to expand also at the grassroots level and to improve football professional training and talent development. Indeed, the reform pays attention to develop a robust in-house training programs and schools instead of simply purchasing high-profile players.

Another key element was the separation of Chinese Football Association(CFA) from the General Administration for Sport (GAS). Differently from the western countries, Chinese sport governing bodies, such as China Football Association(CFA), are quasi-governmental organizations. Indeed, there were a wide believe that centralized system from the old planned economy era was the major obstacles to the development of a free market-based sports industry and professional sport. This recent independency has also attracted a lot of attention from media, considered to be one of the most significant reforms.

Moreover, another interesting operation that the Chinese government undertook was the opening up competition for TV broadcast right for domestic China Super League and National team games. [10]

Chinese football clubs are considered as the main pillar of China’s professional football ecosystem, but they are usually characterized by a strong instability due to a lack of a robust financial, organizational and administrative foundation, thus a continuous change of ownership and cities. Therefore, clubs should improve their overall management, paying more attention on operational and financial stability in promoting soccer at the city level. Moreover, promotion should be done also at diverse holding structure among clubs, including government, private enterprise and individual investors and many other. Finally, the promotion should also focus on a more sustainable talent attraction and retention system.

 

Chapter 3: Chinese Investment in European Football industry

3.1.Introduction

After the implementation of the so called “Go Global Policy” implemented by the Chinese government, it was possible to notice the growing number of Chinese firms entering in the international scenario. Those activities are capturing the worldwide attention, considering the Chinese outward foreign direct investment (OFDI) development as unprecedented. Moreover, three important scenario should be outlined:

  1. Merger an acquisitions (M&A) is becoming the preferred form of Chinese OFDI
  2. The target of those investment are all develop countries
  3. Starting from 2011 the Chinese investment in the European market are twice respect the U.S. while in 2014 Chinese OFDI to Europe reached a new peak of US$18 billion.[11]


Figure 1 illustrates the tremendous growth of Chinese OFDI in Europe.

Chinese firm’s internationalization shows some characteristics in their development patterns. Firstly, the great influence and the dynamic participation of the government, the search for strategic assets and its fast learning capabilities[12].

In particular, the country’s influence on the international sporting stage is continuously increasing. Tts focus on European football industry started from December 2014 when Chinese government announced its intention to revitalize local football industry going along with a series of major investment program in sports and political reforms. Since 2015, Chinese companies have purchased 14 European clubs for an investment valued at over $2 billion, demostrating the strong Chinese interest in foreign sports assets. Aside from clubs, they are also heavily investing on sports marketing companies, agencies, events, sponsorship and organization rights for tournaments. Differently from the past, where China’s attention was focused on buying foreign companies and expertise into the country. Nowadays, there is a shift towards acquiring foreign business in their country of origin. This allows Chinese investors to learn from international organizations, and to assimilate their competences aiming to produce the equivalent in the long term. According to a study of Stanford University, Chinese investment overseas in the last 15 month are around $1,9bn, with principal investment in English clubs, followed by Spanish, French and Netherlands clubs[13] (Figure 10).

The aim of this chapter is to analyse the investment patterns, motives and determinants of Chinese firms in European countries, with focusing on its M&A activities and see if those strategies carried out by Chinese firms are sustainable decision for long-term chinese football industry development. Moreover, is important to outline that there are two main reason of choice of the football industry: First, it represent an important opportunity since the football in China was not consider so popular, but nowadays is characterized by a high media coverage and many investment opportunities are available. Secondly, the China’s government supports of football development, with many reforms taking into place.

3.2.Theoretical Background

OLI Paradigm

Dunning’s OLI paradigm is considered one of the most suitable instrument to understand the extend and the patter of OFDI. OLI stand for:

  • Ownership advantages

Consist of proprietary capabilities of a firm such as managerial, product or process technology considered to be firm-specific resources and assets[14].

  • Location advantages

In choosing the host country, firms usually have a very clear purposes which are market seeking, efficiency seeking and asset seeking. The former is consider to be an important choice to protect existing markets or to develop new ones[15] taking into consideration the market size and the expected market growth. The second reasons means trying to benefit from rationalizing the established investment and diversifying them in investing in different locations, reaching economies of scale and scope and risk diversification. The latter focus on acquiring particular resources that is now available in the home country or is more convenient in terms of costs.

  • internalization advantages

Thus, from the above mentioned definition, is possible to state that the decision of firms to invest outboard is because they usually have developed competitive advantages in the home country(O), which can be moved to other countries to exploit location advantages(L) through means of FDI (I).

In our case, several studies outlined the necessity to integrate the Chinese firms OFDI decision to an existing theoretical perspectives due to its particular background, ownership, administrative structure, and the landscape of political and institutional support and constraints they are bound to.[16]

Determinants Framework

Holtbrügge & Kreppel (2012) have develop a complete framework to analysing various determinants that brings Chinese firms and other EMFs under three levels(Table X):

  • Country level

Determinants in this level are principally the size of the host market, the potential of forward integration into the host market and the level of technological and managerial know-how. However, if OFDI is driven by seeking new markets or growing opportunities the size of the host market become a crucial element, for example Lenovo and Haier (market seeking). Chinese market is renowned about its low labour costs, and other cost advantages at home, in the other hand the country lack of many important factors as marketing or sales know-how.[17] This is the main reason behind their asset seeking OFDI strategies aiming to catch up with global giants in moving up the value chain and thereby enhancing their global competitiveness[18]. Finally regarding the level of technologies, Chinese firms in investing abroad want to learn and benefit from strategic assets like advanced technology, international known brands, management and marketing skills[19].

  • Industry level

Determinants differ between various industries. Is important to know that unregulated investment in China is prohibited, since the investment are planned by the Part’s Five years plan, in which is possible to find the name of industries of national strategic importance that can obtain favourable treatment or institutional support, or in the so called “Countries and Industries for Overseas Investment Guidance Catalogue” [20]. Another important determinant is the competitive pressure in the home market. Since China become part of the World Trade Organization (WTO), the domestic are facing fierce international competition, with consequences as lowering of demand and falling prices, leading part of the Chinese firms in starting market-seeking OFDI activities[21].

  • Firm level


Determinants include the strength of firm-specific resources innate to particular firms. Chinese companies benefits of various resource advantages that differs from those owned by developed countries. Example could be the exploitation of economies of large-scale, preferential access to raw material, institutional support, and recruiting the most qualified employees leading to a dominant position in their home market. The reason behind abroad investment could be the both asset and market seeking[22].

 


[1] http://www.ilpost.it/2017/01/03/trasferimenti-calciatori-cina-tevez-oscar/

[2] http://www.bbc.com/sport/football/20894477

[3] http://www.fifa.com/associations/association=chn/index.html

[4] https://www.sportskeeda.com/football/the-chinese-super-league-a-background

[5]http://www.corrieredellosport.it/news/calcio/calciomercato/2016/12/3019362962/inter_e_milan_dietro_solo_al_real_madrid_per_tifosi_in_cina/

[6] http://www.calcioefinanza.it/2017/01/03/squadre-italiane-con-piu-tifosi-in-cina/

[7] http://www.scmp.com/business/markets/article/1977977/chinas-sports-lottery-business-see-continued-high-growth-2016

[8] http://www.t-mag.it/2016/06/24/levoluzione-del-calcio-in-cina/

[9] eCapital’s market valuation combines and extrapolates data from China’s General Administration of Sport, Ministry of Finance, National Bureau of Statistics, The Twelfth Five-year Plan for Sports Development, China Statistical Yearbook, Annual Report on Development of Sports Industry in China (2015), 2014 China Fitness Industry Development Report, iResearch, Sports Weekly, CVSC-Sofres Media, NetEase, Plunkett Research, IHRSA, IBIS World, Laurent Vanat, PwC, and IEG.

[10] https://www.policyforum.net/chinese-football-and-its-number-one-fan/

[11] http://www.bakermckenzie.com/en/newsroom/2016/03/chinese-fdi-hits-usd40-billion/

[12] http://www.sciencedirect.com/science/article/pii/S109095160900025X

[13] http://www.bbc.com/sport/football/35642084

[14]https://www.business.illinois.edu/josephm/BA545_Fall%202015/Teece,%20Pisano%20and%20Shuen%20(1997).pdf

[15] http://www.rcmewhu.com/upload/file/20150527/20150527110530_2312.pdf

[16] http://www.victoria.ac.nz/chinaresearchcentre/publications/papers/The-Compressed-Development-of-Chinese-OFDI.pdf

[17] http://onlinelibrary.wiley.com/journal/10.1002/%28ISSN%291097-0266/homepage/internationalization_and_innovation_in_emerging_markets_vsi_intro.htm

[18] https://cpianalysis.org/2017/05/25/china-goes-global-the-changing-value-chain/

[19] http://www.rcmewhu.com/upload/file/20150528/20150528192835_2108.pdf

[20]https://books.google.it/books?id=p1sSDQAAQBAJ&pg=PA277&lpg=PA277&dq=This+means+that+all+OFDI+complying+with+this+guidelines+enjoy+favorable+treatment+and+institutional+support+(Luo+et+al.,+2010&source=bl&ots=duBdqX_dUH&sig=5sjZoWaYdyFk84LvuhYAlRxKwWE&hl=it&sa=X&ved=0ahUKEwj_28jM-7_UAhUEXBQKHR5lC8EQ6AEILTAB#v=onepage&q=This%20means%20that%20all%20OFDI%20complying%20with%20this%20guidelines%20enjoy%20favorable%20treatment%20and%20institutional%20support%20(Luo%20et%20al.%2C%202010&f=false

[21] http://www.emeraldinsight.com/doi/abs/10.1108/17468801211197897?mobileUi=0&journalCode=ijoem

[22]https://www.researchgate.net/publication/228253121_Multinational_Advantages_of_Chinese_Business_Groups_A_Theoretical_Exploration

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