Since the 1980s, over 40,000 international companies, ranging from MNCs to SMEs, have been trying to enter the Chinese market, hoping to share a piece of that moreish and tempting China pie! However, many have either failed in their aim of market entry, or have experienced stagnancy in business growth after being present in the Chinese market for over 20 years.
From my recent communication with many international corporates seeking to understand their reasons for failure, along with my recent and regular visits to China, I have come to recognise some key themes around the challenges such businesses have encountered. To overcome these barriers, here are 5 top tips and basic tools to consider if you are ever looking to enter – and ensure business growth in – the Chinese market.
1. Localisation – It Is Not Just About Knowing ‘Ni Hao’ (你好)
This is one of the key tips! Localisation is crucial and should be focused around the 4Ps; Product (and service), People, Price and Promotion. Consider not just the Chinese market as an entity, but take note of the cultural variations by region. An obvious dissimilarity is between the North and South regions. For example, consider the market needs for ‘boilers’ – boilers are used by the majority of households across Europe, but their usage is completely different between Shanghai and Beijing. Heating facilities are subsidised by the government in Beijing, but not in Shanghai, and as a result 2 out of 3 residents in Shanghai don’t have central heating in their home and are unlikely to install it in the future (compared to Beijing where boilers are prevalent). This defines the market opportunity and therefore the different business strategies required when it comes to the product offering for the two different cities (or regions).
2. You’re Either All In Or You’re Out
Yes, you are either all in or you are out. China is not a market where an international company can air drop a ‘sales person’ in to ‘test out’ the market if the business goal is to achieve strong sales revenue and long-term business growth. It is very easy to create – and drown in – a vicious cycle of ‘not generating sufficient revenue to invest in more resources, and not having sufficient resources to generate more revenue’. When entering the Chinese market, it is important to begin with a relatively small investment to research your target market and ensure its feasibility before fully investing in it. When conducting this initial market research, you should look to gather a clear answer to the effectiveness of potential channels to market including; direct sales and supply, distribution networks, e-commerce platforms, joint venture partners, etc.
If your research result implies a ‘green light’, the next step is to think about the extent to which your company has the ability to be ‘all in’ to create a strong, local presence in China.
3. A Strong Distribution Network – You’ve Got To Branch Out!
China is a massive country. Therefore, unless you are willing – and able – to invest in direct sales resource straightaway, building a strong distribution network is vital. A strong and carefully thought out distribution network strategy will ensure regional coverage, localisation, and ultimately overcome the challenges associated with the lack of a direct sales force. A strong distribution network brings with it the benefits of having distributors with knowledge of the local market and already established relationships (GuanXi关系one of the most important elements when doing business in China) that can be used to build a customer base.
The importance of a distribution network becomes clear when, through two case studies, we consider the contrasting success that two companies have had in China, largely as a result of their differing approach to distribution.
The first case study features a successful German chemical manufacturer. The Company first entered China 20 years ago with a core business strategy of selling through an extensive network of distributors. To date, one of its business units generates £250m per annum selling both direct to end-customers and through 160 established distributors.
The second case study features an American industrial equipment manufacturer. The Company first entered the Chinese market 10 years ago with one sales person to “test” the market. However, after 10 years, its entire operation still depends on one sales person. As a result, over the last 10 years the business has seen less than 5% business growth, and is a typical example of a company caught in the vicious lack of revenue and resource investment cycle previously mentioned.
4. Beware Of The Intellectual Property Issues – But Don’t Let It Put You Off
One of the main factors that hinders or prevents many western companies from entering the Chinese market is the fear that their unique ‘trade secret recipe’ will be stolen and replicated more cheaply. In a statistic published by the U.S. Chamber of Commerce’s Global Intellectual Property Center (GIPC), China ranked 27th in a list 45 countries when it comes to having a strong IP systems stand.
The fifth edition report shows that countries such as China, Pakistan, UAE and Sweden, had introduced new enforcement mechanisms and specialized IP courts to better combat counterfeiting and piracy. China scores well on the level of transparency and public reporting by customs authorities on trade-related IP infringement. China’s overall score has increased marginally from the fourth to the fifth edition report, but was held back from a further rise in score due to gaps in the areas of industrial design protection and barriers to commercialization of IP assets.
China has demonstrated a commitment to address challenges in trademark registration with the country’s high courts making positive legal decisions for high profile IP cases involving companies such as Apple, Facebook and Michael Jordan. Another example that demonstrates their commitment is the patent amendments issued by China’s patent office (under review in 2016) is expected to positively increase statutory damages significantly from RMB10,000–RMB1 million to RMB100,000–RMB5 million (about USD750,000).
The risk and reality of IP theft is one not to overlook but with the changes in IP index score as well as the commitment of the country to improve the IP protection, one must not be put off by this issue to enter to the market – the key is to know where to find the best policy and enforce safeguards.
5. Identify A Base And Get Going!
If we return to the clichéd saying that China is a country, the big question is ‘Where to start?’ When setting up business in China, there are so many potential – or seemingly potential – hotspots across the country to choose from. Therefore, it is crucial to obtain an understanding of the market potential by geography during your initial stages of market research. Whilst businesses commonly choose Tier 1 cities, market intelligence will help identify industrial clusters and narrow down the target area(s). For example, many industries typically ‘cluster’ in Tier 2 cities. For example, with automotive related companies in Changchun and Nanjing, and aerospace and aviation companies in Xi’anis.
When choosing your set-up location it is also important to consider factors that will ensure ease of recruitment (e.g. suitable and skilled workforce, transportation facilities, and an attractive area) as this is key to building a business and establishing a solid base.
It is not easy for anyone to move to a new country and ease into the new environment, and it can be even harder for a business, especially moving to China with a western perspective. The five top tips above can be used as a compass to navigate the potential pitfalls, and help businesses to overcome the barriers that many companies have already faced and indeed fallen at, and ultimately ensure long-term business growth.
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