One of the main objectives for many companies when carrying out research in China is to establish the size of the market. Market size information can be used to gauge the overall size of the opportunity, to prioritize segments of the market for special attention and to inform future product development and marketing strategies. However, market sizing is challenging in any market, and the fact that many companies come to China with a low initial base of knowledge makes the market sizing process even more challenging.
How to calculate China market size
There is a growing demand for market size research amongst both Western companies looking to access the market for the first time (learn more about China market entry strategy), and companies with an established presence in China looking to improve their performance or identify new market opportunities. Even companies with a long history in China or Chinese companies themselves often have a limited understanding of the China market and frequently lack the resources to carry out a market sizing exercise internally. High staff turnover and the tendency of salespeople to focus on short-term sales rather than long-term strategic issues make it difficult to arrive at an adequate understanding of market size.
There are several different methods available to research companies when assessing market size in China, each of which has its pros and cons. A ‘top-down’ market sizing exercise involves the use of published statistics, industry reports, other recent studies and other published articles to collate statistical data from which the size of the market can be derived. In China, the viability of this approach often depends upon the industry or market being investigated. Unlike many developing countries, China does collect a significant amount of statistical data which is often useful for the researcher looking to get a handle on market size. Along with the National Bureau of Statistics, there are a number of government bodies and industry associations that publish comprehensive statistical yearbooks and reports.
However, statistics in China should always be treated with a degree of caution, as it is not unusual for government statistics to be embellished or exaggerated. Equally, while such data is useful for the size of mass consumer and commodity markets, for more specialist niche markets it can be difficult to find sources that provide sufficient detail that can lead to an accurate market size. Although the volume and availability of data continues to steadily improve, China remains a long way behind Western markets in this regard.
Another technique for calculating China market size is to try and build a picture of the market by adding together the sales of the companies that sell within it. However, whilst in some markets Chinese companies may publish their annual revenues or output figures on their website, in many instances financial information can be more difficult to come by. Unlike some countries, there is no ‘Companies House’ in China from which to obtain company financials, and generally it is only possible to collect detailed information on publicly listed companies. While interviews with suppliers or competitors can help to cross-validate this information, the accuracy of a market size derived by this approach will normally be limited. The supply-side approach tends to work better in smaller markets where there are a limited number of key suppliers in the market, so as the total number of suppliers increases the accuracy of this approach declines.
A bottom-up approach to the market is often the most robust approach available in China. Interviews with end-users or distributors can help to establish the total level of current and future demand for a particular product or service. For large markets with a significant base of potential customers, it is important to interview a mixture of large, medium and small customers, from which the total level of market demand can then be extrapolated. One key challenge with this approach is that directories and company lists are of variable quality, and there may be companies missing. Equally, distribution channels in China are often highly localized, so the issue of double-counting emerges when trying to assess market size in markets reliant on channel sales.
In most b2b markets it is necessary to use a variety of methods to calculate market size, which can then be triangulated to arrive at the most reliable available estimation. The client’s own internal data and insight are extremely important in helping to assess market size, and the client should be encouraged to challenge the data put forward by the research partner. Once a final view has been reached, it is then equally important to consider how the market sizing information will be used by the client in shaping its future marketing efforts. The quickly changing nature of the Chinese market means that market size information can quickly become obsolete and should be acted upon as quickly as possible.
Market size is an extremely valuable tool in enabling a company to identify opportunities, determine which segment it should focus on and gain competitive edge in the market. In a market as fast changing as China, having a clear view of the size of the opportunity allows companies to make long-term strategic decisions more effectively and set out a road-map of the specific steps required to realise these aims.
