Entering China

It is tempting to talk of ‘developing markets’ as a homogenous group characterised by rapid growth, low cost labour, inequality between rural and urban areas, and a rapidly growing middle class. The danger of this approach is that the substantial differences between countries such China, India and Brazil can be overlooked, leading to misunderstanding and ultimately bad business decision-making.

China is distinct from other developing markets in a number of important ways, all of which have strong ramifications for marketers. To begin with, China’s economy is far more diverse (and therefore offers a much broader range of opportunities) than Brazil for instance, an economy that is far more reliant on raw materials and commodity products.

China’s demographics are also unique among developing counties. A huge population of 1.3 billion not only creates a massive internal consumer market, but the government’s controversial one-child policy has resulted in a rapidly aging population of consumers. Likewise, China’s superior infrastructure over other developing countries has significant implications for marketers in terms of establishing routes to market.

Consequently, China is now often seen as the most lucrative opportunity in the developing world. The country is no longer just viewed as a low-cost manufacturing base, but also increasingly as a lucrative market with a receptive audience of customers. As such, companies are now under growing pressure not only to better understand Chinese buyers, but also to successfully navigate the many barriers and potential risks when trying to execute a successful China market entry strategy.

B2B International has identified 10 key pieces of advice that all companies considering entering China should consider:

1. Multi-channel promotion – China is currently undergoing a technological revolution, with internet penetration and mobile telecommunications usage rates at an all-time high. Consequently, online and mobile telecoms sales channels are becoming an increasingly important promotional route when selling either to Chinese consumers or businesses. At the same time, the relationship-focused culture of the country means that face-to-face selling and events also remain a critical part of most companies’ promotional mix. Similarly, direct mail, often dismissed as an ineffective route to market, is now becoming more important as a promotional activity. The fact that direct mail represents just 5% of Chinese companies’ advertising spend (compared to 35% of American firms’) indicates that it retains some value in grabbing the attention of potential buyers. Overall, a continuous and relentless multi-channel approach is critical in a country where brand loyalty is constantly being tested by growing competition and an ever-increasing variety of goods and services in the marketplace.
2. Establish a sophisticated and competent local sales force – Western companies frequently dedicate insufficient time and resource to establishing a local sales force that fuses buy-in to the company’s objectives with local knowledge and understanding. It is surprisingly common for Western companies’ Chinese sales teams to be under-resourced and under-trained whilst capital is poured into product development and manufacturing plants.
3. Allow three to seven years – Despite the huge opportunities afforded by China, it should be recognised that profiting from these can take time. Establishing a new brand in an already congested marketplace requires not only promotional effort but also local experience. Quality systems, distribution networks, product localisation and staff training are all examples of activities that require long-term commitment and which are prerequisites to having a sustainable Chinese business. On average, service companies and those with relatively simple business models can expect to be sustainably established within around three years of entry; larger corporations with complex business models and distribution networks often regard five to seven years as the necessary period to become fully established.
4. Do your legal homework and evaluate legal risks – Chinese law is complex and often ambiguous, meaning that extensive legal advice is essential at every stage of the market entry process, including areas such as company set-up, labour law and copyright law. At the same time, companies have to accept that many areas of law will remain ambiguous and obtaining a categorically clear answer to fundamental questions such as ‘what activities is my business allowed to carry out?’ or ‘do I have effective copyright protection?’ may well be impossible. It is down to the company to make a judgment call, setting likely revenue streams against legal risks.
5. Don’t underestimate the cost of doing business – Whilst unskilled labour and commodity supplies can be extremely cheap in China, many of the items critical to running a successful business are astonishingly expensive to foreign companies. Office rentals in Beijing and Shanghai are often included in the top 10 most expensive cities in the world. Social insurance and other obligatory labour costs add almost 40% to the wage bill (against, as a comparison, less than 15% in the UK). The fragmented and ephemeral nature of markets means that promotional effort can be extremely costly, as can establishing distribution channels. Training costs can be astronomical. Entering the Chinese market is not a low-cost process, and any company must be confident in the revenue streams it will generate before doing so.
6. Make China an innovation centre – The company that makes China an operations centre and not an innovation centre is missing a huge opportunity, as well as risking ‘missing the mark’. Almost 100 of the Fortune 500 companies now have R&D centres in China, a tribute to the local market’s demand for innovative products and the creative ability of the Chinese to conduct world-leading research and development.
7. Aim beyond just the premium end of the market – Western companies have typically positioned themselves as premium brands in China, focusing on the top 5% richest customers and the tier one cities. Now, however, competition at the top end of many markets is intense, with high quality Chinese competitors prevalent as well as foreign firms. The race is now on to profit from the high growth of the Chinese middle class across second tier cities and beyond.
8. Have a flexible business model – The Chinese market is developing so quickly that new opportunities emerge on a regular basis. Any company entering the market must be prepared for a degree of ‘trial and error’ as it reconciles its existing business and expertise with that of new employees in a new business environment. Everything from positioning to routes to market is likely to evolve substantially as the company develops its business and it is critical that marketing teams and management are not too rigid in their thinking.
9. Establish a comprehensive local presence – Chinese buyers are increasingly confident in and loyal towards Chinese companies, and suspicious of ‘fly by night’ foreign companies who lack a permanent presence in terms of service teams and senior management. Whilst a foreign brand is a strong asset when entering the Chinese market, brand values can be quickly destroyed if the company is not seen to live up to its brand promises in terms of quality, innovation and service. It is critical that a Western company entering China makes a firm promise to the market and lives up to it through all of its interactions with that market.
10. Establish firm and frequent two-way lines of communication between local and parent office – The best foreign companies establish frequent communications between different layers and locations of their businesses. This ensures the sharing of expertise, knowledge and best practice, and consistency of offering. As companies establish centres of innovation within China and Chinese businesses become of increasing strategic importance, the benefits to head offices of this interaction are greater than ever. Rather than seeing communication as a chance to impart knowledge to their Chinese teams, Western managers are increasingly and belatedly recognising the opportunity to increase their own insights.