Understanding the entry points and barriers in this market are critical on how foreign companies thrive in China market. Find out more.
China is a big market but it is also fragmented when it comes to demographics, consumer spending, income, and preferences. They differ from tier 1 and tier 2, including rural areas.
Megacities such as Beijing, Guangzhou, Shanghai, Tianjin, and Shenzhen are the go-to places of foreign companies to build or operate from the ground-up. However, setting up a business and understanding the legal implications require the counsel of an expert in such field. Foreign companies like you should also expect tight competition and higher operational costs in these places.
For deep-pocketed foreign companies, these are probably minimal considerations, but as we go deeper into the successes (and failures) of others, we hope this will serve as a guide for start-ups and medium-enterprises, taking into considerations that language solutions are part of the process as well.
Here’s a snapshot of China’s 13 megalopolises, which in 2000, there were only 3, and they are expected to increase to 13 by 2020 according to The Economist Intelligence Unit, National Bureau of Statistics.
Understanding the entry points and barriers as well in this market is critical to foreign companies, whether you have been in China for many years or considered as a new entrant without previous experience. Regardless of the size, revenue, or industry, the lack of local understanding usually stymied even the big players in the overseas market.
1. Localize, localize, localize
Localization adds that personal and cultural touch. It is one of the crucial elements in business expansion, especially in China. It is not a matter of just knowing the language, but market research and consideration of the 4Ps in your marketing mix: Price, Promotion, People, and Product.
As a foreign company, you also need to consider the variation per region, based on your target market.
For example, the heaters or boilers in Europe are indispensable at homes, whereas in the south and north regions in China have different needs. In Beijing, the government provides the central heating facilities for the residents, whereas in southwest and rural areas, residents buy their heating systems.
The opportunities differ in these regions, but for foreign companies offering these products, they could probably strategize on product offerings in the south.
Another example is the delivery options for the food industry. Fast food companies should also be tied up within the WeChat ecosystem or by any other means of mobile apps and integration since most residents use the app to transact online.
2. Maximize the local talent
Tapping the local talent will help you thrive in a market where everything changes so fast. Progress in the local scene are evident as technology and business models of homegrown companies suit the needs of customers. Those BAT – Baidu, Alibaba, and Tencent – are equipped with technology, network, policy-compliant) and, they know what works and doesn’t. Most of all, they’re playing the field by being good friends with the government.
So, the deal for foreign companies is to comply and leverage the local talent to help them navigate the market.
The professional networking site, LinkedIn thrives in China because aside from a good localization strategy (and having a Chinese name as “Ling Yin)” and hiring a pool of local talent just made more sense for them to attract more users. They complied to the government’s restrictions on content and stored the data in local servers.
They partnered with local companies like Sequoia China and China Broadband Capital to understand the market and hired a local to become the president for LinkedIn China, allowing the local team to work and find ways to connect with the Chinese users.
For foreign companies who have IP and trademarks, it’s a gamble for them to work with local talent, afraid of being copied, that’s why the next point will provide more insights.
3. Protect your company’s IPs and know your rights
One of the reasons why foreign companies are apprehensive to enter the market and maintain their longevity is the fear of being copied or the “secret sauce” will be replicated or stolen.
While we can’t deny these incidents from the past, foreign companies should be knowledgeable about the intellectual property issues before going all out in the market.
According to the Global Innovation Policy Center (GIPC) 2018 report, “China’s overall score rose from 42% (with a score of 14.83 out of 35) in the 5th edition to 48% (19.08 out of 40) in the 6th edition, due to the country’s strong performance on most of the new indicators as well its enhancement of key IP protections for the life sciences.”
To attract foreign investment and players, China is enforcing new mechanisms to combat piracy and counterfeiting. China’s strengths according to the report are: the patent and copyright reform extends protection and strengthens the enforcement; the growing recognition and upholding of IP rights; and efforts to raise awareness and leverage the value of IP rights both in academic and private sectors.
China is committed to addressing these challenges since the high-profile IP cases involved Apple, Michael Jordan, and Facebook where the high courts’ made positive legal decisions in favor of these people and entities.
The patent office also issued the patent amendments (based on the 2016 review) where statutory damages will increase from RMB10,000-RMB 1 million to RMB100,000-RMB 5 million or about USD 750,000.
4. Be knowledgeable about the culture
While being knowledgeable by reading articles and books is easier said than done, cultural immersion by being here and experiencing life in China, the people, places, and stories make a difference for foreign companies.
Even the famous luxury brands can draw flak in promotional videos to Chinese customers like what happened to D&G’s latest advertisement when done wrong while overriding even creativity of the ad. Doing the homework and conducting market research and learn how other local players strategize in customer retention and engagement will help like how Evernote did it. They applied a new strategy that they learned based on what works for the users, which result in 156 percent of their users.
By being knowledgeable about the culture also includes the type of apps and where customers hang out, what they use, how they use it, make more sense in helping foreign companies build business models and marketing strategies. Doing what the locals do also give foreign companies insights on how to integrate those technologies into their services or products.
The digital culture is highly efficient and fast-paced in China—that one who’s live for so long as a foreigner would know how the west and the rest of the world lag behind in terms of payment systems and logistics and shipping for B2C sectors (same day delivery and even drone deliveries are the norms in key cities).
5. Decide where you want to locate your headquarters
The tier 1 cities could be the testing ground among foreign companies, Beijing, Shanghai, Guangzhou, are the top choices since they are highly populated and higher incomes. However, these are mature markets when it comes to consumer spending and behavior.
For those who have limited experience and would like to consider low risk in market entry, as mentioned previously, the operational costs will be higher in these places. Tier 2 cities are becoming popular among foreign companies compared with the past because of the low set-up costs and operating expense.
If foreign companies are thinking for long-term, they may want to expand or locate in these tier 2 or even tier 3 to thrive. Plus, they have an advantage if they start in these places since these are emerging markets with less competition as of the moment.
However, there are also other factors to consider aside from costs, and the decision will solely base on the foreign company’s market analysis and research, the distance of their local suppliers and facilities, the acquisition of raw materials and the current local policies of those cities for foreign entrants, supply of local talent and human resources, and among others.
Foreign companies should be flexible and careful about these matters in order to thrive in a market where there are silos and variations in-between. A reliable local partner and consultant can unlock more insights if you’re serious to enter in a huge, diverse market like China.
If you need help in consultation, language solutions, and digital marketing strategies, let us know and we’ll be happy to collaborate with you.
If you’re serious enough to take your business to the next level, we’d love to offer you a 25% off on your first project this holiday season. Rest assured that you will get premium service with more discounts as well.