Opportunities and Risks of China Market Entry

Why entering China market?

China`s economy has continued to grow with an average growth rate of 9.2% over the last five years. With the country poised to overtake the US as the second largest global economy by 2020 and destined to remain an engine of global growth for the next decade, understanding how to enter this large and complex market has become critical to foreign companies. China`s rapidly changing demographics, rising incomes, increased consumer spending and an increasingly open business environment have all helped to make the Chinese market increasingly attractive to Western businesses across a variety of industries. Similarly, declining sales in their home markets has forced many US and European companies to relocate in China.

Market Entry Opportunities

The first step of any effective China market entry strategy is to identify the geographical location of the target markets and the best specific location to target first. As in many countries, China has actively encouraged the establishment of industrial clusters in specific cities or regions, and in many cases entire industry supply chains can be concentrated in a small handful of cities. In many B2B markets, such clusters can help foreign companies to know where its target customers are when it comes to China market entry, which cities to focus on and even where to base its operations (particularly where local manufacturing will take place). market entry China   Second, confronted with the maturity of market in China’s Tier 1 cities, economic growth and rising incomes in Tier 2 cities have made entering these markets much more attractive to foreign suppliers than it was in the past. Not only do Tier 2 cities have the advantage of lower set-up and operating costs, but also the increase in consumer spending power in these areas is creating a rapid growth in demand for foreign manufactured goods and products. In particular, cities such as Shenzhen, Tianjin, Wuhan, Chongqing, Chengdu, Nanjing, Qingdao, Dalian, Suzhou and Hangzhou all offer strong commercial opportunities for foreign companies across a range of sectors. Over the long term, Tier 2 and even Tier 3 cities can enable foreign companies to gain first-mover advantage in these cities and lead to greater long-term market success. Third, the joint venture (JV) business model seems to bring many advantages and can often be viewed as a lower-risk strategy than the wholly foreign owned enterprise (WFOE). However, entry mode often depends on a number of factors, including industry landscape, the geographical size and scope of the market, whether the company plans to manufacture locally or import its products, and the level of on-the-ground sales and technical support required by customers. Fourth, it is a good way to enter the market through hiring Chinese managers. A key benefit of this is local market knowledge and deeper understanding of Chinese business they bring to the role. Not only are salary and insurance costs lower for local employees, but also Chinese employees very often have existing contacts (‘guanxi’) with suppliers, customers and local government authorities that can be fully utilized.

Market Entry Challenges in China

The challenge of China market entry has become an increasingly important question of all types of foreign companies. First, Tier 1 cities are China’s most mature markets in terms of consumer behavior. Although being based in a Tier 1 city may offer the lowest risk point of market entry with suitable testing ground for foreign companies with limited experience in China, it also means that the company faces higher operational costs and more competition. Daxue consulting: China market entry Second, understanding government policy and regulations is critical to success in Chinese market. There are both opportunities and restrictions for foreign investors in different industries in China. These sectors are designated by the government in the 2011 Catalogue for the Guidance for Foreign-Invested Industries as encouraged, permitted, restricted or prohibited. Also, both domestic and foreign companies should conform to a growing number of industry-specific regulations and standards. China now has a host of different ministries and regulatory organisations with responsibility for industry regulations and laws. For example, in the healthcare sector both the Ministry of Health and the State Food and Drug Administration (SFDA) play a role in drawing up and enforcing regulations, while there are also provincial level MOH and SFDA organs that implement regulations. As regulation is becoming more stringent, foreign companies will need to attempt to unravel the web of complex laws and regulations as well as try to understand which authorities have primary responsibility for implementing them. Third, consumer markets in China are heterogeneous, regionally divided and diverse. The culture, customs and traditions of the Chinese people make up an integral part of business decisions and government policy. For example, there are huge variations between different provinces in terms of population levels, per capita GDP, average income levels, consumer spending habits, education levels, literacy rates, lifestyles and so on. The nature and make-up of markets in different parts of China also varies considerably, which means that foreign companies should think carefully about which geographical location offers the best vantage point to target the broader China market. In the past, foreign businesses have often been drawn to coastal provinces such as Zhejiang, Guangdong, Jiangsu and Shanghai, due to higher populations and incomes in those areas. Although foreign companies in the B2C sector still remain focused on coastal cities, business-to-business markets are often far more geographically scattered. Fourth, IPR infringement is commonplace in China, and any company entering the market for the first time should work under the assumption that its technology will be compromised at some point. With this in mind, it is generally recommended that foreign companies, and particularly those with large IP inventories, consult with lawyers and IPR specialists to formulate an IPR strategy for the China market through legal, practical and technical ways. Fifth, in many industries the supply of highly skilled local managers with industry experience is extremely limited, and employers may still be forced to pay a premium to attract the right calibre of employees.  Equally, staff turnover rates are extremely high in China and retaining quality managers over the long term is challenging.  Losing local managers will also risk losing access to their guanxi networks and local market knowledge.

What can Daxue Consulting do for your market entry strategy in China?

Daxue Consulting: China market entry and research services An increasing number of foreign companies are trying to venture into China on their own. However, later they discover that, they have to work with local partners to leverage resources such as sales channels, customer bases and to control production costs for growth. External help is necessary for long-term strategy. Daxue Consulting is helpful in aiding foreign businesses due diligence and market research, particularly when researches in its own country are insufficient. When conducting market research, it is of crucial importance to find an advisor who is sufficiently familiar with the local market and contextual subtleties to interpret the data correctly. Daxue Consulting will help you properly localize your products and services for the China market and ensure that your business strategy and operation actions are in line with government policies. Thankfully, as China’s economy continues to grow and become more open to foreign companies, the rewards increasingly outweigh the challenges of doing business in China.   Daxue Consulting, Consultant in China https://marketingtochina.com/ https://www.chinadaily.com.cn/ https://www.bbc.com/news/world/asia/china/

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China Market Entry

Understanding how to enter the Chinese market is the first step in successfully developing your brand, product, or service in China. Daxue Consulting provides comprehensive market entry support for any international brand or company looking to enter the Chinese market. At the core of our China market entry service, we focus on market intelligence and strategic set up. Our market entry projects in the past have successfully concluded a/an:

  • Exploration and extensive understanding of your market in China and the related opportunities
  • Contextualization of the brand’s business and of  its product or service’s consumption
  • Market sizing and evaluation of potential for definition of the market entry scope
  • Value proposition validation with end-consumers and local professionals
  • Marketing mix design or adaptation for the Chinese market
  • Consumer segmentation and definition of localized marketing personae in China
  • Marketing plan with road-map for the first 18 to 24 months in China
  • Allocation of investment and modelization of revenue generation
  • Business plan

Thus, the market entry strategy is the key framework for your expansion into the Chinese market. Daxue can assist in determining your businesses needs and create a tailor-made market entry strategy for China ensuring you with a strategic road-map and kick-off plan to match your business situation, competition, and long term objectives in China. Daxue’s tailored product enables foreign companies to enter the Chinese market and establish prospects for long-term growth vis-à-vis our:

  • Rigorous and proven methodologies
  • End-to-end approach
  • Experienced international staff and Project managers

This allows our clients to have a comprehensive vision and insight into the know-hows in selling and providing access to various distribution networks throughout China and other second-tier cities like Hangzhou, Guangzhou, Shenzhen, and Tianjin.  Our team of international consultants at our offices in Beijing and Shanghai have worked with more than 250 brands over the last 5 years for projects in various industries.


CONTACT US NOW TO FURTHER DISCUSS HOW TO ANSWER YOUR NEEDS IN CHINA


How to strategically plan a step-by-step market entry in China?

In the strategic set up of your China market entry plan, Daxue enables your firm or company to tap into the Chinese market by providing a formulated market entry structure, which includes:

1.    Market Overview and Potential Assessment

Our team will work on mapping out the challenges, opportunities and existing & future environmental conditions and how they will impact the business’ development model of your brand in China. For the most exploratory projects, we will deeply focus on contextualizing the market and your business in China, breaking down the drivers and consumer related trends impacting its evolution. We will then conduct an assessment on the environment’s evolution, and provide an overall “picture” of the competition landscape.

This first step of the research will especially aim at evaluating the potential volume of the the targeted distribution channels, with a likely focus on online operation, the structure of the market and its most promising segments.

In the end, this will provide you with an overall understanding of your market’s size, potential for growth, and opportunities for products or services.

What are the insights and metrics we will usually focus on to map the market and its opportunities though? 

  • Market drivers, trends and restraints: collection of macro- and micro-data on the market volume (indicators) and structure
    • Macro trends: large-scale, sustained shift in market environment (Social, Technological, Economic, Environmental, Political and organizational drivers)
    • Micro trends: tendency rather pervasive within a given sphere of influence, typically consumer-driven.
    • Meso trends: evolution driven by long term force of changes in behaviors, technological disruption, retail environment changes
  • Sales and conversion metrics on distribution channels, with a focus on online data
  • Evolution of consumer interest and search for information related to the market over time

2.    Benchmark analysis with business cases of successful market entrants

The purpose of benchmarking analysis is to gain a collection of insights and metrics regarding competitors and their marketing strategy to extrapolate on potential road to success and best practices for the market entry of your brand.

This analysis will especially be interesting to proceed on a consumer segment basis, to understand how for each strategic segment, the product launch can gain market share and compete with the existing competition. Competitor benchmarking provides insight into what competitors are doing, what works, what doesn’t work, and ultimately what you can use to your own advantage – either through adopting successful practices or avoiding ineffective ones. Daxue Consulting will proceed through the benchmark with the objectives to:

  • Identify successful strategies and set up in any part of the marketing mix
  • Extract best practices for client acquisition and promotion
  • Collect metrics (conversion, promotion ROI, digital engagement, etc) to be leveraged when designing the revenue generation model (step 5)
  • Direct the whole research into the most influential forces of change in the market today
  • Define hypothesis regarding the consumer perception and expectation by analyzing the marketing choices of competitors

3.    Concept and Consumer Experience Testing

In the concept and consumer experience testing nexus, Daxue will collect hard data and first hand insights from both end-consumers and local professionals (brand managers, retailers, importers, traders, etc). The objective will be to validate the concept you are bringing to China, and the value proposition you offer to Chinese consumers. In output, this will allow your business to solidify its offer. Moreover, these interactions with end-consumers, often through focus groups, will allow you to gain knowledge on the preferred purchase channels, information sources as well as the acceptance of marketing messages.

4.    Consumer Segmentation

Your consumers in China do not fit into a single and unique profile. Each will look for specific products, will leverage its own information sources, and will develop unique perception toward the category and the various brands. It is then crucial to identify its key segments of consumer and to quantify the potential of market share to be captured by a new comer.

In this section, Daxue will provide a segmentation and breakdown of the total demand per key criteria (attitude and consumption habits, demographic distribution, digital behavior, need-based profiling). Thus, Daxue will help identify your market’s key segments of consumers and to quantify the potential of market share to be captured by a new comer in their market entry.

When these key segments will be identified, Daxue Consulting team suggests to generate “marketing personae” to represent the different consumer types that might be targeted by new comers in China. These personae’s building will of course be data-driven, each exhibiting key behaviors defining your key audience. Daxue Consulting then recommends 1 data collection process per persona, guided by how well it meets “their” needs. Products features, distribution models and branding choices can also be prioritized based on how well they address the needs and expectations of one or more personas.

5.    Allocation of investment and implementation design

The final step will materialize the market entry plan by combining and correlating the findings from the research. Our objective is then to design an actionable road-map for your first 2 to 3 years in China, including:

  • Initial and yearly investment to be considered according to various scenario (conservative, market-alignment, aggressive)
  • Portfolio of marketing actions to undertake with key milestones to target and related costs
  • Initial “Day 1” focus of consumer targeting and step-by-step scaling up operations
  • Partnership and network building
  • Financial statements and revenue generation models

How to match the key requirements for a successful market entry in China?

Rising incomes, rapidly changing demographics, increasing consumer spending and an improving business environment have all helped make the Chinese market an attractive target for many foreign companies and brands. Understanding the opportunities and challenges within the Chinese industry is necessary to make informed market entry decisions. Daxue Consulting provides you with the step-by-step approach previously discussed, but also assess the feasibility and the alignment of your project within the Chinese context. Our approach triangulates our knowledge of the Chinese market, our know-how in the regulatory landscape, and with our experience in strategic consulting.

  • Market knowledge:

Entering and growing in the China market can be a daunting task for managers of foreign invested enterprises. Due to the size and diversity of China and the lack of reliable centralized/official information databases, it is difficult to obtain information on certain industries, ripe markets, or companies. Thus, market knowledge must be obtained “on the ground.” This is where Daxue can help, as it requires an investment of time and effort to acquire reliable market knowledge on which to base sound business decisions.

  • Regulatory environment:

There are situations when regulations may be difficult to understand or are inconsistently enforced. This is often due to loosely interpreted regulations or the continued involvement of multiple authorities in oversight. Companies must ensure that they fully understand the regulatory environment before entering the China market.

  •  Strategic consulting:

Here, Daxue Consulting provides strategic insight into the local company advantage within the Chinese competitive landscape as it is important for foreign companies to gain market knowledge and insights into its competitors. Also, in some cases, foreign entrants may need to work with local partners in capacity. Therefore, we assist your market entry with a design of a strategic and marketing road-map, a definition of business plan, and via a thorough screening of partners and competitors.


How to better integrate the existing value and supply chains when entering the Chinese market?

Through this strategy, multinational players have been able to leverage their acquired local resources to strongly capture share in lower-tier cities without impacting the branding of their own premium brands. They also took advantage of the existing distribution network and created various entry-points for their product in the value chain. Finally, they have been able to optimize their product development strategy by owning brands already matching the specific taste and consumption habits of Chinese consumers.


To assist you in your China market entry, Daxue uses various methodologies

Daxue Consulting’s team is involved and work closely with your staff in every step of your China market entry. We help you to identify your market, we drive you to choose the most suitable location, we conduct valuable market research, we support you to hire a great staff and we provide you knowledge and expertise on due diligence. To optimize each of these steps, Daxue may use various methodologies:

  • Qualitative interviews with market experts: consultants, professors, experts
  • Quantitative surveys through any methods: online survey, phone questionnaire, in store interview
  • Diagnosis, analysis of competitors, competing for media plans through desk research
  • Interviews with competitors through various approaches
  • Synthesis of internal documents, etc.

Daxue Consulting approach is practical and oriented to key drivers of growthChina market entry

Our team aims to assist you in the development of strategies customized to your specific market in China, thanks to a strong understanding of this market. Still, as we think that a China market entry is not just about opening a door, we also support you in the execution of your strategy in China and we keep providing information about a trend and further opportunities for development in China.

We strongly believe that Consulting is about mutual investment and share of idea and expertise, we work closely with your staff to leverage  your company’s competitive advantage in the most adapted way in China. Your expertise of your own activity and our knowledge on every aspect of China market, including local customer tastes, local competition, and regulation, ensure great results.

As China market Entry is also about cross-cultural adaptation, we are happy and proud to work with a great international team. Therefore, our services are multi-language and multi-cultural. We also provide proven business training for you and your staff to adapt to a new and complex market in an easy and faster way.

Invest in China with the relevant investment vehicle

In these years, the WFOE has been the most popular vehicle for Western investors to operate in China and the second tier cities like Guangzhou, Shenzhen, Tianjin, etc. Focus on China - Concept
One of the main advantages of this investment vehicle in China is that it takes less time to establish than a Joint Venture. Indeed, the foreign company that wants to enter the Chinese market does not need to select a local partner or negotiate a Joint Venture contract. Also, the WFOE structure gives Western companies more control over their operations, as no local partner is involved in the process. Most foreign investors find it much easier to recruit and train employees when the Western investor is in the total control of the employer side of the relationship.
The growing popularity of WFOEs in China does not eliminate the need to work with Chinese partners. Hiring local managers is crucial to the company’s success in the Chinese market because their compensation requirements are considered to be lower than their foreign counterparts, and they are more familiar with local market conditions. WFOEs should also interact with local companies to get access to distribution channels and customer relationships.

See DX Consulting in the International press: Le Monde (French) / The Financial Time / Reuters

 

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