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). 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. 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?
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/