Designing a market entry strategy for your China business in 2020
A strong political will to open the market and offer a friendlier
environment to foreign investors has made China a more attractive
business destination in 2020.
With a rapidly changing world economy and the global uncertainty
caused by the COVID-19 pandemic, it may be wise to take the
opportunity to design a well thought market entry strategy for your China business.
With a population of about 1.4 billion people, China represents a significant potential market for foreign companies. But its attractiveness comes attached to a series of cultural and structural challenges that require knowledge and a strategic approach to be navigated successfully. No matter the size of the company, from a multinational to a small first-timer, the lack of local cultural understanding can prove catastrophic.
One of the most important things that foreign companies need to realize is that China is not a homogeneous country, and that it is extremely socially and economically fragmented. Uneven rates of economic growth in different parts of the country over recent years have increased many of the economic and social discrepancies that already existed between regions.
There are significant disparities between provinces in terms of population levels, per capita GDP, average income levels, consumer spending habits, education levels, literacy rates, and lifestyles, among other variables. As such, China is a collection of individual sub-markets defined by vastly differing demographic, economic and cultural characteristics.
Taking these elements into consideration, foreign companies should analyze carefully which geographical location offers the best vantage point to target the broader China market. Coastal regions with higher income levels, such as Zhejiang, Guangdong, Jiangsu and Shanghai, have historically attracted more foreign business.
The first step for any effective China market entry strategy is to identify the geographical location of the target market(s) and the best specific location to target first. As in many other countries, China has actively encouraged the setting up 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.
Choosing the right vehicle for entry is one of the most crucial decisions a business can make when entering China for the first time. Although a growing number of foreign companies are ‘going it alone’, the joint venture (JV) business model still brings with it many advantages and can often be seen as a lower-risk strategy than the wholly foreign owned enterprise (WFOE). Equally, while some business to business (b2b) markets require setting up a local Chinese entity, in other markets using local intermediaries or a small representative office may suffice.
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. Ultimately, when choosing which form is most appropriate, a company should consider each of these factors, along with the overall costs of setting up a local entity and hiring local employees.
China can be a country of surprising and unexpected opportunities. It is important to seize these opportunities as they present themselves. If you focus on local entrepreneurs as clients, but a large state-owned company expresses interest in your product, you might want to consider the opportunity. Without such flexibility, China can be a cruel place. Doors shut as quickly as they open.
Flexibility can also be a game-changer in China. The Chinese business environment requires flexibility towards simple aspects such as planning your schedule. Last minute changes are common. Also, China’s legal environment is another reason to be flexible. Regulation changes can, and will, be implemented overnight, forcing you to adapt your strategy regarding possible legal challenges or opportunities.
Once you have a solid China strategy; it is important to follow through. Even when you act upon certain opportunities, it is still important to make sure you adhere to the overall goals of your strategy. This will prevent you from taking unplanned turns and ending up wasting time and resources in adventures that do not align with your own interests.
Such situations arise when dealing with Chinese counterparts. Often seemingly out of thin air they tend to adapt their strategy towards you. They might suggest changes which are not in line with your original intended China strategy. However, you have to dare sticking to your strategy, convincing your Chinese counterpart of your preferred approach.
Almost all Chinese distributors will push for exclusive distribution contracts. Even though they only focus on a specific area in China. Many foreign companies give in, in the hope this exclusivity will make the Chinese distributor work harder. Even if the organizations originally considered, rightfully so, that China is too large for exclusivity to any company. By giving exclusive rights to one distributor, companies may give up the part of their strategy to grow and expand their business to different regions in China.
According to a report by the consulting firm McKinsey, China’s economic momentum will continue in 2020 with domestic consumption leading the way, selectively creating opportunities. If China’s priority sectors match those of your business, 2020 will be a good year to step up as the taps of government funding remain open for now.
China’s consumer retail spending in the first 10 months of 2019 rose 8 percent year on year, ahead of income growth of roughly 6 percent. Over 10 million new jobs were created. With moderate house price growth and a positive year in domestic stock markets over the last year, the wealth impact on consumer confidence remained positive.
More and more consumer purchases are now financed through installment payment schemes, through credit cards and bank debt (now well over $1 trillion). The average Chinese consumer is not yet overleveraged (total household debt stands at only 60 percent of GDP), but the 20-30 age groups who borrow most enthusiastically are getting there, pulling forward consumption from future years.
These younger age groups also sustain higher current spending by not entering the property ownership market. For many, property prices are now so high it is simply not possible until much later in life. Many realize that renting is a better economic plan. A recent JLL report showed the average price of renting in top Chinese cities was less than half the average mortgage payment. At the individual city level, these trends could finally trigger a material downward adjustment of as much as 30 percent in specific city property prices in 2020.
After more than a month locked indoors due to the COVID-19 pandemic, Chinese consumers are slowly returning to their normal routines, while their government is encouraging them to spend heavily to help reactivate the country’s economy.
Taking the first step in the Chinese market can be extremely intimidating. Although there are often many obstacles in the way of achieving success in China, the rewards of successfully navigating this difficult course are also immense.
As China’s economy continues to grow and becomes more open to foreign companies, the rewards increasingly outweigh the challenges of doing business in China. A solid marketing strategy can help companies overcome those challenges and embrace the opportunities.
There is no one-size-fits-all approach by which foreign companies should view the China market, which is constantly evolving and changing. Each company’s China strategy should be well-thought and based on any number of different factors, among them industry sector, product type, company size and culture, as well as long-term business goals.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.