How to choose the correct route to enter the Chinese market

With over 1.4 billion people, China has become one of the most active and interesting markets on the globe. Attracted by these massive numbers, countless foreign companies pursue the ambition of exporting and selling into the Chinese market.

However, most underestimate the time and money that are necessary to scale up in the region.

Deciding on the correct route to enter the Chinese market is the first step in the right direction.

The second step is to evaluate your market potential. There is no point in coming into the market if you don’t know what opportunities exist and what they are. Knowledge is power; research and data mining are fundamental to establishing your business.

We are still living in a pandemic, and unless you are willing to do lengthy quarantines, you may not be able to travel to China. It is important to know that there are companies on the ground that can do this evaluation for you.

 

Option 1: Cross Border eCommerce (CBE)

If you are interested in selling your products in China but are not ready to establish a presence in the country yet, the Cross Border eCommerce (CBE) option could be a good way to start.

With more than 840 million online shoppers, China has the largest digital buyer population. In 2021, China’s ecommerce market was larger than the United States, the United Kingdom, Japan, Germany, and France combined. China’s ecommerce sales in 2021 reached 52% of total retail sales, making it the first country in the world ever to have more online sales than traditional ones.

According to The eCommerce Guide, Alibaba’s Taobao and Tmall, (50.8 percent of market share) and JD.com (15.9 percent) dominate China’s ecommerce market, followed by Pinduoduo (13.2 percent) in third place.

Instead of establishing a presence in China to sell online, foreign firms can choose to CBE to sell products. They can benefit from streamlined customs procedures through over 100 cross-border ecommerce-integrated pilot zones. Those zones limit Chinese consumers to purchasing up to 5,000 RMB ($727) per transaction and no more than 26,000 RMB ($3,782) per year.  They must work with authorized partners to record customs transactions.

China has long led the world in aggregate ecommerce sales figures and share of total retail. However, the country reached a behavioral tipping point, fueled by the restrictions of the COVID-19 pandemic.

The current CBE regime permits overseas sellers to sell goods directly to Chinese consumers through certain registered ecommerce platforms (e.g., Tmall.hk, JD.com). The qualifying products can be imported on an expedited basis at reduced import tax rates. The products are either shipped from overseas or stored in a bonded warehouse.

 

Option 2: Partner a Professional Employer Organization (PEO)

Once the Chinese consumer is familiar with your product and you feel ready to have a presence on the ground, a next possible step could be to partner with a Professional Employer Organization (PEO). This option has pros and cons.

As a new foreign business owner in China, investing in a corporate structure may seem out of the question for the moment, therefore you need to look for low-cost options.

Using a PEO to enter the Chinese market, could be the ideal solution. PEOs specialize in assisting small companies regarding benefits and human resources for their workers.

When you partner with a PEO, they hire the individual on your behalf so that you don't have to incorporate a company in the country. All the employment requirements are fulfilled, including the payment of social benefits, which allows you to start your business immediately.

China has a complicated legal system, which can make hiring or firing an employee difficult.  Finding a PEO that understands local customs and regulations may be of help for your business.

When you sign an agreement with a PEO, you are adopting a co-employment structure. This means that your employees are also the PEO’s employees and that it will have authority over your tax and health care responsibilities.

 

Option 3: Partner with a local distributor

If you think the previous option is not for you, a local partner could help you move your business forward. Utilizing an infrastructure and logistical know how that already exists may prove to be more time and cost-efficient.

The distributor model allows businesses to leverage local expertise and is a popular method among foreign companies. Finding the best fit partnerships will be critical to your business success.

There are several advantages of working with a distributor. Some of these are increasing revenue, instant market exposure, expanding brand awareness, benefiting from a local presence, and leveraging existing contacts. They can help you access a wider network of customers and channels in new markets.

In general, distributors have processes and teams that know how to sell to their customers, and deal with local customs and regulatory requirements. This helps businesses increase sales and make significant savings.

Nevertheless, you should be aware of the disadvantages. Being detached at a local level can result in challenges, such as identifying whether your products are a good fit for the market, or whether your distributors are selling through the most effective channels.

The distance from your target market can cause problems, such as the lack of brand control. It is crucial to protect your brand. Your distribution agreement should consider who is responsible in the event of a third-party bringing a claim against distributors for products infringing on third-party intellectual property rights.

When researching a potential partner, use traditional web engines but include the Chinese as well. Make sure the address and phone numbers are real and ask to talk to clients. Small steps can take you a long way in China. They are the difference between a fruitful relationship and a catastrophic one.

Finally, take the time to design your business plan. Use a local professional to handle your trade needs, such as outsourcing to a media agency or hiring a local person through an agent.

There are other options to enter the Chinese market, however these three tend to be the most cost and time efficient. You need to be a problem solver to succeed in China. Do not underestimate the challenges you will face, and instead be prepared to handle any situation.


To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
 

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.