China, which represents 13.3% of global GDP, is the world leader in export and the top economic powerhouse. According to the IMF, it has been surpassing the US in terms of GDP and purchasing power since 2014. For the last 30 years, China has been experiencing wave after wave of reforms that encourage foreign investment and export, resulting in annual growth rates of almost 10%.
In the last few years, however, China’s growth rate has been decelerating (reaching only 6.9% in 2015), a sign that their economy is changing to become more service-based. The services sector already makes up half of the economy and the growth of the Chinese middle class is not showing any signs of stopping: with already 109 million people (compared to 92 million in the US), it is expected to double by 2020.
Being avid consumers, this middle class attracts a growing number of foreign businesses. To encourage this trend, the Chinese government has made internal consumption a new priority. While the Asian giant has managed to attract a significant amount of foreign business, it’s still a market that remains a mystery to many.
That’s why we’ve outlined several key factors for successfully entering the Chinese market, with a few practical examples to show you how it’s done.
1. Research the Chinese market
China is far from being a homogenous country: with 56 different ethnicities, 94% of the population is concentrated in a few pockets and the country is constantly balancing between modernity and tradition.
Consumer behavior differs between regions and event cities in China. For example, minimum wage is set on a local level and can be up to twice as high in some areas than others: €120/month in Yinchun and €245/month in Guangzhou.
Being such a complex market, it is crucial to do a significant amount of research ahead of time in order to successfully adapt your offering to local preferences.
Below you’ll find a few resources to get you started:
Success Story: KFC
KFC is the most popular restaurant chain in Chine, with over 5000 locations in 1100 cities. When it first entered the market, they received complaints from consumers stating that their dishes were too spicy (Shanghai) while others found them too dull (Sichuan and Hunan). KFC later adapted their recipes and menus to each region and now offers different levels of spiciness for different areas. The children’s toys found in the kid’s meals also differ by region.
2. Understand the complex legal environment
Business law is a fairly new field in China and is constantly evolving. The state heavily regulates foreign investment and getting approval from the authorities is a crucial first step for all businesses.
To know which type of investment is sanctioned by the state, you need to consult the catalog of foreign investment, which is classified into 3 categories:
- Sectors where investment is encouraged: subway construction and management, retirement home creation and maintenance, industrial design, architectural design, textiles, etc.
- Sectors where investment is restricted: creation of educational institutions, car manufacturing and airline maintenance, etc.
- Sectors where investment is prohibited: production and maintenance of nuclear fuels, sale of tobacco, production of audio recordings and online publications, etc.
The sectors that are not listed above are authorized.
The latest updated of the catalog in 2015 opens new investment opportunities for foreign companies; for example, direct selling, distance selling and online selling, which were restricted by the government until now, have been authorized. This is great news for international online retailers, as China is the global leader in ecommerce sales.
Businesses wishing to establish themselves in China have several legal options to choose from:
- Representative office: this is the simplest type of corporate model, but it does not conduct sale or direct purchase activities.
- Equity joint venture or cooperative joint venture: this model is highly encouraged by the Chinese government et involves joining forces with a Chinese partner.
- Wholly Foreign-Owned Enterprise: this is the most versatile option for foreign businesses, as it allows them to bypass partnering with a Chinese investor. The main advantages of this option are greater autonomy, control and flexibility.
Businesses also need to take a close look at the Chinese tax system, administrative requirements and and intellectual property laws before taking any steps into the country.
3. Finding the right local partner
Taking on the Chinese market on your own is difficult. Finding the right local partner is no easy feat either, but it can help your business avoid common pitfalls and adapt to the market faster. It allows you to access an already-established network as well as have a better understanding of the culture, the market particularities and regulations, among others.
Foreign businesses are often required to partner with a Chinese company in certain industries that are considered sensitive or strategic. These include alternative energy, biotechnology, and advanced industrial machinery.
It is important to pay attention to the conditions of the partnership and to clearly outline the legal structure of the collaboration in order to avoid possible future disagreements. Protection of intellectual property is a sensitive subject in China and requires taking a few precautionary measures to prevent possible technology leaks.
Foreign companies have a range of organizations that they can turn for advice and guidance in the Chinese market, such as UK Trade & Investment and the China-Britain Business Council. When in doubt, asking for help is a necessary step in overcoming the legal challenges of working in China.
Success Story: Starbucks
The coffee giant relied heavily on local partnerships in order to adapt their offering to Chinese consumers:
- With Beijing Mei Da in the north of the country
- With Uni-President in the east
- With Maxim’s Caterers in the south
By benefiting from each partner’s expertise and experience, Starbucks was able to understand the local preferences of the market much faster. Its intelligent positioning helped it to quickly establish a strong foothold and become a market leader, with over 1900 stores throughout 99 cities in the country.
4. Understanding and attracting Chinese consumers
Chinese shoppers prefer international brands, which carry a certain identity as a status symbol. This does not, however, mean that foreign companies can duplicate their domestic strategy in China and hope for the same results. They need to fully adapt their offering and take into account the Chinese culture and values.
This includes:
- Deciding whether to translate your brand name and if so, finding an accurate translation that is easy to pronounce and memorable
- Adapting your marketing channels, as the web norms of China are not the same as in the West
- Creating advertising that matches consumer needs, such as focusing on promotions and reviews
Success story: Montblanc
Montblanc, a German luxury brand, launched an innovative gamification campaign on the Chinese Wechat for its 90-year anniversary. The in-app game allowed users to submit their profile to be rated by other members of the Wechat community and win tickets to Montblanc’s “Black & White” exhibit.
Montblanc was able to generate spontaneous word-of-mouth while promoting their values through user-generated content. Users voted for the photos that showed the most elegance, sophistication and leadership, all values of the Montblanc brand.
5. Adapting your management style and learning to negotiate
The Chinese management style is significantly different from other regions of the globe and businesses need to adapt their approach in order to have a cohesive, committed workforce.
They should take into account the following factors:
- Avoid arrogant behavior and vivid displays of emotion
- Build and maintain strong trust relationships
- Focus on having a positive dialogue
- Give teams structure and clear goals
- Put the interest of the group above those of the individual
Negotiation in China is like a balancing act between: showing restraint and patience, respecting the hierarchy, never allowing the other party to lose face, making group harmony and consensus a priority.
Success story: Procter & Gamble
P&G was one of the first multinational to actively recruit new hires in Chinese university and to develop an intensive training program for their teams. P&G then focused on structuring their company around local talent in order to have a truly Chinese management style.
While the company currently faces some difficulties in the country, it remains a good example of how to build a local team.
China: a difficult but worthwhile market
Succeeding in the Chinese market requires significant time, research and investment. Not only are there major differences between China and western countries, but there are also differences within the market itself. It is often best to find an experienced local partner that can guide you.
With so many cultural differences, administrative hurdles and government regulations, China may seem like an unrealistic goal for many companies; however, it is important to look at the success stories of Ikea, Starbucks and Apple to see that it is a market with enormous potential.
