In the past decades, manufacturers rushed to China for good quality and low cost labor. But in recent years, due to the open business environment as well as the rising income of the average Chinese consumer (and thus their increased willingness to spend), China has become less attractive as a destination for OEM and more attractive as a consumer market.
For companies facing declining sales in their home market, China is a tempting target for global expansion due to its large population of highly aspirational middle class consumers.
If you are thinking about engaging Chinese customers or establishing a physical presence in China, ask yourself (and others) the following 3 questions first.
Does China want or need you?
The China market isn’t for everyone. According to the former CEO of Alibaba, Wei Zhe, in terms of business model, Chinese companies are more innovative than US companies. Business model alone cannot be a competitive advantage in China, not only because intellectual property rights are not protected, but your business model may already exist in China.
The competitive advantage US companies have would either be technology or branding. In short, companies that succeed in China usually have something that China either needs or wants. In other words, something China lacks, such as technology in certain industries; or would like to have, such as famous brands. Technology and branding play an important role in market entry in China.
If you offer efficiency tools or services for either individuals or businesses, go ahead and invest in the China market. Successful cases include Evernote and LinkedIn. If you are an international brand (especially if you are a luxury brand), the Chinese middle class would love to have you there. It’s worth mentioning that mobile-based tech companies are currently leading another wave of entry to Chinese digital market.
What are the restrictions?
If you plan on having a physical presence in China, then you need to consider the government’s attitude towards the sector your business falls in. The Chinese government restricts foreign investment in many segments of China’s economy, especially where state-owned companies dominate, such as banking, telecommunications, government procurement, and so on. Social media and media publishing companies usually fail in China (like Facebook or Twitter), not only because Chinese giants have dominated the market, but also because of government restrictions over social media.
For certain sectors in China, companies have the option of forming a joint venture with a Chinese firm or setting up a representative office.
While operating in China or dealing with Chinese stakeholders, ingrained assumptions made by US companies may cause the business to suffer. For example, in the US, having a 51 percent share of a company means having the ability to control the company. However, the ability to control a company in China mostly depends on the right to appoint a representative.
Do you know the market?
The most risky way to enter China market is to transplant a global business model. Many companies believe that if a business model works globally, it must also work in China. This line of thought is very dangerous and has been proven wrong in many failed cases, such as eBay. When you are transplanting your global business model, you are transferring the value and culture in your home country at the same time. On the other hand, if companies try to adopt local business practises without fully understanding them, the business would also be walking on a risky path.
It takes time to acquire cultural sensitivity and knowledge. To acquire knowledge for your business, you would either hire local employees with a deep understanding of the Chinese and US markets, or work with external agencies. An effective strategic planning requires a deep understanding of the brand, its product, and the culture and market landscape of China, with an open mind to adjust to local needs.
Featured image: Shutterstock