China Market Entry Strategy

Western companies continue to face challenges with China market entry regardless of the size and nature of the company. Despite the difficulties created by the pandemic the Chinese economy has continued to grow throughout. It remains the second-largest global economy behind the United States. This means that entering as large and complex a market as the Chinese market can be challenging.

Western businesses are usually attracted to the Chinese market because of its continued growth that facilitates high volumes of customer spending, rising incomes, and changing demographics.

Identify the Market

One of the biggest influences on the Chinese market is the size of the country itself – and the population that goes with it. This even separates the Chinese market from other Asian markets like South Korea and Japan. China market entry can be challenging just because of its size. As such, it can be difficult to identify and discern the best opportunity for market entry. Any size company wanting to enter the Chinese market requires sufficient local understanding of Chinese consumers. Without a solid local understanding, a foreign company will not succeed when entering the Chinese market.

When entering the Chinese market, the foreign company needs to understand that the Chinese market is not homogeneous. Despite the fact that their geopolitical situation is homogeneous, they tend to be economically and socially fragmented. This will undoubtedly have an impact on the Chinese consumer culture. Chinese economic growth is far from uniform and this further aggravates the social and economic inequalities in the country.

This means that when a foreign company plans a Chinese market entry, they should seriously consider which geographical area they are looking to enter. You will likely find larger population densities along the coast, which causes many foreign businesses to flock to the coast. This refers specifically to B2C sectors.

When looking at B2B China market entry the organizations are far more scattered. With B2B businesses it is not unusual to see an entire supply chain localized to one region. In such a case it can be helpful to know exactly where the target audience is. Knowing where to start is essential.

Selecting A Location for China Market Entry

There are some areas of the Chinese market that have dense populations with high-income levels, such as Guangzhou, Beijing, and Shanghai. Consumer behavior in these markets is quite mature and is usually good for testing foreign brands. That being said, while the risk is lower here, the operation costs are significantly higher than in other parts of the country.

The next Chinese market that can be considered is a slightly lower-cost market. Economic growth here is fairly rapid and the region includes cities like Hangzhou, Dalian, Xi’an, Wuhan, Chengdu, and Tianjin. Commercial opportunities here are strong for foreign companies. Long-term business strategy and market success are more likely in a Tier 2 or 3 area while production costs are not quite as high as with Tier 1 areas.

One of the biggest decisions a business needs to make when entering the Chinese market is whether they want to take a risk on less tested locations, or whether they want to play it safe. In order to make these decisions you need to understand distribution channels. Are your raw materials available, what is the current infrastructure like, what is the cost of human resources, and many other factors.

Government Policies And Regulations

Your China market entry strategy should focus on regulations and government policies. Many industries within China are heavily regulated. Foreign companies are restricted from entering many industries in the Chinese market. The Chinese government keeps introducing more control and regulations as expansion plans stack up.

There have been incidents in the past that have inspired tightened regulations to protect the Chinese people. These regulations are in place to ensure minimal pollution, top production standards, fair labor practices, etc. This means that foreign companies face regular inspections and environmental assessments throughout their production process.

China market entry plans are often heavily influenced by government regulations especially in terms of timeline and market entry costs. The vast majority of new businesses expanding into China are subject to Chinese consumer regulations and should be planned for accordingly.

What can make compliance difficult is that the regulations are not always entirely clear and easy to interpret. Much of it is highly contextual and can be especially difficult for Western companies to interpret.

Mode of Market Entry

Deciding on your mode of entry is pretty crucial when entering China for business purposes. The specific market you plan to enter might impact how you establish your company. A wholly foreign-owned enterprise (WFOE), is quite high risk, so if businesses can expand with a joint venture, it might be better. Having local experts at your disposal can help a lot with these decisions.

There are a number of factors that will influence your final entry mode. Company plans and marketing strategies depend on things like geographical size and the nature of your product. Luxury brands will not launch the same way that bargain brands might. Hiring local employees can help enforce a deep understanding of localized content and cultural information. Many foreign brands unfortunately do not appreciate how essential local knowledge and understanding are to the survival of businesses.

We have made a list of advantages and disadvantages of China market entry according to the type of enterprise you are entering.

Representative Office

Disadvantages

• A limited number of employees or size of company.
• Third-party employer for staff.
• Not permitted to trade.

Advantages

• Administration, auditing, and marketing tend to be smooth.
• There is no registered capital requirement.
• Low cost in terms of overheads.
• Fast set-up.

Joint Venture

Disadvantages

• Partners tend to negotiate terms in their favor.
• Having local employees can have a real impact on success.
• IPR might be at risk.
• The negotiation period can be a little longer.
• Agreeing on terms with a partnership can be challenging.
• Finding a partner that you can trust is essential.
• You do not have as much managerial control.

Advantages

• Local management provides a low-cost base.
• You have a production facility.
• You have access to existing resources with your partner.
• You can make use of existing Chinese customers and sales networks.
• It is mandatory for some industries to have this.

WFOE

Disadvantages

• Tax can be high.
• There is a requirement for a minimum number of staff.
• There are limitations in terms of industry.
• Operation and start-up costs are high.
• There is no access to JV partner resources.
• The incubation period is long.

Advantages

• IPR is better protected.
• RMB profits can be converted into USD.
• There is more flexibility.
• Employees are not restricted.
• You have a lot of managerial control.

The scope and size of an enterprise can be the deciding factors in foreign enterprise market entry. High-tech firms prefer WFOEs. Companies with highly commoditized products get more benefits from a partnership.

Conducting Market Research

Regardless of the mode that is decided on, thorough market research needs to be done before entering the Chinese market. There are companies specifically specializing in this kind of research in China, and they can be extremely helpful, especially for businesses that have no previous export experience.

Western companies might be surprised at the availability of English-language publications in the Chinese market. Proper research can help to identify future trends among Chinese consumers. It provides a good idea of what future performance might look like after entering the Chinese market. Research also provides insight into some potential problems, or gaps, in the market.

Hiring Staff

The quality of staff in your business may far outweigh most other factors of success as you enter the Chinese market. Some modes of business activity provide greater freedom for foreign companies and will decide the staffing requirements of your organization. With a global presence, the exact location of the company is closely related to the quality of human resources that are available.

Some business practices are heavily reliant on Chinese language skills that are hard to come by with international companies. Many want to employ expatriates, but they do not have the language skills required to effectively communicate with customers and may even lack the cultural understanding. Many industries, including e-commerce, are limited and expensive to get into. Intellectual property rights can be tight, as can other regulatory issues.

Due Diligence

Regardless of the type of venture you engage in, due diligence is your only key to making it work. Trustworthiness among employees and partners is essential, and it cannot be achieved without due diligence. Risk assessment and legal counsel are required to meet due diligence standards. China is dedicated to protecting its customers and workforce from unregulated goods and services.

Developing An International Property Rights (IPR) Strategy in China

IPR is not always respected in China. It is, therefore, safe to assume that your intellectual property is at risk in China. Foreign companies are usually advised to consult with lawyers on protecting their IP inventories. However, what works for one company will not necessarily work for another. In China patents are under a “first-to-file” system. This means that if you do not file your patent in China as soon as possible, a Chinese company might file before you do.

Thorough due diligence for foreign companies means a mixture of practical and legal measures when entering the Chinese market. Market entrants need to ensure that their services and products, along with their employees, are up to standard and are patented accordingly as a protective factor.

Concluding Thoughts

It can be quite intimidating for companies to enter the China market. The road is treacherous as there are obstacles standing in the way of success in China. However, the ever-growing economy in China still makes it an attractive market to enter. Hard work and dedication to due diligence and market entry planning can go a long way.

The economic and social landscape in China is constantly changing. Starting a business in China can, therefore, be trying as it can be difficult to keep up with these changing landscapes. Foreign companies sometimes face some acrobatics to meet the requirements of the China market. There are a number of factors that impact a market entry strategy in China, and it will look different for each business depending on things like company size, e-commerce landscape, base of customers, etc.

We have summarized a ‘do and don’t’ list for a foreign company wanting to enter the China market. We do this in closing to provide a brief bird’s eye view of the contents of this article and a way to introduce further reading.

Don’t:

• Assume that anything has automatic protection under laws in China.
• Select employees or partners without conducting prior due diligence.
• Invest in a local presence before doing thorough market research.
• Assume that the market in China is interchangeable between regions.
• Rely on unsupported information about partners in China.

Do:

• Engage in due diligent practices when selecting employees and partners.
• Register all your trademarks before entering the market.
• Speak to a lawyer for an IPR strategy.
• Establish the best route to the China market in advance.
• Research the best mode for market entry.
• Pay attention to market segments.
• Detailed market research before entering the market.
• Start with initial background research before getting to the more detailed research.