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Why Expand to China?
Years after China’s economic reforms, China had developed at an incredible speed and became the second-largest economy in the world. Since experiencing one of the world’s biggest booms, China’s GDP has risen tenfold and is now widely seen as an engine of the world and regional growth. With that being said, China’s rapidly changing demographics, rising incomes, increased consumer spending, and an increasingly open business environment have all become essential reasons for Westerners to want and expand their business in this lucrative market. The sense of stability imposed on the Chinese market, thanks to governmental stability, appears to be another excellent motive for foreign entrepreneurs looking to export or invest in a secured environment.
Even after the Covid-19 crisis, during which many economies across the globe suffered a tremendous economic loss, China’s economy grew a record of 18.3% in the first quarter of 2021 compared to the same quarter last year. This shows how capable and reliable the Chinese market is and how investing in it is the right choice.
However, with all of its many benefits, entering the Chinese market can be quite a challenging feat. Foreign companies with limited or no experience of doing business in China could even think of it as an impossible task. The cultural and language barrier, the strict regulations, the high market competition, etc., can all appear to be overwhelming and too challenging to overcome. That is not the case.
That is far from true. With the right knowledge and a proper market entry strategy, expanding your business in China is guaranteed and would turn into a successful outcome. The purpose of this article is to provide some handy tips and recommendations for your market entry plan and give you a better understanding of the Chinese business world.
Chinese Market Opportunities:
First and foremost, there is a need to identify the Chinese market and its unique characteristics. It is essential to point out the differences between areas in China and notice the economic gap in each one. Central China is more agriculture-focused and not as wealthy, although low-end manufacturing is increasingly moving into the region. Western China is the least economically prosperous region, although it has significant natural resources.
The three wealthiest and most important economic regions are on the east coast: The Pearl River Delta near Hong Kong, the Yangtze River Delta surrounding Shanghai, and the Bohai Bay region near Beijing. Furthermore, China’s industry is divided geographically, meaning that each region and city is known for its industrial orientation. For example, Shanghai’s target markets are chemicals, pharmaceutical, automobile, and financial industries, while Beijing or Shenzhen are more focused on IT, communications, and electronics. The first step of any effective china market entry strategy is to identify the target markets’ geographical location and base your operations according to the most compatible city/region.
A unique system that China is known for and dramatically affects its economic distribution is the Chinese city tier system. This unofficial list of divisions provides a better outlook on the different economic characteristics of each region in China and helps identify the most financially progressive cities. The tier 1 cities are commonly known as Beijing, Shanghai, Guangzhou, and Shenzhen, and they are the center of business and economic prosperity in all of China. Some examples of tier 2 cities are Tianjin, Wuhan, Chengdu, Nanjing, and so on, and they represent a source of great potential for many foreign investors. While the competition is exceptionally high in the tier 1 city areas, the tier 2 cities offer a more plausible chance of success. Tier 2 cities also have the advantage of the lower setup and operating costs, and many of these cities are quickly developing new industries and attention-getting enterprises. The recent development of tier 2 and even tier 3 cities has given many western companies new opportunities to expand into the Chinese market, where Beijing and Shanghai are not the only limited options.
Pillars of Success:
After gaining a better picture of the ways of the Chinese market, its characteristics, and new opportunities, we have gathered the most inclusive tips and recommendations for your market entry strategy. Following these pillars of success would assure a more accessible entry to the Chinese market and increase your chances of success.
Just as it is clear that appearance is a key factor in maintaining any connection, it is just as obvious that it plays a crucial role in business in particular. A well-kept appearance reflects your professionalism, as well as the image of your own company. Chinese business culture puts even more weight on appearance and finds a proper appearance as a matter of good manners. Moreover, Chinese ethics link between appearance and respect, meaning that sloppy attire can be interpreted as a form of a disrespectful attitude. A Chinese business person would most certainly take it as a personal insult if you were to appear without a suit to an important meeting. To maintain your own image and create a better atmosphere between you and your Chinese counterpart- a good appearance must be concluded in your strategy.
Unfortunately, putting effort only into your appearance might not be enough and would likely not satisfy some Chinese businessmen completely. For the sake of gaining trust and assuring the reliability of your own company, there is a need to provide official documents that prove your expertise. Many Chinese companies offer copies of their certificates and honors in their website to show their clients they are a reliable source. This common tactic of appearance is what your Chinese client would look for while browsing your company’s website. It is then extremely important to gain their trust and put on your website any sort of relevant certificate. Just this small, seemingly insignificant step would help increase your credibility in their eyes and increase cooperation chances.
China is known for having strict regulations and a high case of government intervention in its economy. Western companies who wish to enter the Chinese market must be aware of that and thus carry out a thorough inspection of said regulatory laws beforehand. One should first make sure that the Chinese regulation approves of their product before making further process in its marketing and import. Other than researching this important aspect of Chinese law procedure, there are two more essential aspects you should keep track of in your business intelligence report.
While investigating the Chinese market, you must first make sure that your product is truly needed and check whether there is even competition in this industry. For example, China is highly developed in the field of mobile payment; therefore, introducing a product to this already developed market would be deemed unnecessary. This example shows the importance of understanding the Chinese market in advance so that there won’t be a chance of you wasting precious time and money.
Moreover, making a business intelligent report can create two more significant advantages. Firstly, it would make the impression that you are thoroughly prepared and informed about the Chinese market, thus providing further proof for your Chinese counterparts that you are someone worth working with. Secondly, having a business intelligence report during business negotiations would prove to be an essential tool. No one can misinform you when you have hold of all the necessary knowledge and facts. That way, you can know for sure that you made the right decisions, ones that would give you the most profitable results. It is important to note that having a professional agency make an intelligence report is the most recommended. With a professional agency, you can be confident that their report would be realistic and true to reality, as a subjective third party writes it.
Innovators and entrepreneurs who wish to acquire funding to support their products financially can use Chinese equity crowdfunding platforms. Crowdfunding is fairly popular in China, because Chinese people are one of the world’s biggest online spenders, frequently shopping and investing online. Chinese consumers also tend to be open to a wide range of products, be it foreign or otherwise, and they are also quicker to buy products that had piqued their interest even if they are new. Therefore, Chinese equity crowdfunding has excellent potential, as the Chinese market is ideally suited for this investment model. Another excellent way for getting funding is by seeking Chinese venture capital (VC) investors. China has the largest venture capital market in Asia, and is only second to the US. It is best to keep in mind that VCs in China tend to back companies less on technology breakthrough, and more on business model innovation enabled by proven technology.
Government Grants:China had become one of the leading countries in the field of electric vehicles, accounting for more than half of all-electric cars made and sold in the world. This phenomenal success is the product of a groundbreaking agreement between Chinese authorities and Tesla- making Tesla the first production facility in China wholly owned by a foreign carmaker. That shows that the Chinese government would give grants to foreign companies who decide to establish operations in China, especially companies with strong IPs, like Tesla, for example. If your product can be of value and contribute greatly to the Chinese market, the higher the chances of gaining subsidies from the government.
Chinese speaking representative:
An incredibly important point in your strategic plan, communication. Being the most crucial key in any sort of business proposition and dealings should come first and foremost. Knowing the significant impact that clear and effective communication holds, it should be in one’s best interest to invest in that particular matter and hire a Chinese-speaking representative. Besides providing help in overcoming any sort of language barrier, a Chinese-speaking representative could also help detect the ‘deeper meaning’ behind the words exchanged and what was said ‘between the lines.
Chinese communication style tends to be far more indirect than Westerners’. Therefore, there are many code words or phrases in the Chinese language used for saying “no” or politely expressing refusal. A foreigner would have difficulty understanding those delicate wordings, while a Chinese-speaking representative would be able to pinpoint them naturally. Not clearly knowing the true state of mind of the client in front of you can put you in a great disadvantage and can easily ruin any chance of a profitable collaboration.
In choosing a Chinese-speaking representative, it is best to hire someone from mainland China rather than a Chinese Singaporean or a Taiwanese. This emphasis comes from the notion that the closest the representative is to the client, the better. This way, it would be considerably more straightforward for the client to feel more open, more straightforward and trustful, and thus help navigate the business meeting toward a favorable outcome. Furthermore, hiring a representative is not too costly, rather it is reasonably priced and can be of great assistance to your Chinese market entry goal.
The average Chinese spends 2.5 percent more time on his phone than the average American, so it is not a surprise that a compelling digital presence is required in your business strategy plan. The multi-purpose Chinese social platform, WeChat, is extremely popular in China, attracting more than 1 billion active users every month and quickly becoming an essential tool in the Chinese business world. Everything business-related goes through this app, and so it would be strategically wise to focus most of your digital presence there. Since many WeChat users use the social app for work purposes, WeChat Work (WeCom) was developed to cater to the employees’ and companies’ needs, and hence offers another option for a business-oriented app that is albeit more professional.
Aside from investing in a digital presence through popular social media platforms, it is also highly recommended to put in effort on your own company’s official website. As mentioned before, a company’s website is a part of its appearance, of its image, and is one of the first things your Chinese client might look for and base his general impression on. While making sure your website is organized, informative, and caters to the Chinese businessman’s eye, you should also pay attention to the requirements of the Great Firewall of China. The Great Firewall of China refers to the country’s online censorship system that blocks a range of foreign websites and slows down cross-border internet traffic, requiring foreign companies to adapt to domestic Chinese regulations. Failing to meet those requirements may prevent your Chinese client from going into your website, causing them to question your reliability and see you as an incompatible business partner. To avoid that, you must keep in mind that a digital presence holds a significant factor during foreign trade and is not something you should take for granted.
Opening a representative office in China should be considered as one of the first starting points of your entry strategy. Even before arranging a Chinese business card, you should open an ROs in China and establish your entity there. This course of action is recommended for several reasons, one of them being for the sake of IP protection. Many foreign entrepreneurs worry about this particular issue, and although IP protection laws in China have improved over the years, it remains a source of concern. Having a local firm in one of the cities in China could ease those worries and guarantee that your IP rights could not be easily provoked.
Another important advantage that a legal entity in China provides is in how it can contribute to your image. Having an ROs in China can give the impression that you are already settled, that you are already making contacts and building relations with other companies in the Chinese market. This impression could benefit you greatly during business negotiations by making your potential clients assume that you have other options and offers and that they should stay ahead of the competition.
This kind of strategic planning comes from the concept known as ‘The Hourglass Principle’. To make haste in dealings and negotiations and find clients swiftly and easily, you must create a certain motive for those potential clients to want and sign with you as quickly as possible. Creating the image that there is competition, in an inexplicit manner, could encourage your Chinese client to sign dealings with you faster- without the need for you to say or do much of anything.
Before making that big step of expanding your business into China, it is crucial first to gather as much relevant information as possible and know beforehand the market you are trying to pursue. Having a market entry strategy is a tool that can make a significant change to your advantage and make this process as smooth and trouble-free as it can. The pillars of success described above can give you general guidance of what your market entry plan should consist of and what you should primarily pay attention to along the way.
More often than not, tackling those strategic points all by yourself could not be an easy task. Fundamental issues such as conducting a business intelligence report, or hiring a Chinese-speaking representative, are required for some external aid from a professional agency. Guiding you step by step and aiming to build a long-term strategy designed for your company’s needs is what Xinergy Global stands for. Contact Xinergy today for more information about our strategic methods and business development solutions.