By Zennon Kapron
“Biggest risk in China investing? Not doing it” was the title of a newspaper article that appeared in USA Today in late 2007. If it were only that simple.
With 1.3B potential customers and a per capita income that is increasing more than 10% a year, it is rare to find a large multinational company that is not either already in China or plans to do business with China soon. The IBMs, GEs and Toyotas of the world can afford to make a few mistakes and find success through trial and error but for a SME it’s a different story; you may only be able to afford one attempt to break into the market. What chance do you have to succeed when doing business with China as an SME with no current China presence? Well, a pretty good one if you keep in mind a few simple rules.
Culturally, geographical and politically, China is unlike any other country in the world and Chinese consumer and business preferences and behaviour cannot be easily generalised. Just because your product does well in Europe or the US does not ensure success in China. Purchasing decisions are not as simple as the right product at the right price; instead they involve complexities in politics and relationships that don’t exist in the west.
Understanding the China market before you tackle it is crucial. Many US tech companies like eBay and Yahoo initially fell into the trap of trying to duplicate what they did to be successful in the west when they came to doing business in China and failed. Other companies like Google, continue doing business, but constantly face an uphill struggle with the likes of the local providers like Taobao, Alibaba, and Alibaba’s Alipay. These Chinese companies understand the consumers and nuances of doing business in China and how critical it is for success.
Research, Research, and more Research
The first place to start to understand where your company and product or service fits is desktop research. Although a lot of information on China is as you would expect, in Chinese, there is a wealth of doing business with china information in English available on the web. Check business sites, chambers of commerce, blogs and newspapers. This should very quickly give you an idea of whether a market exists for your product or not and potential competition or barriers to entry. There are also doing business with china events where you can meet the experts face to face.
With an understanding of the potential opportunity in mind, you’ll want to find a research company with on the ground presence in mainland China to help you get into more details. At this point you’ll want to get into what you’ll be selling, who you’ll be targeting, and where you’ll be selling.
An incredibly valuable service that many research companies in China will provide for a reasonable price is actually interviewing potential customers. The results of these interviews will give you a good idea of the preferences of potential customers as well as some of their key decision making criteria. You’ll also likely get a better feel for who the incumbent competition is and why they are successful.
When you’re picking a research company to work with, if you are a small company then find a small research company. It may be a hassle as they can be more difficult to find but it will pay off in the long run as they’re going to better understand your challenges as an fellow SME, give you excellent attention and customer service, and provide good value for money. Chamber of commerce websites are a good place to look for these companies.
Partner wisely…and watch your partner closely
For nearly any product or service, partnering with a local Chinese company is one of the easiest ways to enter the market. Partnerships through contractual agreements or joint ventures can leverage the local company’s existing customers, distribution channels and most importantly network of powerful connections more commonly known as guanxi. All of these are absolutely critical for doing business and can take time to develop on your own.
Usually the best partner recommendations come from people or companies who have been doing business in China for a while as they’ll have had time to find the trustworthy and useful ones. Ask some of your industry peers and contacts for recommendations.
Once you’ve found a partner and have an agreement in place, the job is far from over; you need to keep a close eye on the relationship. Stories of Chinese companies copying and pirating products abound. Chinese companies are more than happy to learn from Western companies and then use that knowledge to their own advantage. Intellectual property protection is increasing in China, but still lags behind the west.
One client we recently talked to had just sold a software package to a company in China through a Chinese partner company. It was the client’s first deployment in China, which was excellent news. However, when we probed further, the client could not tell us who the customer was nor the details of the deployment. In fact, his Chinese partner hadn’t even told him about the sale as they had taken the software and sold it as their own with getting his consent or even telling him. Our client had only heard about the sale through a 3rd party.
Patience, flexibility and perseverance
China is not a market for the faint of heart, the impatient or the inflexible. A company looking to do business in China needs to have a long-term view and development strategy as success usually does not come quickly. Any go / no-go analysis of entering China needs to assume a worst case scenario of a few years of little to no profit.
In addition to keeping a long term view, the company and strategy will need to be a flexible as market conditions in China are constantly changing and companies need to be able to react immediately to any changes without affecting business operations.
There’s no book you can read or magic formula that makes business in China easy, but with the proper research, partners and long term strategy it can be a lot easier.