China Characteristics -
Do's & Don'ts for China Entry

Here are 7 Do's and Don'ts for China Entry

Do's

1) Know Your Market
This is the first thing to do, because if there is no market for your product in China, there is no point in coming here. This may sound simplistic, but too many companies have come to China, even invested significant money, without having a market. At the extreme, a US pharmaceuticals company once set up a $10m factory for a certain medicine, to find that the Chinese government gives this away free. More commonly, a company sets up in China, and finds that competing products sell for half (or one third, or..) as much as their product, and that their market lies in competing with everyone else for the top 10% of the market, with a much higher cost-structure than one's competitors. Knowing one's market will enable one to know:

a) If there is a market for your product
b) What prices you can sell at
c) What end-users require
d) How to sell in this market
e) What kind of vehicle you should have ..........any many other issues

Entering the China market is essentially a mechanical activity. What matters most is what your market here is, and how you develop this.

2) Start Small, Then Grow Larger
Unless you're BP and Dow, and have to build a $2bil plastics plant to attain scale, it's best to start small in China. Structurally, this means a representative office, which requires little investment and time. This will give you time to learn the market better, develop the market, and learn from your mistakes. If, after this time, you want to establish local production, this can be done without difficulty, and you should be able to do this with greater success than if you did everything in the beginning.

3) Pay Close Attention to Channel Issues
Many markets and companies in China are made by developing the market- rather than product strengths, dotting all the "i's" for the government, or other such issues. The market is so vast that a network of channel partners- typically distributors- are needed to develop this effectively. This means that learning to develop the market (sell products and grow one's brand) through distributors is a priority.

4) Protect Your Technology
Protecting one's technology in China is like making a first impression- you only get once chance. Don't be naive: technology does get stolen in this market. This is not typically by someone coming in the middle of the night to open your safe. Much more common is an engineer that you have developed (and informally transferred technology to) going to a competitor, or starting his/her own company. And your remedies against this are few. The best thing is not to lose the technology in the first place. Evaluate what technology you most want to protect, and then systematically institute the means to protect it; and err on the side of caution.

5) Keep Costs Down
This may also seem simplistic, but again not enough Western companies do this. Western cost structures are often inappropriately transferred to China, where one's products should be as cheap as possible. For example, factory equipment and product components should be sourced in China as possible, and expats put in China (at a major expense) only if necessary. Many companies find that given their investment and fixed costs, they have too little to spend on sales and marketing, where some serious spending is often needed.

6) Build your Brand
Brand matters in China. In fact, it can matter more than in the West, because in China, other such mediums of trust (eg, long term familiarity with the brand, accurate product labeling) sometimes do not exist. Not only does brand matter, but brand offers a protection against the competition. If a customer only purchases your product, then if your technology is stolen, or competitors make gains in quality, this could be trouble. But if they purchase your brand, then the situation is different, and you are in a much better position. This applies to business to business products nearly as much as consumer products. For example, Siemens has done a very good job of building its brand in industrial markets in China.

7) Get Our of Your Chair & Office
There are two things to mention here. First, some foreign executives in China rarely interact with those outside the inner circle of their (English speaking) managers. They become too isolated and dependent upon this group. It makes a great deal of sense to have interaction with parties throughout the organization, even if communication is a little difficult. Second, foreign executives spend too little time with their customers, or potential customers. Spending more time with customers allows the executive to bypass the filtered information on customers they typically receive, and gain their own insights. Furthermore, it shows customers that they are valued, and aids in their retention.

Dont's

1) Don't Make a JV, Unless You Must
Ten years ago, many companies had to form joint ventures in order to establish local production in this market. Today, even aside from WTO, investment guidelines are much more liberal, and a company can typically form a WOFE (100% owned subsidiary). The only reason to form a JV is if the Chinese company truly has something to offer- such as access to markets, relationships in the right places, existing manufacturing facilities, etc. While some JV's are very successful, many are full of problems, ranging from financial control, to management, to technology transfer. And they are often difficult to get out of.

2) Don't Manage From a Distance
One common mistake too frequently made in this market is managing the market from a distance, which includes Hong Kong and Singapore. Managing a company of all but the smallest scale in China is a full time job at the executive level, and needs to be treated as such. This is not only because there are many challenges and potential difficulties in this market, but also because China is very much an "in person" business culture, which applies to employees as well as to customers. Some problems that poor-performing companies have in this market can be traced to absentee executives.

3) Don't Give Your Products Away
This again seems simplistic, but is done too often. Companies do not literally give products, away, but sell products at a loss to gain market share- with the assumption they can raise prices later. For some markets this makes sense, but for most it does not. Market share is important, but not more important than pricing power, in a market where prices can be very low. Furthermore, promises by customers to purchase at a higher price later often ring false, and one's price likewise impacts one's brand perception. You come to China to make money, not just to be here.

4) Don't Count on Short-term Gains
Some companies in this market have the wrong expectations: some think that they need to succeed right after coming here, while others get the idea that waiting 10 years to turn a profit is reasonable. In the first instance, the company is setting itself up to fail. This market needs to be developed, and Chinese end-users typically require a higher level of familiarity with the supplier before they will become customers. At the other end, with few exceptions, if a company has been here over 6-7 years, and has still not made a profit, then something is wrong. Some companies make the market work in the first year, some later, some never- 2-3 years is a reasonable expectation.

5) Don't Give your Company to the Wrong Person to Manage
Deciding who should manage your company in China can be a challenge. Some favor expats, even with no experience in Asian markets and who cannot speak Chinese; others favor "huaqiao" (people from Hong Kong, Taiwan, Singapore), and some favor locals. The most important thing here is not to strictly abide by any of these guidelines. There are good managers to be found in each of these groups. A trial period, under supervision of someone from the home office, often makes good sense.

6) Don't Let Distributors Control You
Managing distributors can be difficult in any country, and especially in China, where foreign companies have less knowledge and are less well known, and where distributors are less bound by traditional practices. Poaching is common, as is disregarding the rules laid down by the supplier. And many distributors offer notoriously poor service. This can hurt your sales and do even worse things to your brand. So don't let it happen. While you may not be able to really control your distributors, don't let them control you, and don't let them determine how you develop this market. At the end of the day, it's your sales and reputation- not theirs- that stands to lose.

7) Don't Think That WTO Will Make Your Market
The main impact or benefit from WTO now through the medium term is two-fold: one, that investments become easier to make, and two, that more areas are open for trade and investment. However, WTO will not make one's market in China, and you should not think that it will. You still need to compete on price, still need to make meaningful contact with customers, sell good products, etc. Don't make wrong assumptions- develop the market smartly and aggressively.

About GCiS China Strategic Research

top

more articles