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B2B Markets – Entering China

Introduction

As the world’s second largest economy with impressive annual growth rates, the Chinese economy is poised to overtake the US for first position by 2020.

Rapidly changing demographics, rising incomes, consumer spending, and an increasingly open business environment make China extremely attractive to many US companies. Here are some key challenges and advice if you are considering entry:

Identify potential markets

China represents a huge opportunity. However, with a population exceeding 1.3 billion, its size also presents huge challenges.

Far from a uniform and homogenous market, China is a collection of sub-markets, defined by differing demographic, economic and cultural characteristics. Uneven rates of economic growth have exacerbated differences between provinces in population, per capita GDP, income levels, spending habits, education levels, literacy rates and lifestyles.

Any effective entry strategy must identify a specific location first. In consumer markets the ‘higher income’ coastal provinces - Zhejiang, Guangdong, Jiangsu and Shanghai are typical, but industrial clusters in specific cities/regions, including entire industry supply chains, make the B2B market different.

Pick specific locations

Shanghai, Beijing, Guangzhou and Shenzhen are Tier 1 cities - highly populated with a large middle class, mature consumer markets and the lowest risk. However, they have higher operational costs and more competition.

With lower set-up and operating costs, and with rapid increases in spending, Tier 2 cities like Tianjin, Wuhan, Chongqing, Chengdu, Nanjing, Qingdao, Dalian, Suzhou and Hangzhou offer strong commercial opportunities across a range of sectors. Tier 2 and even Tier 3 cities can provide first-mover advantage.

Consider Chinese policies and regulations

China's entry to the WTO in 2001 helped liberalize trade but many industries remain heavily regulated -some remain off limits to foreign companies.

China has many ministries and regulatory organisations. Expect lengthy environmental assessments, examine regulations prior to committing, and continuously monitor for changes. Chinese regulatory bodies can operate in an opaque manner.

Although a growing number of foreign companies ‘go it alone,’ the joint venture (JV) has advantages over wholly foreign owned enterprise (WFOE), depending on the size and scope of the enterprise and market. WFOEs are the modus operandi for high-tech firms with large IP inventories but companies with more commoditised products mitigate risk by partnership.

Carry out your research

English publications on China are available online, making initial research easy. Experienced market research companies can build upon this with detailed Chinese-language desk research and in-depth interviews. Specialist research is essential to determine the size and nature of the opportunity; act as a benchmark to measure future performance; identify potential road-blocks; and uncover weaknesses in product/service offering.

Employ the right people

Hiring expatriates may offer greater operational control, but it is costly. Expats have limited local knowledge and lack language skills. Local managers bring market knowledge and a deep understanding of Chinese business. Salary and insurance costs are lower and locals often have contacts (‘guanxi') with suppliers, customers and local government authorities. Skilled local managers are limited and staff turnover rates are high. Finding and retaining quality managers can be challenging.

Move forward with caution

Due diligence is vital to verify the trustworthiness of partners and employees and to flag up skeletons in the cupboard before making any sizeable investment. Although basic due diligence can be done in-house, there are numerous legal and risk assessment consultants with offices in China, providing business intelligence, individual background checks, and risk analysis consultancy.

International Property Rights (IPR)

IPR infringement is common in China. It is wise to work under the assumption that your technology will be compromised at some point, so consult lawyers/IPR specialists to formulate an IPR strategy.

China has a ‘first to file’ patent system. Local Chinese companies can register another company's patents. There are time limitations on registering. Companies that registered outside China more than 12 months previously are usually unable to register locally. Registering could also disclose key technical information that could otherwise be protected through employee non-disclosure agreements (NDAs).

China has a ‘first to file’ trademark system. Your brand and logo cannot be used if these trademarks have already been registered by a Chinese company. Register your trademarks with the China Trademark Office as soon as possible. Registering different categories may be necessary to deter infringers. Ensure all trademarks are registered in English and Chinese. Protect your IPR by carrying out thorough due diligence on prospective partners and employees, signing NDAs, and constantly monitoring for infringements. Pursue legal proceedings against IP infringers to deter others and alert authorities.

Conclusion

China is changing. Its markets are evolving more rapidly than almost anywhere else. Making that first step into China can be intimidating, with almost endless potential pitfalls. But while there are many obstacles to success, the rewards of successfully navigating China are immense.