Despite the economic slowdown, the increasing wealth and consumer spend in China is already being felt around the world, with recent tourism numbers showing that visitors from the country spend more than any other country in the world with a record $229 billion shelled out on the road in 2015. And recently, the once export-orientated powerhouse is now much more internally focused. For growing companies with overseas aspirations, China seems like the perfect destination for expansion because of the ample opportunities China has offered. But with an unfamiliar market and consumer environment awaiting those who try, we summarize 10 must-ask questions and corresponding suggestions aiming to shed some light on your Chinese market entry.
1. What should I know about Chinese government?
Just like anywhere, there is no single ‘The Government’ in China. The Authorities are divided into many small, local units, that control the different affairs of business, such as licenses, taxes, or labour affairs. It is important to understand the detailed breakdown of government departments, such as the difference between ‘地税’ (local tax bureau) and ‘国税’ (National Tax Bureau) when getting to grips with tax compliance. Typically, there is an individual in the local office that can solve the issue you’re facing, but you need to understand where he or she sits in the hierarchy in order to resolve it. Also, no one has a ‘grand plan’ for your business, to marginalise or penalise you, there are just a numerous uncoordinated offices doing their best to implement the rules they have been given.
Suggestion: Every time you hit a roadblock relating to the authorities, ask the question: “Which department is it?”. Firstly, take some time to figure out where they sit within their department’s hierarchy, then go to the office with your local staff or representative, and finally, visit your main point of contact in person in order to get to the bottom of the issue. You will be amazed at the number of problems you can solve this way. After a while, when you get to know who it is making the calls, the ‘fear’ will subside.
2. How to retain local staff?
Retention is a big issue in China. In the same way that Chinese consumers love to shop around on price, local staff will also jump ship for a better offer. The job market is lively and dynamic, and it is all driven by a relentless growth in salaries in a land of opportunity.
Suggestion: Every 6-12 months benchmark salaries in each of your key positions. The quickest (and the most cost-efficient) way to do this is to go to job websites, like 51job.com and scan CVs for similar positions, looking at what people are earning. Then move salaries up before people start grumbling and thinking of a move. This can be an uncomfortable process for a business owner, but a worthwhile one. You’ll only have to increase salaries to a more competitive level when re-hiring, and this way, you avoid the disruption of high staff turnover.
3. What does contract really mean in China?
Foreign companies often run into problems with contract negotiation in China market. The attitude towards contracts is quite different in China, largely because of how hard it is to win legal fights fairly in the Courts. Transactions are often ‘1 for 1’ (“I give you X, you pay me for X”) rather than credit based, largely for this reason.
Suggestion: The next time you are negotiating a contract, approach it with the following mindset: “This contract accurately minutes the discussion both parties have had”. Count negotiation wins only if they are leverage wins (such as “You pay us, then you receive the goods”) and not contract wins (such as “You shall be obligated to pay within 30 days of goods receipt”).
4. Does language really matter?
Of the foreigners who have built a successful business in China market, there is no direct connection between those that have learned the language and those that have not. Undoubtedly, it makes life a little easier, but being able to speak Chinese is no more a guarantee of success than being able to use chopsticks. Similarly, not being able to is not a barrier, and all problems can be resolved through effective use of bilingual staff. Good business sense, understanding of people, and a strong business model are all much more important.
Suggestion: Be skeptical of anyone (local or foreign) for whom their main attribute is ‘Fluent English and Chinese’ (unless you are looking for a translator), as this is not a characteristic which, on its own, will help you to succeed.
5. How to deal with IP protection wisely?
Being the victim of reverse engineering has long been a headache for foreign companies in China, and not just regarding manufactured products; a successful business model, idea, or service will also get copied. There is more and more protection for IP, but the situation on the ground is still quite different from Western economies in this respect. This is less of a barrier to entry than you may think though, it’s just a reality that needs to be accepted. China market is large enough for anyone, you just have to be able to carve your own niche in it.
Suggestion: Don’t obsess about how you can ringfence your ‘IP’, but think rather how you can protect your brand. Someone may be able to copy your product, but they can never be you. Customers will still buy from you, and pay a premium to do so, if they believe that you are the genuine article, and the way to achieve that is through brand building. Make it clear that you are the international brand, and the quality that can be relied upon.
6. What is the right strategy for Chinese market entry?
China’s great appeal is it’s size. Ever since early dreams of selling shirt tails, foreigners have been seduced by the sheer scale of the China market. In truth, it is a series of smaller markets that may share many characteristics, but also have deep variations that ensure that one size generally does not fit all.
Suggestion: If you are established in one region, think carefully before moving on. Don’t assume that replicating what works in one region will also work elsewhere. Customer preference, staff behaviour, legal framework, and costs all vary considerably between regions, so test your product or business model thoroughly, before moving on.
7. How to successfully sell to Chinese customers?
If there is one place where foreign companies get stuck more than anywhere else, it is here. Regardless of B2B or B2C, selling to local consumers and companies in Chinese market is much harder than selling to international ones.
Suggestion: Have locals selling to locals, and international staff selling to international customers. If your product, service, or sales methodology needs adapting for local markets, your local staff will tell you.
8. How to manage Chinese staff?
Chinese staff can be great — hard working, resourceful with strong commercial acumen. For foreigners managing a local team, it can also be frustrating, due to certain cultural differences on both sides. Western managers may expect staff to have a high degree of independent expression, to share their ideas and objections equally and freely. Chinese staff are much less easy speaking out in this way, particularly if there are disagreements or objections. Or, more accurately put, the signs they use to express such objection are much subtler and require much more sensitive antennae to extract. Miss them at your peril.
Suggestion: Spend extra time with local staff. If important ideas and plans are under discussion, meet with staff one on one, and start gently teasing out what they think. Look out of clues for objection: hesitation, indirect answers, a “whatever you say” attitude, or even politely phrased suggestions, these could all mask a deep disagreement.
9. How to squeeze through legal grey area?
Total legal compliance is a laudable and attainable objective in most western economies. In China, things are often less clear cut. Like anywhere, illegal behaviour is not tolerated, and can be heavily punished. Yet, in many areas there is a gap between the letter of the law (or lack of it) and common practise. This is the ‘grey area’ and is often the space where innovation happens and is observed, until the Government feel the time is right to bring it under more formal regulation (on-line payment platforms such as Alipay and wealth management are prime examples).
Suggestion: Ask a legal advisor what rules apply in your situation. Also ask other companies how they are actually operating and whether a formal ‘opinion’ exists from the relevant regulatory authority. Make an informed decision but also accept that you may have to live with some ambiguity if you want to be competitive. A network of local entrepreneurs, as well as legal advisors, is very important in order to navigate such situations.
10. What are the characteristics of China’s tax system?
Coming from systems of well enforced self reporting, China’s tax system can seem a polar opposite. It is tightly controlled, in that each company is directly connected to the tax office through an invoice (‘fapiao’) machine, ensuring the tax bureau collects each time companies transact with one another. But at the same time, company reporting is weakly controlled, with many companies running multiple sets of books. The outcome often feels overly strict and freewheeling at the same time to many new entrants.
Suggestion: Focus on your products, customers, and staff. Find someone who knows what they are doing to run this part of your business for you, at least until you have a few years experience in Chinese market.
Most importantly, remember that you are not alone. The network of foreign companies and experienced China advisors is growing year-on-year. Leverage these networks through Chambers of Commerce, Business Councils and on-line platforms. You will soon feel ‘in control’ (as far as it is possible to do so) of your business in Chinese market.
Related reading: 7 Insights into International Brands Entering China Retail Market