Want a successful business in China? Answer these 4 questions
Jun 28, 2016
China’s market has enormous purchase power, but you can’t embrace it just by crossing the border. Chinese business standards differ a lot from western ones, so you’ll have to spend some time adjusting your product, marketing and cooperation strategies to the demands of the local market.
By the end of 2014, the China’s economy became the largest one in the world, having outpaced even the US economy. That’s why many entrepreneurs consider access to Chinese market as an opportunity for the rapid expansion of their business.
1. Do you really want to do business in China?
Even though China seems like an attractive business opportunity, we advise you to thoroughly study the market in order to understand whether it really fits your company.
Local cultural peculiarities are also worth considering. For example, in Western countries, consumers’ habits and cultural preferences are more or less alike, while in China they differ a lot depending on the region. Even the language and spelling are different.
You will also have to draft a new marketing strategy, as your western model won’t be applicable in China. Furthermore, this strategy should be different for every region of the country.
Though, it’s not only your marketing which you will have to adjust. The product itself has to be modified as well in order to meet tastes and demands of Chinese consumers. For example, McDonald’s and KFC intruded hot drinks with soy milk and rice meals in their restaurants in order to get established on the Chinese market.
2. Which region to choose?
Decide which region of China is the most promising for your company. At the beginning, it’s better to adjust your business to peculiarities of one or several regions only. It’s crucial to consider the quality of infrastructure, whether transportation is conducted via the roads or through shipping, the quality, and prices of storage facilities, fiscal policy, and even the climate.
Level of central government and local authorities’ support of the region is also worth taking into account.In some regions, they provide favorable conditions for companies operating in particular industries. Authorities may assist with logistics as well as provide other types of support. You can find detailed information on the provided assistance on the site of the Ministry of Commerce of China.
3. Which business model to choose?
The choice of business model depends on whether your company is engaged in production or retail, as well as on availability of financial, technical and human resources.
If you have a commercial enterprise you can choose one of the following alternatives:
- Franchise model provides you the right to represent a particular brand in the country. At the same time, you remain independent in financing, marketing, and sales issues.
- Authorized dealer model. Under this model, a company is engaged in the independent retail of products and its activity is not attached to a particular territory. Such companies receive revenue in form of sales fee. At the same time, they spend their own funds on products promotion, logistics, networking, etc.
- Commercial representative model – is similar to an authorized dealer model but such company is supervised by product’s manufacturer.
- Company’s representation model envisages engagement in networking and business development in the receiving country but not in sales.
Direct sales, sales through intermediaries or group of exporters are also among available options. They allow a company to enter the market without a de facto presence in China.
If you own a manufacturing company then consider the following options:
- Subsidiary or 100% foreign capital company model allows to establish an independent business entity, control all operations, and choose a local business strategy. You will be responsible for sales, work with intermediaries, and adjustment to demands of local consumers as well as human resources management. This model requires physical presence in China.
- Joint venture model provides that you create a joint company with Chinese counterparts and share your financial and technical resources with them. Shareholders, trade, and technical support agreements may serve as a basis for the establishment of a joint venture.
- Within the foreign-owned enterprise, the minimal investment contribution is not required. Only revenues of each partner of the enterprise are taxable, while in two previous models a 25% corporate tax should be also paid. The distribution of revenue under such model is flexible but the structure of the enterprise is strictly outlined. As a rule, such enterprises are established on the basis of partnership agreements which specify partners’ duties and obligations as well as registration details required by the Chinese authorities.
- Technologies exchange model does not envisage physical presence in the country.
There’s no universal option among those described above. You have to decide yourself which model is the most suitable for your business in terms of time and financial resources. Though, it’s worth considering the long-term perspective when choosing a model: a company’s development as a rule advances by fits in starts in the beginning, but within some time it achieves steady growth.
4. Which precautionary measures should I apply before investing in China?
First of all register your own brand, protect your technologies and the source of added value in your product. The protection of intellectual property in China is very important.
All registration procedures are conducted by the Trademark and Patent Office of China affiliated with the State Ministry of Commerce, as well as by the State Intellectual Property Office. Be very accurate in translation of your brand’s name to the Chinses language; use services of qualified translators only. According to the Chinese legislation, the trademark is initially valid for 10 years, but after the expiration of the initial term, you can extend its validity for an unlimited number of times. The registration cost depends on the type of a product, availability of property rights as well as agent’s fee – as a rule, the total price varies from 1600 to 2400 Euro.
Secondly, if you are planning to hire local staff, cooperate with local counterparts and authorities, it’s better to get acquainted with specific approaches to business and trade relations which are predominant in China. Failure to enter the Chinese market will result in loss of opportunity for business expansion as well as will harm the overall performance of your company. At the same time, it’s impossible to foresee all cultural, institutional, financial and other risks. In case you’ll face obstacles in addressing certain challenges while accessing the Chinese market, we encourage you to ask for advice from consultants in business development, international management, legislation, and marketing spheres.
Source: Business Blogs