6 most important considerations when entering the Chinese market

December 24, 2018
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You’ve decided it’s time. The Chinese market, with its vast size and impress growth history, can no longer be ignored as a place of doing business, capturing customers and establishing real market share.

With the sheer size, history and land area that comes with the Chinese territory, it is no wonder that Chinese cultural traditions, norms and expectations abound and have permeated into its business practices. As a result, a level of business complexity exists here that is often a confusing amalgamation of Western influence, ancient Han Chinese tradition and local, modern mixed economic regulations instituted by the One Party system. Indeed, China is a place where businesses go to either thrive or die.

Small and Medium-sized Companies

Small and Medium Sized Enterprises (SMEs) are particularly vulnerable to failure within the first few years of market entry, as financial investment and time are often very scarce resources. SMEs don’t have the luxury of hiring a full team of C-Level execs with 30 plus years of experience in China, leasing premium office space or buying market research reports for their industry from powerhouses like PwC or McKinsey, like the Multi-Nationals do. Even for Multi National Companies’, their failure in China can be very stressful, expensive and real.

SMEs get one shot at market entry and therefore, need to focus great attention on correctly and carefully executing each progressive step.

The following are some of the most important considerations for SMEs when entering the Chinese market:

  1. Bureaucracy & Timeline

When would you like to be operational in China? Do you have a legal entity in China? Do you need a legal entity in China? (check alternatives here)

Time is money in business, and spending more of the former will definitely affect your options and flexibility in China. Chinese government regulations: applications, licensing, filings, approvals, stamps, translations, etc. are hugely time consuming to comply with. Don’t believe us? Ask any foreign business manager who runs a legit operation here, or simply do a search online. The overwhelming requirements can paralyze an otherwise well-managed SME.

  1. Competitors

Who are you competing with? Where are they from? How long have they been selling in the Chinese market? In what other industries do your competitors perhaps have market share?

Depending on your industry, these could be other foreign-owned companies, joint ventures comprised of a Chinese and foreign business partnership, or local Chinese companies. In our experience, it’s really difficult to discover who you will actually be competing with, until you start your sales operations on the ground.

  1. Market Demand

Do you have existing accounts and a history of purchase orders? Are you exploring for new accounts and trying to develop new markets? Who are your main customers going to be? In which specific regions and cities in China are you selling or planning to sell? What is a realistic sales target in Year One for your product and industry, and what do you expect to achieve as a growth rate in Year Two and beyond? And finally (worst case scenario), have you decided at what point will you call it quits?

The simple truth of business, especially in China, is that none of these questions can honestly be answered before establishing some level of sales operations on the ground. You just don’t know until you try.

  1. Sales and/or Production Costs

What is your planned investment for setting up operations during the first year in China? Are you looking for business financing? If so, how much in Year 1? What, if any or if known, Chinese legal regulations, licenses, restrictions are tied to selling your products?

If you don’t know these numbers, or don’t at the very least have a good estimation, it’s going to make your entry that much bumpier. Often times, foreign companies find a local business service provider that will provide exactly what they think they need – and nothing more. This is a common problem we see happening over and over, as further down the road unexpected costs will inevitably arise, putting the company (sometimes grossly) over budget and foster an increasing level of distrust of doing business in China.

  1. Logistics

Do you need to import your products to China? Do you know the Chinese legal regulations, licenses or restrictions that affect the importation of your products? Is your product, market or industry better suited for bonded or front warehousing? Should you find a 3PL provider or a partner who can manage your entire supply chain in China, including the burdensome financial aspect?

Logistics, along with the taxes and accounting exercises that follow, are truly complex in Mainland China. Depending on the product and industry category you’re wishing to import, the licensing, permits and paperwork just for approval can seem never-ending. The up-side of course is after you find a logistics partner that you can trust and a solution that fits with your budget and timeline, then comes the easy part – sales.

  1. Distribution Channels

Are you already selling in China? If yes, do you have distribution partners, or are you in discussion with a distributor in China? Are there specific reasons why you have chosen the distributor route?

As sales are the lifeblood of any company, maintaining and growing them ultimately comes down to who’s in control. Unfortunately, giving up the control of your sales volumes to distributors isn’t always the option that best benefits your company’s bottom line. Because distributors are usually selling many products (in some cases, thousands) from multiple overseas sellers (tens to hundreds, in some cases), the priority to distribute your products to end-users can be misaligned with the distributors’ business activities. In other words, their number one priority isn’t necessarily selling your product. It’s making money. Through the distributor model, sales volumes and growth usually aren’t what they could or should be.

This is why we highly encourage SMEs to control their own products’ “sales destiny” in China and hire their own local, professional sales team to exclusively focus on selling their products, and their products alone. Over the long term, new business development and sales volumes can be better controlled and grown. And at the end of the day, this is what every SME wants.

Good luck with your Chinese adventure. We’ll be happy to assist you.

PTL Group helps international SMEs enter the Chinese market by establishing and managing their on-the-ground operations before formal subsidiaries are registered. This allows a critical period of market learning with full operational flexibility before committing to a specific structure, business model and partnerships. Grow your China business before registering a formal entity. Utilize PTL Group’s expertise to Build your sales & technical team, to manage your Sales and Logistic processes, and to promote your Brand in China.

Read more about our Business Services in China or Get in Touch.