Managing the Chinese Challenge

Managing the Chinese Challenge

Background

China is the fastest growing market in the world today.  Therefore, it represents a huge opportunity for companies that are interested in selling their products in China.  At the same time, it has tremendous natural resources and work force, at some of the lowest costs in the world, providing the Chinese companies a competitive advantage, in China and globally.  However, it also allows foreign companies to reduce their production costs by transferring manufacturing or development facilities to China.

In contrast to the enormous prospect that exists in China, the entry of foreign companies to this market, and succeed in it, is quite difficult.  The cultural and business differences, coupled with the strong governmental regulations that still exist, make the penetration of foreign companies very difficult.  However, success in the Chinese market is not altogether impossible.  Numerous companies have succeeded greatly in the Chinese market and are enjoying the fruits of their labor.

As Chinese companies expand worldwide, they are becoming a substantial competitive force that must be dealt with.  Companies must find ways to overcome the Chinese cost advantage, either by reducing costs themselves, or by using other marketing methods.

In this document, we address two issues: penetrating the Chinese market and dealing with the Chinese competition worldwide.

Penetrating or Expanding Into China

Companies are interested in penetrating the Chinese market for two major reasons.  The first is to sell their products in this huge market, which is growing at the fastest pace in the world.  The second is to take advantage of the low production costs that exist in this market.  Expanding into China presents a challenge and must be done systematically.

Barriers to Entry

To succeed in China, companies must overcome the barriers to entry that are unique to the Chinese market.  The barriers are a result of the geographic conditions, the culture, and the distinctive economic structure.

Lack of Information

Unlike the western and developed markets, the Chinese market suffers from a noticeable lack of information and access to data.  The government does not publish extensive information about the macro conditions, and even when it does, it is not always reliable, there is a lack of industry associations to provide data on different industries, and research companies are not commonplace.  Private companies, those in western countries provide vast information about the products and services, through their web site and company collateral, do not provide such information in China.  In fact, companies are very hesitant to provide any information at all, they are very suspicious of any one who ask for an information, and even when eventually do provide information, it is usually very limited and in Chinese.

Diversity

The diversity that exists in China is apparent in a number of different aspects.  Many different regions of the country vary in regards to the geography, demographics, natural resources, etc.

The coastal area in China, including Beijing, Shanghai, and Guangdong, is much more advanced and developed than the western provinces.  Most of the international companies operate in the coastal area, providing state of the art technology and knowledge, while the western provinces have been mostly neglected by these companies.  On the other hand, the western parts of the country represent a larger opportunity, since they are growing at a much faster pace and are green fields for foreign companies seeking to enter the market.  Only recently, Intel has made a decision to invest over $300 million in a project in Sichuan.

The variance in the income and spending between the urban areas and the rural areas are very distinct.  Around 60% of the population still resides in rural areas, making a living mostly from agricultural at very low wages, while the other 40% reside in large cities, employed in various industries, enjoying higher wages.  The upper tenth of the population, constitutes of 60 millions people, earns an annual income of $5,000.  They were targeted as potential credit card users, which is obviously relevant only in the big cities.

Regulation

The involvement of the government in the different aspects of the business world in China constitutes a barrier for external companies to enter the market and to do business in China.  Many of the industries are highly regulated and in many cases, the government owns the companies operating in different areas, where government owned monopolies are still commonplace in China.

In contrast, the government invests very heavily in different industries and regions it seeks to promote.  To overcome the heavy migration that exists from Western China to the coastal area, the government is currently investing in many industries, such as information technology, pharmaceutical, chemicals, and others in the western provinces to promote these industries, create employment and retain the local population.

Cultural

The cultural differences between Western counties and China are an obstacle.  The business environment, negotiation methods, and behavior make it very difficult for uninformed business people to operate in this market.

The Chinese can be characterized, in their social and business behavior, as “rule benders” vs. “rules followers”, as preferring loyalty (friendship) over honesty, and their business negotiation is based on benefits rather then fairness.  In order for a foreign company to be able to communicate and to establish long lasting and beneficial business relations with the Chinese, it has to be aware of those characteristics and act accordingly.

Formulating a Penetration
Strategy

A penetration into the Chinese market has to be guided by a well-defined and clear strategy.  The strategy will define the objectives and the means to achieve those objectives.

Market Mapping

A preliminary and a necessary step, and to overcome the lack of sufficient information, the company must draw a market map.

The market-mapping phase examines all the different aspects concerning the market structure, the different players operating in the market, the geographical spread of the industry and other relevant factors.

The market-mapping phase also must focus on the customers; segmenting the market and identifying the relevant segments.  The customer segmentation takes into consideration the geographical and demographic disparity.

The following sources of information can be used in this phase:

  • Interviews: Potential customers, suppliers, distributors, and government officials
  • Local Companies: Examining the local players in the industry, their activities, products, and marketing material
  • Local Consultants and Experts: Exchange of ideas and information with local consultants specializing in the relevant industries
  • Market Studies: Numerous off-the-shelf market studies provide overall data on the macro level of some industries
  • Internal Resources: Mitzuv has gathered information on the Chinese market internally, which can be applied in many cases

Primary Objective

The first step in formulating the strategy is defining the preliminary objective of the Chinese market.  A company must first determine if it has any product or service to sell to the Chinese market, or it is interested in outsourcing its manufacturing in the Chinese market, or both.

Selling

Being the fastest growing market in the world and the second largest market in absolute terms, the Chinese market is very appealing to companies that can sell their products or services.  As a first step, a company must identify the level of existing or potential demand for its product.  If, currently a demand for their product does not exist in the Chinese market, they may consider crating the demand.  A few years ago, when the first cellular companies entered China, there was no demand at all.  They had to create it.  In 2003, China is the largest cellular market in the world, with more than 250 million subscribers, and still growing very fast.  The demand can, and most likely will, vary according to different geographical regions, target markets, customers, and industries.  When identifying the demand it is also very important to prioritize the different needs, in order to determine where to invest the most resources.

When selling in China, it is unlikely that foreign companies will be able to compete on price, since local companies will be able to easily match these prices.  Therefore, foreign companies must be able to either provide a unique technology, that cannot be easily imitated locally, or bring certain knowledge that does not exist in the local market.  The knowledge must also be difficult to imitate or copy.

Manufacturing

The low costs of labor makes the Chinese market a strong focus for many companies interested in lowering their production costs.  Obviously, there are drawbacks and limitation to manufacturing in China, and not all companies are fit for it.

Once a company has made the decision which of these objectives it wants to pursue, the strategy will have to be developed accordingly.

Local Partners

Due to the nature of the Chinese market, and its very high regulations, international companies cannot succeed in the market without some local partners.  The local partners can take an active role in the marketing or manufacturing of the products, but in some cases, they will simply take the position of a mediator, acting as a go-between the international company and different local organizations, such as marketers, retailers, manufacturers, and very importantly the government.

Before beginning any actual activity in the local market, the company must identify the most appropriate local partner to team up with.  Choosing the right partner can be one of the most important factors in deciding the company’s success in the Chinese market.  Having the right connection and ties in the market (“guan chi”), together with the appropriate local resources, including customers, is vital for the success of any company.

For a company who is looking to sell in the Chinese market, there are two types of potential local partners:

  • A Chinese company who has a good capability of distribution and sales, due to good connections with the government, with the military or with a specific industry (e.g. banking, medical, insurance, municipal management, etc.)
  • A Chinese company that is already selling its own product, but is looking for complementary product or technology in order to improve or to expand its offering

For a company who is looking to buy or manufacture in China, the appropriate local partner is someone reliable in conformance quality and has a significant cost advantage.

Government Involvement

In almost all industries and all aspects, the Chinese government is and will be involved.  The Chinese economy is still highly centralized and strongly regulated.  The government in China operates in three different levels: national, provincial, and city.  Different levels of the government will be involved in different issues.

It is important to take into consideration government involvement is all the business development activities.  In many cases, the government might even be helpful in creating the right connections, facilitating the activities, and in some cases even providing resources.

Business Culture

Understanding the Chinese business culture is a crucial barrier that must be overcome when doing business with Chinese companies.  Since the country has been closed off to the world for many years, and since its culture is so different from what western companies are used to, the business culture must be understood fully.

There are many nuances and intricacies the way the Chinese operate in business.  For foreign companies to be able to work with the Chinese, they must be prepared and know how to react in different business situations.  Not having the understanding of the business culture can result in terminating transactions that otherwise would have made great financial sense.

Local Representation

In most cases, Chinese companies will require local representation from the international company.  The representation must include Chinese people that can communicate easily with their counterparts.  The local representation must be able to provide all marketing and promotional material in Chinese for review of the local companies.


Coping with Chinese
Competition

When China was a closed economy, the Chinese companies did not present threat, since they did not operate globally.  In the last few years, as the Chinese economy opened to the world, and China joined the WTO, Chinese companies have become one of the strongest competitive forces in the world.

The main competitive advantage of Chinese companies is their low costs.  In most cases, they do not have any unique technology or superior products.  In certain industries, especially in commodities, this cost advantage becomes a major advantage, where foreign companies have a difficult time addressing.

In order for non-Chinese companies to be able to deal with the Chinese competition globally, they must be aware of the strengths and weaknesses of their Chinese counterparts.  Global companies must need to be capable of overcoming the Chinese strengths, take advantage of their weaknesses, and leverage their own strengths.

Mapping Chinese Com­petitio­n

The first step in coping with the Chinese competition is having a comprehensive map of the companies operating in the relevant industry.  Companies must begin by identifying the different Chinese competitors and gathering pertinent information about them.  The information should include the following:

  • Company background – name, address, top management, ownership
  • Product offering
  • Production capabilities
  • Prices and costs
  • Financial data

Obviously not all the information will be available in many cases, and in certain cases, different types of information will have different weight.

Weaknesses and Strengths

Based on the general information that is gathered on the different companies, and having an understanding of the Chinese economy, the strengths and weaknesses of the Chinese companies must be identified.  These strengths and weaknesses must be focused on the specific attributes of the Chinese companies, their competitive advantages, and their mentality.

Threats and Opportunities

Due to their unique competitive advantage and their way of operation, the Chinese companies pose threats that are different then those posed by other companies.  Simultaneously, there are opportunities of cooperation and collaboration with the Chinese companies, taking advantage of their strengths and combining them with the strength of the international company.

Strategic Options

There are two strategic options to face Chinese competitors in the global market: Beat them or Join them.

“Beating” them would mean offering a better product.  “Better” in terms of technology, service, professional knowledge, delivery terms, financing method and terms, business model, shopping experience, etc.  Only in rare cases, it will be feasible to offer the product at a lower price.

“Joining” them would mean cooperation.  This can be by adapting the Chinese product and embedding it into the non-Chinese system, it can be by becoming a distributor for the Chinese products, or by investing in the Chinese company and becoming one of its owners.

Conclusion

For obvious reasons, China draws the attention of the entire world: Both for the opportunities it poses and for the threats it presents.

There are many un-known and un-familiar attributes and characteristics related in doing business in China and doing business vis-à-vis Chinese companies in the world.  Nevertheless, these obstacles can be solved with systematic learning and careful planning of both strategic and tactical steps.

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