Market Watch

Entering the Chinese Market: Challenges and Solutions

When most companies decide that they want to grow their business by entering into an entirely new market, most eyes turn almost immediately to China. With a population of 1.4 billion and generally easing economic restrictions, China is an extremely attractive market to potentially grow your business. Currently, China is the world’s second-largest economy and is forecasted to be the largest by the end of this decade. Additionally, as the middle class in China continues to grow, a larger percentage of their population will be pulled out of poverty and turned into avid consumers of products.

However, despite all of the positives of investing in China, it’s still a very foreign market and the decision to expand here will come with unique challenges. If you want to do business in China then you will need to learn a host of new skills including navigating the complicated political system, acting in accordance with local customs and culture, knowing where to physically set up shop, and many more.

Let’s take a look at some of the most common challenges of entering the Chinese market and how you can overcome them.

The challenges and solutions of doing business in China

When it comes to expanding your business to China the list of pros is about a mile long. However, when management teams or business owners actually start to plan out the process, they realize that the list of uncertainties is equally as long. This alone is enough to stop most companies in their tracks and scrap the idea completely.

That said, deciding not to expand to China simply because it’s a new experience is like never learning to ride a bike when you’re younger out of a fear of falling. While almost everyone falls a few times to start, they quickly master it and soon they aren’t able to imagine life without knowing how to ride a bike.

A few of the challenges that come with expanding into China that we will examine are:

  1. Gaining access to local markets
  2. Changing consumer buying patterns
  3. Government-related issues
  4. Dealing with intense competition
  5. Conforming to rules and regulations
  6. Finding and retaining good employees

While almost all executives would agree that introducing their company’s products into the fastest growing economy in the world is a good thing, very few have the experience or a concrete plan on how to do that. This is part of the reason why partnering with an outside firm can be a bigger help than you’d ever imagine.

Access to local markets

On the surface, the immense size of the Chinese population seems like a positive factor for companies looking to expand. More people mean more consumers to buy products which means more sales. Right?

This might be true if you were simply expanding your own existing market. However, the Chinese market is full of consumers who likely have no idea who or what your company is or does. If your business were to just suddenly appear on the streets in Beijing, many consumers are likely to walk right past it simply because it’s unfamiliar to them. These consumers already have their favorite local brands and products that they are loyal to and it will be difficult to pry them away. Not to mention that you will need to compete with plenty of already-established companies that have local roots. If you want to enter China successfully then you’ll need to market your product in a way that appeals to Chinese consumers so that you will stand out. This is where forming a partnership can be instrumental in your success.

In order to enter such a large market successfully, it is extremely important to form a partnership that has a solidified presence and can give your company the confidence to enter a market and achieve an appropriate market share. Partnering with distributors, such as China Resource Group or SinoPharm, could prove to be the X-factor a company needs to get their product in front of the Chinese consumer.

Once a company has an established network and distribution lined up, competition will be the next challenge. A recent survey done by BLANK showed that only 13.7% of foreign companies that already have a foothold on Chinese soil actually intend to increase their investment into the market. This should increase confidence in executives making the push into the market that foreign competition is muted.

Changing consumer buying patterns

Businesses are currently witnessing huge changes in consumer buying patterns in China. This is mainly due to the ever-rising number of options that consumers have. When consumers are presented with more options, they will naturally tend to look for the product or service that suits their budget and quality preferences perfectly. This consumer change is also due to the increase in income across the middle class, which has been fueled by decades of economic development. Based on Pew’s income band classification, China’s middle class has been among the fastest growing in the world, swelling from 39.1 million people (3.1 percent of the population) in 2000 to roughly 707 million (50.8 percent of the population) in 2018. This amounts to an increase of 667.9 million (or 47.8 percentage points).

This sounds promising for the future of China’s economy but also may not be fully realized yet, mainly due to the extreme circumstances presented by COVID-19. Due to the uncertainty that surrounded almost the entire year of 2020, Chinese citizens were more likely than ever to save their money. One survey showed 42% of young consumers intend to save more as a result of the virus. These extreme circumstances, coupled with a country that already had one of the highest savings rates of a first-world country at 44.9%, drastically decreased the velocity of money within the economy.

So far, consumption has been slower to bounce back in China compared with manufacturing and other sectors. However, as the vaccines roll out into the population and employment has begun to reach pre-pandemic levels, the Chinese consumer is very likely to return to their pre-covid strength. Not only that, but it is likely that we will see an incredible surge of 2021 “revenge spending”. By this, we mean that consumers may spend more than they previously did in order to compensate for an entire year of being locked down.

While the effects of Covid-19 may lead to a reduction in profits in the short term, the long-term view for the Chinese economy remains strong. Covid-19 presented a significant short-term issue that will eventually subside. When that happens, the Chinese economy will continue to grow at a significant rate to eventually become the biggest in the world. In fact, a survey done by BLANk shows that long-term confidence remains positive, as 87% of companies reported no plans to move production out of the country.

The majority of companies with manufacturing operations in China intend to keep production in the country in the next three years, with only 3 firms planning to move at least 30% of manufacturing overseas, the survey found.

Attitudes on spending among consumers in their 20s and 30s, historically the engine of China’s consumption growth, have also changed markedly in the wake of COVID-19.  In the wake of the virus, young consumers are becoming more prudent and health conscious. More than 70% of respondents to a McKinsey COVID-19 consumer survey will continue to spend more time and money purchasing safe and eco-friendly products, while three-quarters want to eat more healthily after the crisis.

Changes like these that take place among an entire demographic of consumers can be either good or bad depending on the industry that you are in. For example, the insurance, healthcare, and agriculture industries stand to benefit from this shift in consumer mindsets.

Formulating partnerships with companies that operate in these industries could provide a rare opportunity to investors or companies that want to move into this market.

Government-related issues

It’s common for western businesses that are expanding into China to be concerned over potential issues relating to government procedures. These issues could be anything from an overly complex bureaucracy, to the government giving preference to local firms, to being blocked from obtaining the proper licenses and permits to trade legally which would stop them in their tracks before they have even begun.

An overwhelming majority of companies’ state that visa and travel restrictions have an adverse impact on their operation. Over 50 percent of them were affected by China’s visa and travel restrictions while approximately 40 percent of them were influenced by American restrictions.

While Chinese tariffs continued to impact US company sales to China in 2020, 10% fewer companies cited this as a top concern this year compared to last. This is likely a result of their success with China’s tariff exclusion process established this year as well as the uptick in Chinese purchases of US goods in accordance with the Expanding Trade chapter of the Phase One agreement.

On the bright side, many U.S. companies have said that some of their long-standing complaints about doing business in China—primarily related to market access and bureaucratic red tape—are receding, as Beijing delivers on long-promised reforms.

If government-related issues are one of the main factors prohibiting you from expanding your business into China, then partnering with an outside firm is a great option to explore. Partnering with the right firm will allow you to bypass almost any issue that comes up because they will have solidified relationships with government officials. At the end of the day, China is eager to get new technology coming into their country and, as long as you are following the proper protocols, they will be eager to work with you, not against you

Intense competition

Due to the abundance of opportunity present there, business competition in China is fiercer than ever. The number of private companies in China shot up from 140,000 in 1992 to 15.61 million in 2018 alone. According to the U.S. government, around 480 of the Fortune 500 companies have operations in China (96%). This makes for a marketplace in which Chinese and foreign companies are locked in a fierce battle for survival.

To help protect themselves against this intense competition, profitability is a key factor for long-term confidence in the Chinese market. The survey showed that 91% of companies said their Chinese operations are profitable, though at a lower margin than before. In 2019, 69% of American companies said they had seen revenues grow, down from 79% in 2018 and 87% in 2017.

Nearly half – or 47.6% – of respondents anticipate their 2020 revenue would exceed last year’s. That is up from just under a third, or 32.5%, who had the same expectation back in July 2020.

This year, one-third of respondents observed accelerated preferential policy support for Chinese companies directly as a result of US-China trade frictions. 25% of respondents said that increased competition with Chinese companies had hurt their profit margins last year.

Conforming to rules and standards

China, more so than other countries, is very particular with how products are designed, made, sold, and used. Any company looking to expand into China will need to abide by these strict guidelines and adhere to the country’s high standards. At first glance, these conformity rules can appear complex to Western business owners and even deter them from seeking opportunities in the country. An underlying concern is also that Chinese-owned companies may not be held to the same strict standards as overseas firms, which would make the market conditions even more difficult.

Market access restrictions, joint venture requirements, or administrative licensing requirements, such as those embedded in standardization and industrial policies, often preclude a company’s ability to enter the China market. Technology transfer does not affect all companies, but for those that it does, it is an acute concern. Although the issue has remained a sticking point in bilateral tensions between the United States and China, two-thirds of companies report that technology transfer does not have an impact on their operational decisions in China. Even so, 13% of respondent companies have been asked to transfer technology this year, compared to only 5% last year.

The percentage of companies that are somewhat or very concerned about China’s information flow and technology security policies increased this year to 84% from 76% in 2019.

Of the approximately two-thirds of respondents attempting to participate in standards setting, most rate their ability to do so as only fair (64%), and nearly a quarter as poor. 17% of companies report high or above average influence in standards setting, and indeed industry leaders are often able to be influential in standards setting by contributing their technical expertise. However, the ability to participate does not always translate to influence. Only 45% of companies feel they had average influence in standards setting, while nearly two-fifths feel that it was below average or low.

Due to the complexity of dealing with Chinese standards for production, it’s always easiest to partner with someone who has experience in dealing with this.

Finding and retaining good employees

Foreign companies can face various obstacles when hiring employees in China. Increased competition in the market has caused the demand for high-quality labor to overtake the supply. This means that the most qualified and experienced staff have moved to the companies that can offer the best salaries. Western businesses are concerned that they will struggle to acquire suitable employees or hold on to them once hired. Additionally, as the demand for the best staff continues to rise, so will the cost of that labor. This could potentially force younger businesses out of the market. 

A third of respondents are concerned about potential exit bans, detentions, and other restrictions on their employees.

COVID-19 outbreak and various factors took a toll on employment levels of the participating companies in 2020. 30% of them have reduced headcount. Although the Chinese economy grew at its slowest pace in nearly three decades in 2020, most of the participating companies seem to be confident in employment expansion, with 44% reporting plans to increase their headcounts significantly or slightly in 2021.

Despite the challenge of finding and retaining top-quality employees, it is still possible to do. The best way to find the best talent is to partner with a firm that has a history of hiring quality individuals. When it comes to this, Summer Atlantic has a team who will directly operate the structure, therefore negating this risk altogether

What’s the best way to overcome the obstacles of entering the Chinese market

While there are numerous political and cultural challenges faced by businesses looking to enter the Chinese market, many businesses believe that opportunity is well worth the effort. The U.S.-China Business Council found that nearly 70% of member companies are optimistic about the five-year business outlook in China, the group reported in August 2020.

Another survey conducted in the following President-elect Joe Biden’s win month shows that out of 124 company leaders, only 2 said they are more pessimistic about doing business in China. Just over half, or 54.8%, said they are “more optimistic” and 8.1% are “much more optimistic” given the expected change from President Donald Trump’s administration, the survey found.

The best way to overcome the challenges of entering the Chinese market is to partner with a firm that has already done it successfully. When it comes to this, Summer Atlantic is the best positioned firm that can help you grow a strong presence in China and become a multinational business with a bright future.