Doing business in China

Updated: May 2. 2019

I have been doing business in China for over 30 years. Two factors still determine foreign companies’ chances of success.

The first is to have already achieved success in your industry in Canada or even in North America. If China is offering spectacular business opportunities, the competition is going to be fierce. You will be confronted with Asian, European and North American leaders in your industry who will each invest significant sums of money. You will not beat them in China if you do not do so at home.

The second factor is to be ready to commit major resources with a long-term view. It is a strategic market, one that is to be tackled with patience and the conviction that it will eventually be one of the company’s major markets. It is never a market that can be developed in an opportunistic manner.

But there is now something new: much is needed now to impress Chinese consumers.

For most North American companies, this means to refrain from doing business in China. For companies that qualify, it means setting aside adequate resources, but also being deliberate and methodical.

A continent consisting of 7 regions

The first thing to know before venturing into China is that the market is not homogenous; it’s a continent comprised of 7 regions, each one as different from one another as Germany and France are. Most of them have a population of 200 to 300 million, have distinct business networks and people that speak distinct languages. Mandarin is the official language, but Cantonese is spoken in Hong Kong and a local dialect in Shanghai. With the exception of the e-commerce giants, no distribution partner adequately covers the country as a whole. We must therefore proceed region by region.

The language barrier

Then, we must realize that very few Chinese speak English. Not only do they not speak English, but they usually cannot read words in Roman letters. If you expect to achieve major sales in China, your company name must be in Chinese characters. Buyers and consumers will want to look up your company online by typing the Chinese characters in their search engine. Obviously, your website will also have to be in Chinese so they can find you.

The cultural factor

Introducing yourself in Chinese is not enough. You must first take the time to understand the culture and local reality.

On one hand, products and concepts must often be adapted. Sizes of food product boxes must be revised to take into consideration cramped kitchen cabinets. Starbucks revised the design of its cafés to make them into social meeting centres rather than places where people come with their laptops to work alone.

Social etiquette is different and you must know how to develop loyalty among employees and partners. The key here is to rely on a team of locally-hired people.

First and foremost, survey the market and develop a vision as well as a business plan.

If you wish to succeed in China, you must learn about the market before you start. Commission a market study. Or, take at least 2 weeks to acquire knowledge about one or two major regions with someone who speaks Chinese. Visit potential customers, retailers or distributors, scrutinize the competition, take note of prices and ask many questions. You will be surprised at the amount of information people will share with you.

You must first estimate the size and market growth of each of these segments and the estimated market share of the main competitors.

The Chinese market is huge, but competitive and segmented. It is paramount to determine which regions and what segment to target. Establish clearly what your competitive advantages will be. To succeed, you must determine if major changes have to be made to your product or concept.

Finally, you must understand what role your company will play in the Chinese market and your sales potential over a 3-5 year period. Assess required resources and profitability for the same period. Set your objectives and get support from your investors, as well as your board of directors. This exercise will have provided you with a vision and a business plan.

Choosing partners

Only after the previous phase is completed can you begin to identify potential partners. Establish strict selection criteria: regions, type of customers, sales strength, financial resources, vision, and a business plan consistent with yours. Your market study will have helped you identify some potential customers and/or distributors. Continue the research, and then, meet the prospects that seem to provide you with the best potential. It is crucial to go and visit their premises. Assess each one of them rigorously with the same selection criteria.

Don’t start up with someone simply because he is calling or visiting you, or seems nice. It’s a common mistake of people starting to do business in China. Compare his skills with some other alternatives. Make sure he or she has the means, the experience and the networks to help you succeed.

Take the time needed. Starting up with the wrong partner will make you lose much time and money.

Communication tools

In China, everything is done with the cell phone. When arriving there, your service provider’s international package will allow you to remain in touch with your home. But it is not enough for local calls. You will need a SIM card from a Chinese supplier like China Mobile, which will give you a Chinese telephone number. Nobody in China will be willing to dial an international number to reach you. You can get them with an affordable package either directly from your hotel or at a boutique usually just a few minutes away. In fact, there is very little telephone conversation with new business partners. And email is not often used. Communication takes place through WeChat ((微信 ou ‘Weixin’). Schedule your meetings before you arrive in China on WeChat and do your follow-ups upon return with WeChat.

E-commerce

Due to its quick adoption by a young population, China is the largest e-commerce market in the world. The Chinese will purchase goods online worth one trillion (yes, one thousand billion) American dollars in 2019!

Five hundred million Chinese consumers, mainly between the ages of 20 to 40, purchase online. Ninety percent of online business goes through portals that allow for price and product comparison, rather than referring to company websites. Alibaba, with its TMall (天猫 ‘Tianmao’) portal, controls 50% of the B2C commerce. JD.com (京东 ‘Jingdong’) is the second major portal with 30% of the market. Based on expected sales figures, suppliers can build or launch their own online “store” with a legal entity and a distribution warehouse in China, using a third party to build and manage them, or even sell their products to TMall or JD.com who will offer them on their web sites as retailers.

A series of specialized portals targeting niche markets have emerged over the last few years. Here are two examples: Womaiwang (我买网), a B2C portal of natural food products, and GFresh (极鲜网), a B2B portal for seafood.

Online sales have seen a yearly increase of 65% over the last decade. Eighty percent of transactions in China are done without cash, 60% are digital.

For more details, read the excellent “Guide to E-Commerce in China” published by the Canadian Trade Commissioner Service.

Social networks

Social networks have become the main communication media for consumer products. You can post promotional videos on them. You can work with influencers who will talk about your products online. The major social networks are:

QQ: 600 million monthly users. The platform regroups instant messaging, blogs, games and online payment. Because it is widely used by students to create discussion groups, they (exceptionally) use Roman letters.

WeChat (‘Weixin’,微信): 1 billion monthly users. Initially, a messaging app that is now probably the most multifunctional platform in the world. It plays an important part in the Chinese e-commerce market. You can order a taxi, make restaurant reservations, purchase movie tickets, purchase goods online and have access to video games. It is also by far the major electronic payment app in China. It allows you to pay for “dumplings” by scanning the QR code of a street kiosk with your cell phone. The messages and promotional videos seen on it are now essential tools of brand marketing strategies.

Sina Weibo (微博): a news sharing app often called the ‘’Chinese twitter.” It includes micro-blogging functions with publications of up to 10,000 characters and allows video publication. It is not necessary to be a member to view its activities and news, which makes Weibo an open platform. It is also one of the major promotional tools for Chinese brands.

Resources

Resources must be proportionate to market potential.

An influential member of your management team must be dedicated to China. He or she must be responsible for developing the business plan and support the work of your partners or your organization in China. Before starting, that person must visit the country several times, and continue with regular visits afterwards, meaning 3 or 4 times a year.

You then need, at the outset, a serious representation on site in China who will follow the work of your partners closely, approach new opportunities, and keep up to date with the competition’s actions and developments in your industry. If things go well, you will quickly need a sales team in the country with representatives in the major regions. The organization will evolve with operational functions and R&D activities managed locally. Promotional activities must be well funded. The leader of this organization must therefore be a high-caliber individual.

Plan your resources and financing a few years ahead, with the backing of your investors and your board of directors.

An example of success

Starbucks, already mentioned several times in this article, is one of the best success stories of a Western company in China. The first Starbucks was opened in Beijing in 1999. Howard Schultz very quickly believed that China would eventually become a bigger market than that of the United States for the company. Development in China has long been one of management’s priorities.

Starbucks now has 3,300 stores, some of which are the most profitable in the world, in 141 cities in China. The company employs 50,000 people in the country where it is known as “Xingbake” (星巴克).

Operations are headed by Belinda Wong, a native a Hong Kong, who joined Starbucks in 2000 after having worked with McDonald’s China. Her team independently prepares the vision, the strategy for growth, acquisition and retaining talent, as well as managing the brand for China.

The Starbucks Reserve Roastery in Shanghai is by far the most innovative of the chain worldwide, inspired by the ‘New Retail’ (refer to preceding article, ‘Innovation now comes from China’). Starbucks worked on the new concept with Alibaba, which developed an augmented reality technology to improve customer experience, and to help the chain launch its quick coffee delivery service.

And one of failure

In contrast, companies that launch out in China without a sustainable competitive advantage and sufficient financial resources are falling like flies.

Lassonde, today’s largest manufacturer of fruit juice in Canada, had invested in a factory in the 1990s in China, where it was among the first to market pure fruit juice. At the beginning, in a competition-free environment, sales grew very quickly, and profitability surpassed expectations.

Those who had a key role in the management of Chinese operations give contradicting versions of the causes for what happened later. What is sure is that Lassonde was at that time still just a mid-sized business owning regional brands in Eastern Canada. When the world’s major juice brands were launched in the market with significant resources a few years later, everything quickly changed. Sales plummeted and losses were so high they were threatening the Canadian parent company. Lassonde had no choice but to abruptly end their operations in China.