25 June 2021
Article

Battle of China. 7 Questions for Russian Companies That Want to Enter the Chinese Market

Valentin Marchenko, Asian studies expert and head of SKOLKOVO’s consulting practice China Unit explains how companies can start working in China without losing time, money, or patience.
Battle of China. 7 Questions for Russian Companies That Want to Enter the Chinese Market
Content source: istockphoto.com

30 years ago China was an attractive source of cheap labor, yet now it's the country's giant market that draws business in. Modern-day China is home to almost 1.5 billion people that are constantly buying products, and the economy is growing at an incredible 10% per year. China might outpace the USA as early as in 2028 and become the world leader in terms of GDP volume. It is no surprise that virtually the entire world is competing for a chance to sell their goods and services in China. 

Russian companies are also in the race for this market. Some of them succeed, some do not. Here are a few things that companies should keep in mind if they want to get a piece of this pie. 

Eco-friendly and more. What do Chinese consumers want? 

Try to choose a business area with the highest potential for growth. 

There is currently a very high demand for quality food since there are not enough domestic resources to provide China's huge population with food. Russian businesses are already actively trying to fill this niche by supplying raw meat and processed food, including sweets, convenience food, and ice-cream, to the Chinese market. There is still room for newcomers, especially those who manufacture eco-friendly goods. 

A considerable amount of attention is focused on protecting the environment in China, so there is a lot of interest in niche eco-friendly non-food items, such as cleaning supplies. Splat famously uses German raw materials to manufacture their products in Russia and exports them to China

Source: istockphoto.com

Services, especially educational services, have a lot of potential. Unique products, which might be considered status symbols, could also offer a path for success in China. I know a company that manufactures furniture out of airplane parts. This is definitely an expensive niche product, but considering the size of the market, even niche products can generate high revenue in China.

Attention to detail. How to get on the clients’ good side?

Chinese consumers are very hard to please. We have all heard stories of large international companies bungling their PR campaigns after failing to adapt them to the local mindset. 

Dolce & Gabbana was caught up in a scandal in 2018: the fashion house launched an advertisement where a model was shown trying to use chopsticks to eat various Italian dishes, such as cannolis, pizza, and spaghetti. The ad was deemed racist in China and consumers refused to buy the brand’s products. Designers Domenico Dolce and Stefano Gabbana ended up having to apologize to their consumers in China.

This means you should pay close attention to what you say about China and how you say it: a boycott from local consumers, like the one Adidas and Nike are currently facing, could hinder your plans to expand into China for a long time (if not forever).

Shanghai, Hong Kong, Beijing... How do you choose the right region?

Local specifics are critically important in China, where the market size, taxation, and even the legal system can differ from region to region. 

Let’s take Hong Kong. It was influenced by England until the end of the 20th century, and as a result its legal system is based on English common law. This market is easier for European companies to enter. But keep in mind that if you open a business in Hong Kong, the rest of China would be off limits to you, and instead of a billion and a half potential clients you would only get 7.6 million. 

Source: istockphoto.com

If you opt for mainland China, avoid big cities, like Beijing, Shanghai or Guangzhou. These markets aren't just overheated, they are a crimson-red ocean, where newcomers (especially small and medium business) are crushed by the competition in the blink of an eye. The whole world is fighting for these markets, making it safer to steer clear of them.

The best option would be a second or third tier city in North-Western China with around a million inhabitants. Admittedly, they are not as famous and it is more challenging to find English-speaking partners there. Even so, they represent a huge market that is not accustomed to getting attention from international companies and can become a great starting point to develop your business. 

Be prepared to push and shove. How is the competition?

The competition in China is brutal. I am not exaggerating. There is a reason why I compare the local market to a red ocean: reportedly, 10 thousand new companies are launched in China every day, while tech unicorns were created every four days in 2018. The competition has grown even tougher in recent years, meaning if you don’t elbow the competition aside, you have no chance. 

State protectionism also plays a big role. The Chinese authorities are actively supporting local manufacturers by, for example, introducing high import duties. Unless you are a luxury brand or an American company, that China has a score to settle with, you won't face prohibitively expensive high duties. Nevertheless, this is still something that you should keep in mind. 

Safety in numbers. Where can you find partners?

You can try to do everything yourself, but partners can make your life easier by giving you access to the local ecosystem, client base, and infrastructure.

Some of the venues where you can find partners are exhibitions, fairs, and industry dialogs. Of course, this approach is costly and the output is slow, but it implies actually being in the country, personally starting and developing your business contact network, and personally selling your product to get immediate feedback on the spot. This truly is important. Another option would be to contact specialized government agencies. For example, VEB and the Russian Export Center have founded a trading company called Huanuo Exiang, which helps Russian manufacturers enter the Chinese market. In some cases, trade offices and specialized agencies, such as Business Russia and the Russian-Chinese Business Council, can act as a go-between. Companies would have to pay for their consulting services, but usually they charge a success fee, meaning you pay only after you find a partner and make a deal with them.

Source: istockphoto.com

There is one more key aspect. The government plays a big role, and if your project is at all significant, then you will have to make contact with it. This is immensely important for partners from China: government backing demonstrates that you aren't a crook. Making these types of connections is exactly what local partners can help with.

Not getting black-listed. What type of ownership structure should I chose?

There are several options. If all you need to do is showcase your product, than you can open a representative office. However, you would not be able to engage in commercial business activities and your operations would be limited to market research, participation in exhibitions, and participating in purchasing activities. 

A fully functional business would have to be registered as a foreign-funded enterprise. The Foreign Investment Law stipulates what these companies can do and what kind of support they might receive. In a nutshell, you are eligible to start a local LLC or JSC if you do not fall under the Negative List, which includes 33 restrictions that apply to foreign business in China.

Slow speeds and boycotts. How is the way of thinking different?

Business is done differently in China compared to Russia. No one ever says “no”, direct criticism and hinting at your partners’ problems (like, for example, poor English skills) is unacceptable. Everyone knows these unwritten rules, yet still forgets about them for some reason. And then people wonder, why their partners from China have stopped returning their calls.

If you want to avoid this, you have to keep the local culture in mind. There is no need to learn the language, remembering a few phrases is enough to melt your Chinese colleagues’ hearts. Hire an expert in Chinese culture and language for the rest. He will make sure you don't say anything inappropriate, plus having him on your team would be a sign of respect on its own that your partners are sure to appreciate. 

Be prepared to spend a long time on entering the market. Negotiations may span a lengthy period, and bureaucracy will also take its toll. A year or more sounds like a realistic estimate. Is that long? Yes. Is it worth it? By all means. McKinsey estimates that 75% of China's urban population will join the middle class. That's 650 million people or double the US population with its purchasing power. This is clearly worth the trouble and competing for. 

(0)

Мы используем файлы cookies для улучшения работы сайта Московской школы управления СКОЛКОВО и большего удобства его использования. Продолжая пользоваться сайтом, вы подтверждаете, что были проинформированы об использовании файлов cookies сайтом и согласны с нашими условиями обработки и хранения персональных данных. Вы можете отключить файлы cookies в настройках Вашего браузера или отказаться от пользования сайтом при несогласии с условиями сбора и использования cookies. Для чего нужны файлы cookies: для корректной работы регистрационных форм и отображения информации на сайте.