Ten Essentials to Building Business in China
China’s economy has been the hot topic of the past decade, making it the target for foreign companies seeking to cash in on the boom. The numbers are certainly alluring for doing business in China – China continues to be the only economy in the world to show positive growth in 2020. Its GDP is predicted to expand 1.9 percent this year still despite the massive impact of the COVID-19 pandemic, according to the latest economic outlook released by the International Monetary Fund (IMF) in October of 2020.
Any business looking to expand internationally will have its sights set on China. However, before you decide to set up shop in the world’s most populous country, you need to have a smart China strategy. Here are ten essentials to building a business in China.
Understand the Ways Your Business in China Can Operate
For foreign companies entering China, a significant choice to make is how you want to get your business running in China. Depending on your needs and situation, these are the following options to look into:
– Wholly-owned Foreign Enterprise (WFOE)
– Contractual or Cooperative Joint Venture (CJV)
– Equity Joint Venture (EJV)
– Representative Office (RO)
– Foreign Invested Partnership Enterprise (FIPE)
Find more information about setting up an own business in China in our previous article “Key Considerations for doing business in China“.
Localize, Really Localize
Europe has 44 countries and 24 languages, while China has 34 provinces and seven major mutually unintelligible Chinese language groups, not to mention approximately 300 minority ethnic languages. Just as most savvy entrepreneurs would not see Europe as a cultural monolith, you should not expect China to be a homogenous market.
In China, the north and south divide is one of the most apparent distinctions, with southerners known for their haggling and smooth-talking while northerners tend to be more aggressive and candid. City tiers matter as well, with a nomenclature that is constantly up for debate, sorted by economic development. While foreign brand presence is saturated in China’s tier one cities like Beijing and Shanghai, China’s second and third tier cities are home to a rapidly growing middle class where many foreign brands are only starting to target.
You can read more in our Melchers’ article about the “The importance of thinking regionally in China“.
Engage with the Culture
Before opening up shop in China, or any foreign shore, business owners would be wise to immerse themselves in the culture. In China, like many other cultures around the world, the lunar calendar is the traditional method of keeping track of important dates. Chinese New Year happens on a different day every year as it follows the Chinese lunar calendar, as do all other celebrations.
When it comes to marketing, paying respect to Chinese traditional holidays and customs authentically can be a big boost to a foreign brand’s image. Gucci’s recent campaign for Qixi, China’s Valentine’s day, struck a chord with Chinese audiences – posts about Gucci’s Qixi product line featuring apple motifs (think apple of my eye) were shared all over Douyin, China’s version of Tiktok, and Xiaohongshu, China’s newest emerging social e-commerce platform.
#GucciQixi on Xiaohongshu
Collectivism vs. Individualism
Talk to anyone who has done business in China. They will tell you about the importance of guanxi, translated as connection, something we would view as close interpersonal relationships or friendships. While at first glance, Chinese people, by and large, may seem individualistic to the Western observer, they are collectivist in the sense that their personal connections, be it family or friends from their community circle. Everything outside of this in-group is seen as a zero-sum competition.
While that may be a broad generalization, building guanxi with your business partners and potential clients is a must in China. While those in the West may operate under the motto of business is business, business is intertwined with personal relationships in China. Moreover, trust, the basis of any business, is cultivated through dinners and personal rapport.
Get to Know Local Regulations
The international news usually reports on Chinese governance with the synecdoche of “Beijing”. While the policy is made in Beijing, in practice, enforcement and regulation of said policies vary dramatically at the local level, as each locale has its interpretation. This makes China’s governance model quite decentralized, with each city acting as a petri dish for how best to put in place policy.
This means that when doing business in China, it is vital to understand how business policies are actually handled in the city you are operating in.
Different Internet Ecosystem
While almost everyone knows about the infamous Great Firewall of China, not many people outside of China understand that just how far-reaching and complex China’s internet ecosystem is. As opposed to consumers in the West, there is very little pushback against the digitalization of cash – according to CGTN, 86% of the population now use mobile payments to pay for everything from utility bills to groceries.
Furthermore, with a fully digital ecosystem, businesses need to start getting used to SEO for Baidu, China’s answer to Google, and KOL marketing (otherwise known as influencer marketing) on Weibo or Douyin, China’s versions of Twitter and Tiktok respectively. Furthermore, while emails are the norm for business communication in the West, WeChat is where China’s action happens.
From left to right: Tencent, Alibaba, Baidu. These are the most prominent players in China’s digital ecosystem, with Tencent owning WeChat and Alibaba owning Alipay and Taobao.
Translation is key
The Chinese language, based on only a limited amount of phonetic inventory, means that it is ripe for homonyms. Factor in the numerous Chinese dialects and the probability that your brand name’s translation will sound like another concept is almost guaranteed. This can either work in your favor or against. We suggest hiring an expert or a team of branding talent fluent in China to tip this quirk of the language in your favor.
Find more information about “get your brand name translation right“.
Do Your Research on HR
A fast-paced economy comes with a fast rate of employee turnover. On average, professionals in Chinese stay two years in a company (source: Zhaopin). This is due to the customary 20% pay rise above one’s last job’s salary during pay negotiations.
Further, as a foreign company, how do you determine what a good employee looks like? With cultural differences and market differences, what to look for in an employee should not be clouded by what works back home.
Pay Attention to Industrial Dynamics
While China is a foreign market for your business, basic market competition dynamics still apply. Many foreign companies enter China aiming for market growth without actually analyzing what is already happening in the Chinese market.
In the 1990s, 20 foreign beer companies entered the Chinese market, ready to take over. There, aside from each other’s competition, they encountered 600 local breweries, many subsidized by the government. Today, many businesses encounter the same problem expanding into the Chinese market – oversaturation, subsidized competition, and other foreign companies willing to absorb a lot of short-term losses to keep their hold in the China market. When building a business in China, ensure that you treat the Chinese market with the same common sense as you treat business ventures back home.
Protect Your IP
Be knowledgeable about Chinese IP rights and apply for them as soon as you decide on setting up your business in China to secure registration of trademarks, copyrights, and patents to prevent frustration down the road. It is also essential to consider if that IP needs to come with you into China. Especially for tech companies, consider that many companies can succeed in the Chinese market without bringing their core IP into China.
How Melchers Can Support You in China
When entering China it is imperative for any brand to understand that China is a unique market which requires a carefully crafted approach. Some key factors playing into the decision process of how, when and where to enter China are market profiling, thinking regionally, the choice of right legal set-up or partner in China, brand protection and promotion. Depending on one’s industry, several more factors have to be considered when engaging in China. Especially for small and medium-size enterprises, choosing the right partner in China will be paramount.
To learn more about how we can support you, please contact us at [email protected].