With the fast growth seen within China, many companies are looking at entering the Chinese market as a fantastic opportunity. However, what can be difficult for Western companies to determine is the best way of entering the Chinese market and how to position their company within it. This article looks at the advantages and disadvantages of the different methods of entering the China market. The question regarding the right trade or distribution channel is closely related.
One of the more common ways for companies to get a slice of the Chinese dumpling is through exporting. This process allows a company to benefit without starting a business in China. Exports can either be done directly and indirectly. Direct exportation concerns the shipment of goods from the manufacturer directly to the end customer (the importer), which is doable relatively easily in times of e-commerce. Indirect exportation is where your product is handled by a middle man, usually an agent working on your behalf.
When you directly export you benefit from the greater profit potential, you can work directly with your customers and have more control over the whole operation. However, you will also have to deal with all logistical aspects, language barriers, as well as having a greater degree of responsibility, in general.
With indirect exporting, you benefit from the knowledge and experience of the agent, as well as having links closer to the market which can provide information about your competitors. Furthermore, the agent can represent your organization and find customers for you. On the other hand, you risk the agent producing poor results, approaching your competitors if unhappy, and constantly communicating.
A distributor works for entering the Chinese market in a similar way to an agent. Instead of them working on a commission basis they buy bulk goods to sell themselves to the customers either through a third party or directly. If you decide to use a distributor, you can benefit from effectively passing the risk onto them which will incentivize them to actively try to sell your goods. You will also not need to build up an established place within the market. However, you will be unable to control a distributor’s actions.
By licensing, you grant permission to a certain company to use your intellectual property on an agreed set of terms and conditions. This method obliges you to protect your intellectual property rights (IPR). Another article on this topic is located here.
Franchising is similar, except the other party trades under your name and brand, and in return pays a setup fee and an ongoing commission to the franchisor. By entering into an agreement on this basis, you can benefit from an easier and lower cost of entering the Chinese market. Furthermore you benefit from the risk being linked to an individual’s investment rather than your own which would motivate the other party to be successful. You also gain from furthering your brand and reputation, allowing for wider exposure.
However, you forgo some control over your brand. More importantly, the royalty payments you receive may be less than profit you could have gained from an alternate China market entry strategy.
Alternatively, you could go down the route of investing directly into the Chinese market. A problem here might be that the government restricts certain industries from foreign investment. If the industry you are in is restricted, then your only option may be to enter into a joint venture (as described in this article).
Certain industries within China are completely welcoming to foreign investment and the government often offers subsidies and incentives for firms to set up. Although it is possible for foreign companies to produce in other industries, there might be certain restrictions or a lot of red tape to get past before it is possible to start. Finally, there are restricted industries prevent you from entering the Chinese market in any way.
One of the main things to consider is that the Chinese market is culturally very different from others. If you are in the food industry, the tastes of Chinese people will vary more than in Western countries. For example, Oreo failed to grow until the company lowered the sugar levels in their cookies. After doing, sales exploded – making Oreo the number 1 cookie in China.
Other companies also struggled entering the Chinese market; KFC initially faced difficulty entering the Chinese market due conflicting preferences. The company only experienced success after changing the menu to suit the country’s tastes. BMW also altered its vehicles for China by building a longer limousine version of it’s existing models exclusively for the Chinese market. The Chinese market is large, and while opportunities abound, competition lurks.