Entering the Chinese market is no easy task. Famous brands from the Western world have tried and failed. Even e-commerce giants Amazon have struggled to penetrate the market they dominate in the US. With over 1 billion residents, the Chinese market is substantial. If a company successfully manages to capture their target audience vast profits can be waiting. However, this market is one of the most difficult worldwide to break into.
China entering into the World Trade Organization (WTO) was the country’s first step to liberating free trade. Prior to this, the majority of markets were heavily regulated and closed too foreign investment. While there has been significant progress since China joining the WTO, there are still many markets restricted to foreign companies. Energy, telecommunications and petrochemicals are prime examples.
Alternatively, you may consider the option of partnering with a Chinese firm in the form of a joint venture. While you would lose a degree of control, and encounter other challenges, it may be the only way to break into the Chinese market. Many companies skirt around restrictions through this method.
Investing into research and due diligence is essential prior to entering the Chinese market. Consult with a professional regulation expert and discuss what options are on the table. Many industries are open to foreign investment without the need of working in partnership with a Chinese firm. Regulations in China are frequently changing. Continue to monitor the market regulation environment for your firm. Since China is continuing to relax outside investment regulations, if you are put off by the thought of a joint venture, the near future may allow you to do it alone.
Why Partner up with Chinese Companies?
With China appearing to be a thriving country on the up, with a booming economy and over a billion citizens who are finding themselves with increasingly more disposable income. It should come as no surprise the market appears extremely attractive to Western brands and companies. An increasing demand by these citizens for foreign luxury goods suggests there could perhaps not be a better time to entry into this market. However, when reading the news, we frequently hear how these Western firms enter into partnerships with Chinese firms as a way of breaking into the market.
At face value, there may not appear to be a logical reason for this. True, the knowledge and experience these Chinese firms have of their domestic market may be valuable to foreign firms. However, a standard 50/50 partnership would result in significant profits being shared which comes at a hefty price.
Ultimately though, the reason why foreign firms enter into such agreements isn’t usually to gain access to skills or knowledge, but rather because there is no other option. These agreements are generally joint ventures where two companies both enter into a commercial venture while still being two separate distinct companies. That is not to say there are no advantages to such a venture, skills and knowledge can prove to be valuable, as can combining resources and spreading the risk.
An early example of a popular joint venture in China can be seen within the automobile industry. In the 1980’s, foreign companies were restricted from owning a majority share in a manufacturing plant in China. Many car manufacturers saw the potential of the vast Chinese market, and as a way to access this area had to enter into joint ventures with Chinese firms. One of the earliest success stories can be seen by Volkswagen, who partnered with China’s Automotive Industry. Currently Volkswagen sells over 2million cars to Chinese consumers in a year with an operating income of over $850M yearly.
While China has seen a vast amount of liberalization since the 1980s, the concept of joint ventures is still extremely common. Not all industries require such a setup for a foreign firm to operate in though. As a result of China trying to protect its own domestic market, and one of the methods they employ is restricting access to foreign firms. This seeks to create a knowledge and technology transfer to take place and enable Chinese firms to benefit.
Lessons are still being learnt by international corporations who see China as an easy market. This could not be further from the truth and many brands have failed to be considered successful in China. While China is becoming more alike to countries such as the USA in many ways, there is still a contrasting culture rooted deep within the country.
Much like to what happened to KFC who eventually withdrew its business in this shore. They found difficulty in catering to the difference tastes between their current market and China. While KFC did enter into a joint venture to enter the Chinese market, this was still not enough to help the company thrive. Despite altering the menu to try and suit local tastes, declining sales and controversies relating to the sale of expired meat, has resulted in KFC struggling in this market.
This goes to show that many Western companies are quickly learning the Chinese market isn’t as simple as they may think. Joint ventures can be a strategic way of spreading the risk between two separate entities. They can also help a company understand the local market much better. Sometimes, there is no other way to enter the market if the industry is restricted or has severe amounts of red tape.
An increasing number of Chinese companies require that their contracts with American companies provide for disputes to be resolved via arbitration in China; both sides will use CIETAC arbitration clauses under these circumstances. Many people worry if they can get a fair decision when they have to arbitrate in China, especially foreigners. Moreover, many American companies usually believe “the Chinese way of doing things” is bias due to the fact that some foreign companies are not always treated fairly in China; however, people should clearly understand the difference between the bias and the American misunderstandings of how China operates for everyone.
Other Essential Factors When Doing Business in China
Respect Differing Cultures
Another essential factor when you are considering entering the Chinese market comes down to the differing cultures. China has a vastly different culture to the West. International companies continue to fail in China due to being unwilling to adapt.
McDonalds and KFC both struggled in China. Chinese citizens initially enjoyed Western fast food seeing it as a luxury brand (for fast food). However, the different tastes quickly saw citizens visit other Asian fast food brand restaurants. KFC eventually begun to add more domestic style items to their menu in China. Though this did help sales, the company has struggled regardless.
Another key aspect to consider before entering the Chinese market is protecting your intellectual property. The best defense is to consult with lawyers and intellectual property rights experts to try and mitigate the risk your company is exposed too. Strategies include registering trademarks and patents domestically, as well as carefully selecting employees to hire.
Practical measures such as non-disclosure agreements may be useful. As well as actively monitoring the market for any potential infringements. Preparation is key. Without sufficiently protecting your IP, it may be much harder to bring infringers to justice.
IP Protection in China
Before you sell products in China, intellectual property is one of the most important things among all your strategies. There are 4 factors you need to take into consideration.
- Your trademarks and patents in other countries are not going to protect you in China.
- You must register the trademark or patent in the mainland China.
- You need to think long and hard about exactly what it is your company should be registering, especially the trademark in Chinese or English.
- Companies need to take a long-term approach to their China trademark filings.
The Chinese New Year
“Chinese New Year” (better known as “Spring Festival” in China) is the most important festival in China. It’s bigger than Christmas or Ramadan, by a lot. As the lunar calendar determines the exact date, the holiday varies each year but typically falls sometime in January and February. Chinese New Year is important to Chinese people as this is when gifts and Red Envelopes are exchanged. People spend time with their families, friend and have some rest.
Western countries usually see a minimal holiday shutdown. Christmas is guaranteed, but a whole week of inactivity is rare. However, in China, the Chinese New Year is seen as a major event. Total production shutdowns can last up to one month. Factory workers enjoy taking an extended break. The Chinese New Year may only last 2 weeks, but workers finish a few days before, and can return weeks after the official end date. Production levels should return to normal by 3-4 weeks after Chinese New Year.
Spring Festival: The Workers
Blue-collar workers are often excited for the new year, as often this is the only time when they get to see their families since most factories in China are located on the coast while most workers come from inner regions. Therefore, the holiday holds emotional stock. Suppliers and importers plan around it to ensure the holiday does not impact inventory, quality and costs.
However, without labor, production stops. Factory floor workers often head off two weeks before the Chinese New Year but can leave up to four weeks in advance as train tickets are difficult to get during this time. Their return is normally connected to the “Lantern Festival” which is about fifteen days after the Chinese New Year.
Laborers have vacation for at least four weeks in most cases. This is the only time of the year for their families, so they stay as long as they can. Chinese factory laborers normally work through other holidays in order to build up this extra time. Another factor affecting the holiday is the distance from the worker’s job to hometown. Local residents (běndì rén) may leave later, while outsiders (wàidì rén) would try and get on an earlier train.
During the 1-month long holiday, the workers typically spend their bonuses buying gifts for friends and family and eating dinner. Coupled with the fact that they are re-energized, the workers look for factories that have orders piled up, so they can once work extra hours.
A heavy workload at the start of the New Year makes the worker believe that the factory is good and will have work throughout, giving them extra hours. If orders aren’t piled up, workers are quick to leave. Most workers do not care about work-life balance: Their goal is to maximize earnings.
Spring Festival: The Timing and Planning
How things move before the holiday depend on factors such as, the size of the clients and factories, production process complexity, raw materials and the professionalism of both the factory and the client.
Large factories (and clients) tend to plan early, producing large numbers of “spare” components earlier planning–i.e. build up their inventory. Some small and medium sized factories and importers do the same, but often they are under-managed and ill equipped for this shock. Some large factories make costly mistakes during this period, however: there are stories of large retail stores losing millions of dollars in lost sales due insufficient inventory.
A Typical Process before the Chinese New Year
Well organized factories normally send a notice to their large clients in the early fall, typically after before the national holiday which falls October 1 which asks them to make their final orders which will be dispatched before the Chinese New Year, normally with a warning that orders placed after this time would most likely be dispatched after the holiday.Beware, two main quality pitfalls arise:
- Throughout this time, factories are under pressure to make sure that their goods are sent out before the holiday.
- At the same time, floor workers are working over-time so they can earn the maximum amount of money possible.
During this time, the factory and the client must put strong quality assurance in place to ensure their quality inspection procedures are tighter than usual. Even repeat order encounter quality issues.
During the New Year
Most of your contacts at the factory should remain reachable (if you are important). Getting quotes and placing orders are still possible. Production for orders will start after the floor workers return. Salespeople often give unrealistic delivery times in order to get your orders. Sometimes, however, it may be because of a lack of coordination with the production planning. Don’t be surprised if you do not get those orders on time.
Most factories spend their time developing new samples to be promoted next season. Good factories also use this time to put a production plan in place as well as plan their raw material purchasing so that once their workers are back, they can get straight down to business.
During this time, factories pay debtors and creditors so that they can start the New Year on a fresh slate so when payment requests arrive, you know why.
After the New Year
This time is often most worrisome for management as they must hope a majority of their workers return. Many workers that had worked in the factory do not return. Several factors influence their decision:
- Workers are finding more opportunities closer to home and prefer these due to the proximity to their family and friends.
- Workers often meet their friends who introduce them to new and more lucrative opportunities which they often take.
Each year factories lose roughly 30% of their blue-collar workforce: A human resources fiasco. It is a worker’s market in China now and therefore factories who offer good working conditions, treat their workers fairly, and have higher salaries retain their workers at higher levels and attract new workers easily.
As was noted in the first piece, some workers return after the Lantern festival which means production resumes with a partial workforce. Slow returners, with non-returners means production is not in full swing. The worker problem coupled with the fact that factories have orders piled up during the holiday means delays are expected. (simply don’t trust that Salesperson above!)
Factories also need to place their raw material orders with their suppliers, but these suppliers have their own order log and factories dependent on the raw materials cannot start production until they get these materials.
Considering the Chinese New Year for Your Business
If you intend to start a business in China, you must tightly consider the Chinese New Year not just another holiday but a big event for the Chinese community. If you are used to celebrating the new year as a single day-off then you have to alter your approach when it comes to your Chinese business.
Confirming last order dates may be wise. Usually the beginning of December is for last orders. If you have a strong relationship with your supplier, you may have already been informed. Products which are seasonal in nature are at the highest chance of risk. Increased lead time over this holiday period may see spring and summer-based products arrive too late. Tight schedules shouldn’t be relied upon. Confirm the last call for orders as soon as possible.
In the event production is not possible within your timeframe, don’t halt business activities on your end. While production will be stopped, other departments remain open. Continue to negotiate, design products and work with your Chinese counterparts in other areas. Due diligence and market research can also be carried out. Production stopping does not mean you have to waste time in all areas.
Remember to mitigate as much risk as possible. Select suppliers which do not reopen following the New Year. Hence, if delivery will not be prior, then refrain from placing a deposit. Suppliers promising extremely quick turnarounds are also unlikely to deliver. Preying on desperate companies some scam suppliers will promise short lead times but do not perform.
Chinese Business Ebonics
Business language is cryptic in nature. When you want to go home you say you are tired. When you don’t like the food, you eat little and say you are full. When you don’t like the person, tell the person some ridiculous problem with yourself as to why you cannot work together. All of these actions boil down to a few linguistic shortcomings many foreigners encounter while working abroad. Firstly, however, these are not 100% accurate, but they are 99.99% true. When doing business in China, you should never say things like: “The supplier should’ve known to do this”, “Why didn’t the supplier tell us”, “This isn’t right, make it right”, “The price is too high”, and “We need it fast.”
Let’s start with the first phrase. The supplier is not a psychic and they deal with people from around the world who look for different quality standards and pricing points. Each client has a different taste and preference for the product, so when you are expecting the factory to know something without you telling it, you are setting yourself up for shoddy quality and long lead times.
The second phrase is obvious. If you understand Chinese culture. Most factories defer to you and expect you to tell them exactly how you like it. This is inherent in the hierarchical nature of China. When you pay, you are the boss, therefore, you have to tell them what to do. If you don’t you will not be able to get what you want.
The third phrase is the reaction to the second phrase. Again, a little bit of Chinese culture is at play. While it is easy for foreigners to enter China and pay, it is just as easy for Chinese staff to shut down and not care about your product. Chinese are passive in nature and having an aggressive posture will only lead to them to shut down. Therefore, in light of the second and third phrases, one should always be direct, clear and concise, but in a respective “win-win” sort of way. Trust me, I’ve had many clients who bring me on after their products are already poorly made. In every instance, it was the case where they were not specific and then acted aggressively as if they are in America.
The fourth phrase is a very easy one to understand. In America, we have a rule, never reduce quality to reduce price. In China, this rule does not apply. When you tell a Chinese factory, “Your price is high.” what you really mean is that you cannot afford the proper inputs therefore change them. Most foreigners believe China is a bargaining culture, and, in many respects it is. However, this statement signals a lack of finances, not a desire for a reduced price.
A better alternative would be to say something like, “the market price for input A is $$$, we’ve reviewed the production process and feel the price can be lower. What kind of reductions can you provide for larger quantities?” This sort of jargon signals that you are knowledgeable about the product, want a price reduction, but want to spend more money. Signals.
Lastly, “We need it fast.” usually means “We need it fast, don’t worry about the quality. We’ll fix that later.” When you tell a supplier to work faster than they suggest, you are bound to have a drop in terms of quality. It always happens because to a factory, this is hinting that you don’t care about attention to detail.
Wording your phrases is often much more important in China than in America. Beware.
How Trustworthy Are Chinese Suppliers?
You may have already put off sourcing products from China after hearing second hand horror stories from people who have been a victim to a scam. Unfortunately, scams are not unheard of, and when it comes to international money transfers, the risk always increases. However, if scams were as common as some believe, it would make no sense for anyone to source from China.
Other outcomes besides purely having your money taken without receiving a product also include having your intellectual property stolen. This may be your product designs being taken and created by Chinese firms, or even as far as pure imitations being made to pass off as a legit product from your own brand.
Let us take a quick look at how trustworthy Chinese suppliers actually are, and what you should look out for to reduce your risk of falling victim to a scam or from being exploited.
In terms of pure scams, the most frequent is a buyer pays a supplier for a batch of goods that they never receive. As soon as the money has been transferred, communications cease. This scam can affect companies looking to place a significant order, to small private resellers who are purchasing a much smaller quantity.
Alternatively, another common issue companies run into is receiving goods not up to the expected quality. Even if the supplier has provided a sample for you to review prior to making an order you can still receive below par goods.
Another aspect to carefully consider prior to making an order, particularly if you are designed and patented the product you are paying to be produced, is the risk of your designs being stolen. For many, this is the driving factor to why they refuse to look towards China for manufacturing. Generally, this only affects larger companies with a unique design, as smaller importers are generally buying ODM type goods (products already designed).
There are also various other types of fraud that can be encountered when ordering from China, and while we will not touch directly on them in this section, all the advice provided will be useful for avoiding becoming a victim.
Networking to Find a Chinese Supplier
Dependable suppliers can be rare but through networking, this task can be made easier. This is true domestically, but even more so when dealing with international suppliers. Counting on a recommendation means sacrificing a level of control that now means if a problem occurs, it can be harder to address. Getting it right first time is essential to success.
When it comes to finding your international supplier, you may want to approach the task on a more domestic scale. The power of networking runs throughout business worldwide. Chances are, through utilizing the networks you currently possess you can find a recommended supplier. Direct competitors would be unlikely to help. Business workshops and networking events will point towards the right direction.
Traveling to Asia would be the most worthwhile method of finding a suitable supplier. Entrepreneurs and small companies struggle to justify the costs. Large costs involved, and time constraints compound the issues. Mitigating the risk of dealing with an unreliable supplier should be prioritized. Networking addresses both the cost and time constraints. A recommended supplier may come pre-vetted. The referral should also entail an honest review.
Due diligence should follow any received referrals. Every company has different needs. A supplier good suitable for one company may be a terrible fit for your own. Networking is greatly beneficial in creating that immediate shortlist. However, within that shortlist you still need to properly carry out checks prior to making an order.
Cost Effective Alternative
Companies have also greatly benefited from hiring the services of sourcing companies. These exist to link suppliers and companies together and form business relationships. Generally, they take on the majority of the risk. From payment terms, negotiating, quality checks and due diligence, sourcing companies can offer an efficient way of finding suppliers for you. Effectively through utilizing their own supplier network, they can find the perfect supplier for you.
Such services are not free. The initial cost can be quite high, especially from the perspective of entrepreneurs just starting out. However, cost savings are made through efficiency and by reducing the level of risk you are exposed too. Short term investments can pay dividends for years to come. A reliable supplier can act as a crucial component to your business.
The cheapest option is to always do it yourself. Despite the task taking a large amount of time, you can find the perfect supplier that suits your needs. Others prefer to hire professional help to ensure the journey goes smoothly. Companies prefer to stick to their strengths, which may be in marketing or sales. Remember to always carry out sufficient due diligence if you prefer to source your own supplier. Hiring professional help is a wise move, but for firms on an extremely tight budget, this initial outlay may not be possible.
Success in China is all but guaranteed. Many large international companies have tried entering the Chinese market and failed. However, do not be discouraged. Learn from the mistakes of Western market leaders. The Chinese market is challenging, but if you can crack the environment you can benefit greatly.