If you have made the decision to establish yourself in China, you should know that you will now be dealing with the largest overall opportunities of our time. At the same time, you will be dealing with a market with perhaps the fiercest competition in the world. In this article, I will discuss some tips and considerations when starting to do business in China. The article is particularly directed to Finnish companies, but many of the issues that I discuss are applicable to many other European countries as well.
The rate of change in China is rapid
It is difficult to overemphasize this. EU’s gross national income per capita (GNI) in current USD has increased at a compounded rate of 3% since 2000 (2% for Finland). In China, the compounded growth has been a staggering 15%. To put this into perspective, in EU the GNI has roughly doubled during this period, while in China it has grown 15-fold!
During the last couple of years, China has transformed from a laggard position of a cash-based society into a pioneering mobile payment one. Shared bikes kicked off in a wide variety of cities and became widely adopted in a matter of a year or so. Hit games such as Tiao Yi Tiao reach level of 100M users in a matter of a few days! Just visiting a random city in China after two years is a stunning experience with all the new high rises and roads that just weren’t there the last time.
China is the most fiercely competed market in the world with a strong local flavor
China is by far a more competitive market than the world’s largest economy, the USA. When compared to a country like Finland, the difference is even greater (even though Finland can claim a high ranking in talent competitiveness worldwide). In fact, if a Finn finds himself not liking a service being provided, s/he is regularly left with no other option than to bite his/her lip and just take it (and Finns have grown quite accustomed to this behavior). In China, however, you will regularly have countless options conveniently available to replace an underperformer. To thrive, you truly need to be exceptional in some way. And expect every aspect of your exceptionality to be replicated (and improved) in an instant by multiple competitors.
As for the local preferences, it is crucial to understand the Chinese consumer. Unfortunately, this task really requires local understanding. This understanding needs then to be a key input in creating the offering. To get a quick idea of the importance of the local flavor, I recommend reading a recent article in the New York Times titled “Aiming at China’s Armpits: When Foreign Brands Misfire” that provides insight into a few products that failed in China due to differing consumer tastes.
Single seat karaoke booths is a recent example of local consumer taste in China
Businesses or consumers as customers?
If your customers are businesses, odds are you have some advanced technology that makes your offering stand out from the crowd. Here you may be wary that once you start doing business in China, you may lose your edge if you don’t properly protect your IPR. However, being overly concerned with imitation and IPR may unnecessarily delay market entry. The reality too often is that if you don’t move fast in bringing your offering to the market, the train has already left the station with someone else reaping the benefits that once were yours to take.
For those companies with consumers as their end customers, it is critical to understand the local tastes of these consumers. This requires having on board a visionary local colleague with meaningful decision-making power over key strategic considerations. For start-ups, ideally the founding team has a member who was born and raised in China. A case in point: A few years ago, a multinational western company tried to bring their international offering to China with the help of a local team, without success. Later the same local visionaries set up their own company, and this time without having to work with the global restrictions, developed a more locally relevant offering for the market and have now established themselves with a solid market position.
For companies selling physical goods with established brands, a well-thought channel and retail strategy is critical for success. These companies need to ensure a way to deliver the products to consumers while appropriately controlling the retail experience as well as ensuring channel stability to sustainably protect the brand value and channel economics. This requires careful consideration into which partners and channels to use, but also into which parts of the value chain should be kept in-house and how the practical co-operation with the distributors should be orchestrated.
Support for planning the entry and setting up operations
Obviously, market entry needs to be planned carefully, and it all starts with creating a solid understanding of the market. There is abundant help available in crafting an understanding of the competition, market opportunity, and the customers. In Finland, Business Finland operating under the Team Finland umbrella is a good first point of contact to seek for help. They are willing and able to provide advice where they can, and direct you to trusted partners for further assistance in areas where they cannot provide direct support. Shanghai FinChi Innovation center, also part of Team Finland, provides a wide range of services for start-ups and SMEs, including virtual office, office space, cash management, HR services, logistics support etc. They can also help with accounting and legal entity registration. There will be many areas where they may not be able to help directly, but they again will be able to direct you forward in their network.
In Finland, Business Finland (formerly Tekes) provides various types of funding for start-ups to develop their offering as well as help in internationalization. Companies should reach out and see if they are eligible for such funding or other publicly available funding. In the private sector, in addition to western VC money, there is also Chinese funding available, which may be an interesting option to look into for some companies. Comb+ is an example of such a fund that focuses on Finland and the Nordics. It also provides other services for startups aiming for the Chinese market.
The Finnish (or other European countries’) business councils in China are another stone to be turned. They can help open doors and have wide networks in China. They also organize useful events, recent example of which is “Belt and Road – Business Across Asia and Beyond”, which was co-organized by Finnish Business Council in Shanghai, SwedCham China and BenCham and was held in Shanghai late January. Such events provide valuable insight into specific relevant topics in China as well as opportunities for networking.
Consul General of Finland in Shanghai Jan Wahlberg kicking off a Finnish Business Council in Shanghai event in February 2018
Date posted 08.02.2018
GNI data: World Bank