MAI knowledge

Complexities of the Chinese Market

August 16, 2017

Most companies now understand that China is a huge market, and that there is immense opportunity for companies that can make a successful expansion into the Chinese market. While this is absolutely true, we see that many companies still carry a relatively simplistic view of China. Many fail to see the complexities of the market and how it’s not just about the process of entering China, but building successful relationships and operating in China over the long term.

 

China is more than one market

One of the most common misunderstandings companies have when they are considering expanding their business into China is that they see China as one market. The reality is that China is fragmented into many different markets, each with their own ways of operating and consumer preferences/trends. It is for this reason that a company’s China strategy may need to be adjusted based upon which specific city or region within China that you wish to expand to.

Chinese cities are generally considered to fall within 4 different tiers, and they are ranked by factors such as GDP, population, income level and business activity.

Tier 1 cities are places like Beijing, Shanghai and Shenzhen, which have large populations with the highest disposable incomes. Tier 2 cities are less populated with lower disposable incomes, then Tier 3 and so on. Opting to enter a higher tier city makes more sense when selling more premium, higher end products, whereas lower tier cities generally tend to offer more growth opportunities and less competition, many cities ranked in the lower tiers can still have relatively large populations when compared with countries like Australia, there are 176 cities in China with populations over 1 million people.

This is why simply tailoring products for “Chinese consumers” as a whole is sometimes not sufficient, as consumer preferences can differ vastly from region to region. For example, consumers in Tier 1 cities often buy from more premium sales channels and have a much higher brand awareness of foreign brands than those in Tier 2 and 3 cities, who often favour cheaper domestic brands over foreign ones, and in southern parts of China, consumers tend to favour the taste of more diluted juices than those in the north. [1]

Understanding which regions are best suited for a company are essential for a successful China expansion.

 

Importance of a Local Partner

Determining which cities to expand to first, and how to operate sales, marketing, logistics within these cities can be very difficult, particularly for a foreign company that has little to no experience operating in China. Which is why having high quality local partners is highly important.

Partners in China have a level of local knowledge that is difficult to match for expanding foreign companies. Despite the obvious advantage of speaking the language, local partners have history of operating within the Chinese market, and through their own networks can often provide access to even more key business and government contacts within an industry.

A good example of this is the recent success in China of various Australian vitamin and baby formula companies like Blackmores and A2milk. These companies recognise the importance of partnerships is China, and have built strong partnerships with parties across importation and supply chain management, retail and distribution, government and industry associations.

 

Chinese business culture

Before you can officially call somebody a Chinese Partner, you must first build a relationship with them, which can be harder that it may seem. The ability to build and maintain business relationships in China is considered just as important as having a great product or a sizeable amount capital.

Unsurprisingly, Chinese business practises stem from Chinese culture, which has developed over thousands of years. Much of today’s business practises in China come from Confucianism, which promotes values of respect, seniority, loyalty and family. These Confucian values have translated into a business culture that is centred around corporate hierarchies, punctuality, saving “face” and a focus on curating trusted networks and personal relationships.

The broader term for building networks and relationships in China is “Guangxi”, which is centred around building relationships that are deep, long term and mutually beneficial.  Asking for too much too quickly will hurt a company’s chances of developing business relationships and can tarnish their reputation.

One of the best ways to make connections and develop relationships is by way of a formal introduction by an already mutual connection, a partner with a large network of contacts is more respected and can more easily connect companies with key decision makers.

At MAI Capital, we have built these long standing trusted relationships that enable us to draw on our network in order to assist our Australian partners tackle the complexities and nuances associated with expanding into China.

References:

[1] L.E.K Consulting, Consumer Spotlight; China (2013)

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