What you need to know to establish a business in China
It was one of the most symbolic failures to affect a Western firm in China. In 1993, Australian brewer Foster embarked on a quest to conquer the Chinese market. The lure was understandable: China is the premier world market for beer. To speed up market penetration, Foster immediately bought out three leading local breweries in Shanghai, Guangdong and Tianjin. The firm then launched a national campaign to impose its brand name. Sadly, however, the market proved far less lucrative than anticipated. Prices were low, consumer interest in a premium foreign brand limited. To make matters worse, Foster committed one commercial blunder after another, offering lager in brown ale areas, light ales in areas where strong ale was the majority choice.
Fierce competition. In June 2006, Foster decided to sell off its last Chinese holdings, ending a thirteen-year presence in the country. Thirteen years in which they didn't make a yuan. This unhappy episode illustrates the harshness of the Chinese market, without a doubt among the most competitive in the world. When Western companies dream of establishing themselves in China, they frequently have exaggerated expectations, even fantasies, fuelled by the gigantism of an economy which, each year, manufactures 50% of the world's cranes, builds 5,000 kilometers of motorways and is expanding by the equivalent of Italy's GDP. As Laurence Parisot, head of the French employers' union and director of the IFOP poll institute, recently quipped, "the Yangtze is not a long and tranquil river". It isn't enough to have a good product or service in order to succeed. You have to prepare your entry meticulously, commit yourself 100% on the ground, bring the best you've got and be flexible in how you achieve your targets.
In spite of the world crisis suddenly hitting the workshops of the world (for example, half of all toy manufacturers have closed down), the environment is not unfavorable. Admittedly, Chinese growth has slowed down: analysts are predicting 7-8% in 2009 compared with 12% in 2007. But the Chinese economy will not collapse. Exports of consumer goods to the West now contribute only around 10% to the growth rate. And in spite of the crisis, China's contribution to overall industrial capacity in the Asia-Pacific zone is expected to reach 50% by 2020 (compared with 25% today)!
Thirty years after the famous "get rich" speech given by Deng Xiaoping, 2008 saw a new stage in China's development. The domestic market is now the driving force behind the economy. The dynamic factors are: urbanization (45% of Chinese currently live in towns, a figure predicted to rise to 65% by 2025, representing almost 1 billion people), a significant need for infrastructure (50% of world investments, the annual construction of the equivalent of all the power stations in France) and the government's wish to acquire world leaders like Lenovo (IT), Haier (electrical goods) and Huawei (telecommunications components manufacturer).
Rural poverty. To make the transformation successful, China must provide support for the center and west of the country, which are still lagging considerably behind. This is why a far-reaching plan of subsidies benefiting 600 million rural inhabitants has been announced, with the objective of doubling their income by 2020. Income differentials – a statistic to take to heart if you hope to sell in China – remain considerable. In Shanghai province, the average income is EUR 2,500 per annum and in Beijing province, the figure is EUR 2,350, but in the poorer provinces such as Xinjiang, the figure drops to EUR 1,100. Inhabitants in remote rural areas in China still exist on less than EUR 1 a day and are flocking to the cities to improve their lot. There are 150 million migrant workers in the country. The urban population is concentrated in four major economic zones. The northwest, around Beijing or Tianjin, primarily accommodates heavy industry and Korean and Japanese investment. The Yangzi Jiang (formerly Yangtze) delta in the southeast, around Shanghai, Hangzhou and Ningbo, is the cradle of high-tech and there is a strong Taiwanese and Singaporean presence. The south, around Canton, Shenzhen and Dongguan, is home to SMEs in the consumer electronics sector and has a strong presence of capital from Hong Kong and Taiwan. Finally, in the center, the economic zone surrounding Chengdu and Wuhan, the most densely populated in the country, is regarded as a priority by the Government.
Of the hundred towns in China with over a million inhabitants, four conurbations (Beijing, Shanghai, Canton and Shenzhen) are conspicuous by their wealth. Per capita income is EUR 5,130 per annum, compared with an average figure of EUR 2,900 in the other 56 main towns. Daily per capita expenditure shows the sharpest differential, EUR 173 compared with EUR 104. Of these city dwellers, 3% earn over EUR 20,000 per annum and 300,000 have assets in excess of EUR 800,000 (excluding housing).
Income level is not the only factor to be considered. The consumer profile varies considerably from one region to another. Frivolous and fashion-minded in Shanghai, the consumer becomes conservative and focused on capital goods in Beijing and cost-conscious in Canton. Young people under the age of 30 are increasingly dissociating themselves from the cautious values of their elders in a country where individuals traditionally save much of their income, particularly due to the lack of a social security system. Another new phenomenon is the rising generation's greater ethical awareness and respect for the environment and anti-corruption measures. Finally, young people are more mobile and travel once or twice a year, taking leisure trips lasting four to five days, mainly inside the country. Use of the Internet is widespread among the young (over 200 million surfers and a usage rate close to that in the US). The majority use the Internet primarily to download films and music or to play games online. Only the richest (those earning more than CNY 100,000 or EUR 11,400 a year) purchase goods on the Web and have recourse to financial services.
Networks of influence. Is it enough to adapt Western products in order to succeed in China? A number of SMEs venture into the country without any in-depth market research or relying on dubious official statistics. Market research is essential if one is to avoid missing one's target, or even committing cultural faux pas. For example, the Chinese consume yoghurt drinks through a straw only; it is therefore useless to expect them to imbibe French-style yoghurts. In beauty care, women wear brighter colors for make-up in the north than in the south. In the clothing sector, women rarely wear yellow, a color once reserved for the emperor that now carries a licentious connotation (pornographic films are known as yellow films). Women like bright colors such as pink and red, and complicated cuts, with multiple pockets and yokes. Driven by a fierce desire for revenge on the West, the ability of Chinese companies to set new standards (liable to be imposed on us within a decade) cannot be underestimated.
The cultural gap widens when one attempts to familiarize oneself with Chinese business culture. In China, trust is built up over time: "he who gains the heart of men will succeed", says the proverb. To ensure the success of your projects, you will have to cultivate an ongoing network of influence ("Guanxi"), always show willingness, find reliable information channels and be able to decode messages. For this reason, a direct presence is necessary in order to retain orders and train Chinese managers with special care to keep them on the right wavelength. Quite a challenge in an environment in which the turnover of executives is frequently 35%. This is why many Western companies decide to sinicize their management. For example, 11 of the 13 factory bosses at Germany's BASF are Chinese. Commitment on the ground is also essential, to be able to monitor your distribution channels and make sure your sales strategy is on track: a premium product could easily end up being sold cut-price in a dusty outlet.
When doing business in China, you have to foresee the unforeseeable. In other words, show flexibility in an ever-changing environment. The legal soundness of contracts is therefore entirely relative, the spirit being more important than the letter. To the Chinese, a contract is endlessly negotiable and amendable: rather than crystallizing relations, it paves the way for a long-term relationship. This instability is also due to the fact that the economic fabric is piecemeal, made up essentially of SMEs: 62% of exports and 56% of the gross domestic product is achieved by companies with sales of under EUR 35 million. On ultra-competitive markets, it is prudent to identify the forces at play and contrive a fall-back solution: the war will never stop. A Western fruit juice manufacturer holding a leading position in a province was forced to abandon the market in a matter of weeks because his distributor suddenly changed partners, allying himself with the number two company. Under these circumstances, legal action is rarely a solution, as exemplified by the problems suffered by Danone and Schneider Electric. "To win a lawsuit is to acquire a hen and lose a cow," say the Chinese.
Fierce competition. In June 2006, Foster decided to sell off its last Chinese holdings, ending a thirteen-year presence in the country. Thirteen years in which they didn't make a yuan. This unhappy episode illustrates the harshness of the Chinese market, without a doubt among the most competitive in the world. When Western companies dream of establishing themselves in China, they frequently have exaggerated expectations, even fantasies, fuelled by the gigantism of an economy which, each year, manufactures 50% of the world's cranes, builds 5,000 kilometers of motorways and is expanding by the equivalent of Italy's GDP. As Laurence Parisot, head of the French employers' union and director of the IFOP poll institute, recently quipped, "the Yangtze is not a long and tranquil river". It isn't enough to have a good product or service in order to succeed. You have to prepare your entry meticulously, commit yourself 100% on the ground, bring the best you've got and be flexible in how you achieve your targets.
In spite of the world crisis suddenly hitting the workshops of the world (for example, half of all toy manufacturers have closed down), the environment is not unfavorable. Admittedly, Chinese growth has slowed down: analysts are predicting 7-8% in 2009 compared with 12% in 2007. But the Chinese economy will not collapse. Exports of consumer goods to the West now contribute only around 10% to the growth rate. And in spite of the crisis, China's contribution to overall industrial capacity in the Asia-Pacific zone is expected to reach 50% by 2020 (compared with 25% today)!
Thirty years after the famous "get rich" speech given by Deng Xiaoping, 2008 saw a new stage in China's development. The domestic market is now the driving force behind the economy. The dynamic factors are: urbanization (45% of Chinese currently live in towns, a figure predicted to rise to 65% by 2025, representing almost 1 billion people), a significant need for infrastructure (50% of world investments, the annual construction of the equivalent of all the power stations in France) and the government's wish to acquire world leaders like Lenovo (IT), Haier (electrical goods) and Huawei (telecommunications components manufacturer).
Rural poverty. To make the transformation successful, China must provide support for the center and west of the country, which are still lagging considerably behind. This is why a far-reaching plan of subsidies benefiting 600 million rural inhabitants has been announced, with the objective of doubling their income by 2020. Income differentials – a statistic to take to heart if you hope to sell in China – remain considerable. In Shanghai province, the average income is EUR 2,500 per annum and in Beijing province, the figure is EUR 2,350, but in the poorer provinces such as Xinjiang, the figure drops to EUR 1,100. Inhabitants in remote rural areas in China still exist on less than EUR 1 a day and are flocking to the cities to improve their lot. There are 150 million migrant workers in the country. The urban population is concentrated in four major economic zones. The northwest, around Beijing or Tianjin, primarily accommodates heavy industry and Korean and Japanese investment. The Yangzi Jiang (formerly Yangtze) delta in the southeast, around Shanghai, Hangzhou and Ningbo, is the cradle of high-tech and there is a strong Taiwanese and Singaporean presence. The south, around Canton, Shenzhen and Dongguan, is home to SMEs in the consumer electronics sector and has a strong presence of capital from Hong Kong and Taiwan. Finally, in the center, the economic zone surrounding Chengdu and Wuhan, the most densely populated in the country, is regarded as a priority by the Government.
Of the hundred towns in China with over a million inhabitants, four conurbations (Beijing, Shanghai, Canton and Shenzhen) are conspicuous by their wealth. Per capita income is EUR 5,130 per annum, compared with an average figure of EUR 2,900 in the other 56 main towns. Daily per capita expenditure shows the sharpest differential, EUR 173 compared with EUR 104. Of these city dwellers, 3% earn over EUR 20,000 per annum and 300,000 have assets in excess of EUR 800,000 (excluding housing).
Income level is not the only factor to be considered. The consumer profile varies considerably from one region to another. Frivolous and fashion-minded in Shanghai, the consumer becomes conservative and focused on capital goods in Beijing and cost-conscious in Canton. Young people under the age of 30 are increasingly dissociating themselves from the cautious values of their elders in a country where individuals traditionally save much of their income, particularly due to the lack of a social security system. Another new phenomenon is the rising generation's greater ethical awareness and respect for the environment and anti-corruption measures. Finally, young people are more mobile and travel once or twice a year, taking leisure trips lasting four to five days, mainly inside the country. Use of the Internet is widespread among the young (over 200 million surfers and a usage rate close to that in the US). The majority use the Internet primarily to download films and music or to play games online. Only the richest (those earning more than CNY 100,000 or EUR 11,400 a year) purchase goods on the Web and have recourse to financial services.
Networks of influence. Is it enough to adapt Western products in order to succeed in China? A number of SMEs venture into the country without any in-depth market research or relying on dubious official statistics. Market research is essential if one is to avoid missing one's target, or even committing cultural faux pas. For example, the Chinese consume yoghurt drinks through a straw only; it is therefore useless to expect them to imbibe French-style yoghurts. In beauty care, women wear brighter colors for make-up in the north than in the south. In the clothing sector, women rarely wear yellow, a color once reserved for the emperor that now carries a licentious connotation (pornographic films are known as yellow films). Women like bright colors such as pink and red, and complicated cuts, with multiple pockets and yokes. Driven by a fierce desire for revenge on the West, the ability of Chinese companies to set new standards (liable to be imposed on us within a decade) cannot be underestimated.
The cultural gap widens when one attempts to familiarize oneself with Chinese business culture. In China, trust is built up over time: "he who gains the heart of men will succeed", says the proverb. To ensure the success of your projects, you will have to cultivate an ongoing network of influence ("Guanxi"), always show willingness, find reliable information channels and be able to decode messages. For this reason, a direct presence is necessary in order to retain orders and train Chinese managers with special care to keep them on the right wavelength. Quite a challenge in an environment in which the turnover of executives is frequently 35%. This is why many Western companies decide to sinicize their management. For example, 11 of the 13 factory bosses at Germany's BASF are Chinese. Commitment on the ground is also essential, to be able to monitor your distribution channels and make sure your sales strategy is on track: a premium product could easily end up being sold cut-price in a dusty outlet.
When doing business in China, you have to foresee the unforeseeable. In other words, show flexibility in an ever-changing environment. The legal soundness of contracts is therefore entirely relative, the spirit being more important than the letter. To the Chinese, a contract is endlessly negotiable and amendable: rather than crystallizing relations, it paves the way for a long-term relationship. This instability is also due to the fact that the economic fabric is piecemeal, made up essentially of SMEs: 62% of exports and 56% of the gross domestic product is achieved by companies with sales of under EUR 35 million. On ultra-competitive markets, it is prudent to identify the forces at play and contrive a fall-back solution: the war will never stop. A Western fruit juice manufacturer holding a leading position in a province was forced to abandon the market in a matter of weeks because his distributor suddenly changed partners, allying himself with the number two company. Under these circumstances, legal action is rarely a solution, as exemplified by the problems suffered by Danone and Schneider Electric. "To win a lawsuit is to acquire a hen and lose a cow," say the Chinese.
