9 Tips for Exporting Product to China

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China is the world’s second largest economy and a major source of global growth. Economists predict that in the next decade China will overtake the United States and become the world’s largest economy. Rapid urbanisation will see an additional 200 million people added to China’s urban population by 2025. The impact of this urbanisation, when coupled with rising per capita GDP and increasing disposable incomes, will result in changing patterns of domestic consumption.

There are now more than 160 cities with populations over one million, and 14 cities with populations over five million. In addition to tier one cities, there are many tier two, tier three and tier four cities, particularly in Western China, that present real and increasing opportunities for foreign business. Many of these cities maintain double digit GDP growth. Estimates indicate that China’s middle class will exceed 50 percent of the population by 2020. China’s growing middle class together with rapid urbanisation will continue to fuel demand for services such as education, tourism, health care and urban design and planning. Higher disposable income will also lead to increased preferences for safe, clean food and beverages, particularly those high in protein.

However, China is a very complex place to do business. Barriers for exporting product to China still exist for small businesses. Small business owners often lack information about exporting product to China, they have an unclear understanding of how to get started, fear they won’t get paid by customers, and believe that exporting product to China is too costly. The complexity of exporting product to China varies by product and industry, but there are some common tips for exporting product to China.

E-Commerce

China has become the largest e-commerce market in the world, overtaking the USA in 2013. There is an estimated 600 million internet users, and an estimated 350 million online shoppers. According to the Chinese Ministry of Commerce and China E-Commerce Research Centre, online retail sales in China for 2014 reached 2.8 trillion RMB, growth of 49.7 percent compared to 2013 and accounted for around 10 percent of all Chinese retail transactions.

China’s large and growing middle-class have become accustomed to making frequent e-commerce purchases. Furthermore, as in many longer-standing e-commerce markets, they are also developing brand awareness, an increasing proclivity to purchase high quality and/or individually satisfying products, and showing a commitment to brand loyalty and repeat business.

E-commerce is well-suited to smaller scale foreign companies looking to enter the Chinese market without needing to invest in a traditional bricks and mortar presence. It offers the opportunity for a relatively straight-forward, fee-for-service, pathway to Chinese consumers.

While in the western world it is true that all businesses must appear on the first page of Google if they are to be noticed, the same is true in China, except that the dominant search engine here is Baidu. But many foreign companies are nowhere to be found on Baidu, this is due to Google-centric SEO techniques, which do not work on Baidu, foreign businesses need to establish a internet presence in China, as it is unlikely that they already have one. Mandarin pages appended to a English website simply do not register in web searches in China, It must be registered in China with an ICP licence, and hosted within the Chinese governmental firewall.

Tariffs taxes and regulation

China has a compound import tax system. The General Administration of Customs of China publishes an annual tariff schedule including HS codes, import tariff, import value-added tax (VAT) and import consumption tax rates. Import VAT is levied on almost all products, with most subject to a rate of 13 percent or 17 percent. Import consumption taxes ranging from one percent to 40 percent are charged on a number of consumer goods, such as tobacco, liquor, cosmetics, jewellery, automobiles, high-end watches

Over the past 30 years, China has been transformed into a powerful economy with a vast capacity for manufacturing and exporting. Many European manufacturers have felt unable to compete with its ability to churn out a never-ending stream of cheap goods. However, as its wealth has grown, it has increasingly become a destination for export, and many foreign companies are already making significant progress, Smaller niche companies are also establishing market bases in China.

Get to know the market

China has a population in excess of 1.3 billion. It has no fewer than 160 cities, with a population of more than one million. Its industrial and economic progress over the past few decades has been staggering. Towns have become cities, small fishing villages turned into busy urban centres. However, amid this boom there are gaps and niches looking to be filled by savvy entrepreneurs. To find these gaps, businesses should undertake desktop research and follow that up with conversations and communication with bodies such as Jingle Office and other business partners in China.

Get to know the market is essential before entering any new market, but China’s complexity and sheer size make it a unique challenge. Imagine a country as large and diverse as Europe, and you begin to get the picture. The opportunities are too great to ignore, but the risk and price of a failed market entry can be especially high. Jingle Office can help you look at the options available, give you independent guidance, and commission focused research so that you make the right decisions for your business.

Think Chinese

Although the market is huge, there are few fast bucks to be made in China. Businesses that want to succeed typically need to show they are there for the long-term. Entrepreneurs say Chinese businesses are very excited by the prospect of overseas investors and growth in imports. However, they want to deal with western companies on an equal footing, and are looking to build relationships that will mature over time. Forging an alliance with a well-respected and trusted distributor or partner can open doors, and help you to avoid any pitfalls. Some businesses choose instead to open offices and employ native staff, which in itself shows commitment. With either of these options, businesses must choose their partners very carefully.

Resilience

Resilience will be needed if you’re to tackle China well.  Building business here in China takes time, and setbacks are to be expected.  Despite China having a strong infrastructure and a stable political system, The Economist Intelligent Unit rated China “high” for legal/regulatory risk and “high” for labour market risk in 2015.  Both of these can hurt pretty hard in the first couple of years of market entry, as you might be trying to deal with import licenses, an unfamiliar tax system,  business registration and remote employees.

You can prepare for these by getting good advice upfront, which will help you to set expectations and budgets wisely.  And if you’re planning to register an entity in China, there are some good “toe in the water” options available from Jingle Office.

Relationships are crucial for exporting product to China

Relationships are crucial for Exporting product to China.  Take note of this – Chinese prefers to do business with trusted friends, and this important fact has many implications for business strategy.  As a simple example, you should budget for senior managers to visit potential partners/clients in China more than once before any significant sales are expected to be made.  But that’s just scratching the surface.

You may want to find an agent or distributor – getting the right one(s) for your particular product and target market could be the difference between sales generation and sales frustration.  Once again there are many options available. Jingle Office can help you find suitable candidates,  build connections and set up quality distributor arrangements.

Tapping all available resources

Once a company has found a market for its product, it can face a mountain of paperwork and procedures before exporting. Fortunately, Jingle Office are in the position to assist with “wading through all those documents.”

It is important to find a good business partner or import agency, who should be well versed in the necessary paperwork & application for approval. Vetting potential buyers and finding trade leads is often easier with the help of a local business expert, who have industry-specific connections and China-specific experiences and expertise, they will help you get in touch with Chinese buyers and distributor, and leading to breakthroughs for your business in China.

Investing time and resources

Between finding the right customer, arranging logistics, dealing with paperwork and fulfilling orders, exporting product to China can take a lot of time. Small businesses just starting to export to China need to have patience. It doesn’t have to be a big expenditure in money but it does have to be a big expenditure in time. Even so, it can be easy to get discouraged.

It will take you a few months to figure out pricing and shipping. You need to figure out how to price your product so you can make money and sell it well, and how to get it over to China and get paid. You have to have a vision for the long term. Hiring a business partner who can bridge the linguistic and cultural divide can be important, and will make a huge difference.

Intellectual Property (IP) & Business Secrets

China is a dominant force in the manufacture of everyday items such as clothing and household appliances. But product manufactured from Europe,U.S, Australia, Japan, South Korea, which are increasingly specialised, niche and often advanced, can find a market in China. However, before businesses begin trading they must also ensure their intellectual property (IP) is protected and choose their business partners in China carefully. Fraud and corruption are still big problems in China, and foreign entrepreneurs attest to the fact that there are those who attempt to steal their business secrets. Foreign businesses need to take legal advice to ensure their patents are valid in China, but also be careful to guard their business secrets as much as possible.

Registration of your Intellectual Property in China should be done as early as possible.  China has a “first to file” system, so if someone else registers your trade names or trademarks before you do, they have the legal right to them.  Make sure that you get help from an IP law specialist who has good experience in China. Now is also the right time to ask – are our current names and logos suitable for China or not?  What should they be?  Some English words and names are hard to write and even pronounce in Chinese, or may carry an unintended meaning because of their sound.  Jingle Office can help you with these problems, and our local experts will assist you with name choices & logo designs, and many other finer details about exporting product to China.

Related reading: Top 10 Considerations for Exporting to China.

Pros and Cons of Starting Business in China with Ecommerce

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The internet is a natural place for foreign businesses to look at to expand your business in China with Ecommerce. Even a very small company can become a global influencer just by making their products available online. Before exploring ecommerce as an option for expanding your business into China, however, it is important to look at several of the pros and cons of starting business in China with Ecommerce and what such a decision would bring.

The Pros of Starting Business in China with Ecommerce

1. The shopping process becomes much more convenient.
An effective ecommerce solution allows customers to shop from the comfort of their home or while they’re on the go with a mobile device. Instead of visiting the brick and mortar store and the time investment that takes, it only takes a couple of clicks to purchase the items which are needed.

2. You don’t need to have physical inventory space. 
You can sell products online without needing to have the items directly in stock on a store shelf with an ecommerce solution. This gives you a bit more freedom with your inventory costs and may potentially reduce tax liabilities at the end of the year if you run low stock numbers.

3. Even remote customers can access your products. 
You might have your business in the city of China, but someone 100 miles away might need what you’ve got. Instead of the time it takes to drive 200 miles round trip to get what they need, the rancher can place an order through your online store and have you ship the product to them. This convenience allows your China business to reach more China prospects that they may not normally be able to reach.

4. It allows a business to offer more choices. 
Because you don’t need to run high inventory numbers to make sure products are always in stock, an online store allows you to sell a wider variety of items. This means you can sell items in more sizes, have more color options, or represent more products within a popular manufacturing brand than you would at your physical location.

5. Ecommerce solutions are open 24/7 with 99+% uptime. 
This means Chinese consumers can access your store at any time of day that is convenient for them. Instead of rushing to meet the 6pm closing time you’ve got, they can come home from work, have dinner with the family, tuck the kids into bed, and the shop for something that you’ve got. This convenience for the consumer cannot be overstated.

6. Purchases can sometimes happen in real time. 
If you’ve got a PDF that people want or an MP3 file that contains some popular music, then you can still give customers the instant gratification of a purchase. They pay for the product and this allows them access to download it directly to their computer. Having transactions in real time is a definite benefit, although fast shipping times, such as Amazon Prime’s free 2 day shipping policy, can also provide the instant gratification customers enjoy.

7. You can develop new vendor relationships. 
Because your inventory is online, vendors can see what products you’re offering. They can bid to have you represent them. The new relationships can help a business be able to increase their profit margins without changing their costs and that’s always a good outcome.

8. You can quickly scale up or down based on your personal preferences. 
Starting Business in China with Ecommerce lets you add or remove products from your store with just a couple clicks of the mouse. Because there are no physical limitations on space, a business can experiment with new product lines or limit inventory options if sales are sluggish.

9. Communication can be fast and automated. 
There are common questions which every business owner gets asked. Instead of needing to physically answer this question repetitively throughout the day, Starting Business in China with Ecommerce allow you to automate the process. You can upload a FAQ page with answers. Automated emails, chat boxes, and contact requests all make it easy to get in touch with you if a customer has a question.

10. Different currencies can be handled automatically. 
You can accept multiple currencies and not worry about the exchange rates with ecommerce. You also don’t need to handle a lot of cash or run batch transactions either. Much of the payment process is completely automated.

The Cons of Starting Business in China with Ecommerce

1. It is difficult to give consumers a “personal touch.” 
Sociability is reduced in the online shopping process. Instead of striking up a conversation or starting a relationship, most online stores just have customers find what they need, add it to a shopping cart, and then punch in their payment details.

2. It’s easier for customers to compare you to the competition. 
This can be a good thing, but for first-time ecommerce businesses, it tends to be more of a negative. If your competitors already have an online store, then there’s a good chance their pricing structure has already been optimized for the internet. Consumers are going to go where they can get the best deal and that might not be your business.

3. There’s no way to try a product before buying a product. 
For many customers, what seals the deal on a purchase is their own tangible first-hand experience with it. When shopping online, there is no way to really try out a product. Consumers are left with online reviews, videos, and pictures to see if they believe the value proposition offered by a business will stand up to the test.

4. Everyone needs to have a data connection of some sort. 
If Starting Business in China with Ecommerce is going to work, then both the customer and the business involved needs to have access to the internet. Should either connection be interrupted, the likelihood of a purchase happening is virtually zero no matter how good the ecommerce solution might be.

5. It can be difficult to verify a customer’s identity. 
Credit card fraud and identity theft are common issues which ecommerce businesses face nearly every day. Sometimes a fraudulent purchase means you lose your product and you lose the payment for your product. Insurance policies can protect you from this somewhat, but any type of insurance has some level of cost associated to it. One way or the other, you’re going to be paying something out.

6. What happens if the data you collected gets hacked? 
As many China ecommerce business have proven to us over the last 5 years, a financial data hack can be a very costly venture for a business. If you are collecting payment data for processing and that data is compromised, there may be costly legal obligations that could put your entire business at risk. Investing into stringent security is often necessary, but often costly, and that may make an ecommerce solution for some businesses a non-viable option right now.

7. You can’t always fix a delay. 
There will inevitably be a customer who receives a delay in the shipping of the product they’ve purchased. Because you’re using third party shipping companies, their delays become your delays. Every company starting business in China with ecommerce faces this risk. To satisfy upset customers, businesses often offer credits or discounts on future purchases, which can eat into your profitability.

8. If a site goes down, you get zero cash. 
There are many elements which go into a website remaining active online. From the hosting provider to the credit card processor to even your shopping cart installation, if anything in that purchasing chain breaks down, there’s a good chance you won’t be making any money at all until the problem gets fixed. Even an outage of just two minutes can cost you a substantial loss.

9. China ICP filing & licensing requirements on Ecommerce business can be time-consuming. 
We all know getting the right server to host your website is crucial, but when you want to maximize its hosting capabilities, the physical location of your server matters a lot too. When it comes to China, things get even more complicated because of its strict laws regarding the Internet. China has something it calls the “Great Firewall of China”, which is a nationwide effort by the government of the People’s Republic of China to regulate content from all websites. There is one other strict law enforced by the Chinese government, and it requires every website to have a valid ICP license.

ICP License is short for Internet Content Provider License, carried out by the Ministry of Industry and Information Technology in China, and has been in effect since 2000. Under Chinese law, all websites operating in China are required to get an ICP license, or else it will be blocked.

10. Shipping can add labor strains to your business. 
It takes time to package your items to prepare them for shipping. If you’re already short on time, then you’re stuck either hiring help for this process or slowing down your turnaround times and that places a strain on your business.

In Conclusion

Starting Business in China with Ecommerce can help you quickly expand into China market. Small businesses can become global enterprises. Opportunities from halfway around the world can make for local profitability. The benefits of being online are clear.

Yet so are the risks. Chargebacks can become a real problem for some businesses. Identity theft, credit card fraud, and hacking activities may all be very costly and could even run a business into bankruptcy under the right circumstances.

There is a lot to gain, but there are also certain risks that must be assumed. These ecommerce pros and cons for foreign business will help you to determine if going China market online is right for you. If so, then get started today so you can take advantage of everything the internet has to offer.

Related reading: 6 Keys to Start Your China Ecommerce Business.

4 Questions to Answer before Selling to China

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China now is open to more than just multinational corporations, but small business owners should evaluate their products objectively before taking the plunge. In the past, only multinational corporations (MNCs) had opportunities to sell products and services to China. Heavy import duties, cumbersome banking regulations, corrupt government officials, and a simple lack of basic knowledge about China prevented foreign small and medium-sized enterprises (SMEs) from succeeding in selling to China. Now today, though still not a free-market economy, China has opened its doors to businesses in a wide range of industries. The keys are to know what products and services to offer and how to sell using a new set of rules.

Selling to China is like selling anywhere else—except it has a few twists and turns. Those of us who went to business school learned about the “four Ps:” product, price, place, and promotion. They still apply in China but with minor changes and variables we don’t normally think of in the West. In China, intellectual property laws and enforcement affect the products you can sell, labor costs lower the price of products you produce and sell, drastic differences between suburban and rural lifestyles alter place, and language and everyday habits modify promotion.

Most SMEs follow the same strategies for China that they have used successfully in other foreign countries. There are many small business owners who are claiming that since they have already tackled South America, Eastern Europe, or Japan, China should be no different. It’s the businesspeople who have gone to China and failed and then realize they need some outside assistance.

Many people assume that anything and everything will sell to a country of more than 1.3 billion people. On the contrary, few industrial or consumer-related items actually do well in China; this is mostly because just about everything already exists in China—or at least can easily be copied—at half the price.

We offen ask a few simple but often neglected questions when examining whether a product or service will succeed in China. Try your best to answer these questions that follow even though most of them require knowledge and experience in China. For some, the answers will be intuitive, and no additional research will be necessary. Others may need to seek assistance from China experts, examine competitors’ positions in China, or conduct market studies in China.

The more you can answer “yes” to the following questions, the greater your chance of success in China. Most of the time we won’t work with a business unless it can answer yes to at least three out of the four questions; anything less would make for a difficult challenge. Look at your products objectively and answer the questions as honestly as you possibly can.

#1. Can you sell your products at a 25 percent discount or will your customers have their investment paid back within 9 to 12 months?

To sell your product in China, you must have either a cost or technological advantage. For example, if you make a plastic injection manufacturing machine that is similar to something that is already available in China, you’d better sell it for about 25 percent less than the local Chinese brand. If you cannot sell the product cheaper, then you must have a technological advantage (which will be addressed later in this article).

With a calculator and industry-related data, such as labor rates and fuel costs, we have analyzed the payback potential of foreign equipments, such as energy-saving cooling towers, automated assembly lines for disposable shavers, computer-aided laser cutting machines, and computer-aided design software. Unfortunately, most don’t make the cut because they have payback periods of more than four years. That’s not to say a market does not exist for these longer-payback items; larger state-owned enterprises or MNC subsidiaries may have an interest, as they have longer-term business outlooks. But foreign SMEs are usually looking to sell to other Chinese SMEs, and they just don’t have the appetite for high-capital investments that take time to reach their full payback potential.

Vision inspection systems are one example of an industrial success in the United States and Europe that has made little impact in China. These systems are high-resolution, high-speed cameras installed throughout a production line to catch faulty products and processes. They are popular for very critical components and products in the medical and semiconductor industries.

We have been approached by a producer of vision inspection systems that wanted to expand into China’s huge manufacturing industry. I thought the system made sense—it replaced manual labor, reduced the amount of bad products, and cut production downtime. I approached medical and electronics factories in China but was consistently laughed out of sales meetings. No Chinese factory was going to pay $100,000 to replace a few low-skilled, low-paid factory workers. Now, things are different because labor costs are rising dramatically, so these vision systems may yet have a chance.

Servomotors—miniature motors used to run machinery that need accurate and consistent power output—continue to sell very well in China. Textile machines, for example, run on many of these finely tuned motors that are needed for precision weaving and spinning thread. Less than a decade ago, German servomotors were two to three times more expensive than Chinese-made ones but had a payback period of six months due to reduced machine downtime and faster output. Payback periods are even better today, as most of the foreign servomotor manufacturers now produce in China.

#2. Are your products or services not having local competitors? Can they not be easily pirated?

You must make sure that your products cannot be copied in China. Legal protection through trademarks or patents is not a remedy because the Chinese legal system doesn’t do a good job in protecting intellectual property rights. There must be a foolproof method that ensures your product cannot be physically copied, pirated, or altered. Without these protections, don’t bother trying to sell to China. In fact, you could risk your existing sales outside of China, as the Chinese will find ways to penetrate international markets with pirated products.

A company produced boogie boards—miniature surfboards used at the beach—and wanted to introduce them to China’s coastal cities. They found an exclusive distributor, spent hundreds of thousands of dollars in marketing, and did well for six months before the distributor copied the product and sold them under a different brand name at half the price. Soon after, other plastics manufacturers copied the boards, which soon made their way across the Pacific to Hawaii and the US mainland, forcing this company into bankruptcy.

Along the same lines, don’t go to China if competent, local competitors already exist. You cannot make your product cheaper. The Chinese are experts in copying and making things cheaper. Many Western companies have tried to use the low-margin strategy to try to gain market share in China, and all have failed. On top of all this, a foreign SME’s cost structure will always be higher than that of local Chinese companies. Foreign SMEs bring expatriates, and have to retain Western lawyers and accounting firms. There’s also a hidden cost that foreigners are unaware of: They abide by Chinese laws when hiring local labor, paying taxes and duties, and repatriating funds. In comparison, many Chinese companies cheat on taxes, pay less than the government-established labor rates, and bribe customs officials when exporting finished products or importing components and raw material.

#3. Could the sale of your products in China account for between 20 and 25 percent of your total revenue within 5 to 7 years?

Small business owners are usually confused when they are posed with this question. They usually answer, “What’s wrong with just reaching 10 or 15 percent of total sales? Wouldn’t you consider that successful?” The short answer is no, but it depends on the specific industry. If margins are abnormally high, then maybe 10 percent is fine. If an industry has little or no organic growth, then going to China for small percentage gains sounds like a good plan. These are the exceptions.

For normal industries with 5 to 10 percent net margins and with revenue growing at about 3 to 7 percent domestically, there is no reason to go to China unless the sales potential will make an everlasting impact on the total business. The reason is simple: Too much sweat is required to succeed in China—so make it worth your while.

By now you know the hard work required to go to China; It will be a formidable task. A new strategy has to be in place with new partners, different marketing plans, and possibly even new products. This big effort better have a big payoff. Why do it unless it becomes a major part of your total revenue stream? We know the “25 percent in five years” plan is subjective and each business has its own ideas as to what constitutes a big number. The main purpose in asking this question is to make businesspeople think about their long-term China strategy. Don’t ever go to China thinking you can make a quick buck. Where do you want to be in five years, and is it worth the undertaking to reach that goal?

#4. Do your products or services offer a technological advancement that saves or improves lives, reduces energy consumption, or serves the present policies of the central government?

The last question as to whether a product or service has a technological advantage is self-explanatory. For example, Chinese hospitals want to save more lives with better medical technology, and Chinese consumers will pay more for 3-D televisions. The Chinese government wants to find ways to reduce pesticides in the nation’s water supply. In manufacturing, an example is laser cutting equipment that produced cleaner cut lines, thus increasing the quality of finished products, which could then be sold for higher prices. The Chinese government is also actively seeking disruptive, game-changing green technologies—smart grid, biofuels, high-energy batteries, and many others—and will gladly pay more to reduce their dependency on fossil fuels.

One industry in which foreign companies have a clear technology advantage is aviation. This especially applies to aviation electronics or avionics, as companies like Honeywell and Rockwell Collins are light-years ahead of Chinese companies. China’s commercial airline manufacturer, Commercial Aircraft Corporation of China Ltd. (COMAC), is using many foreign-made electronics in its new C919 regional jet, which it hopes to sell worldwide by the next decade. COMAC would prefer to use locally made electronics, but it would take the company too much money and time to get up to speed.

Further, a US Federal Aviation Administration (FAA) official in Beijing told me in 2011 that it would be highly unlikely that the FAA would approve any Chinese-made avionics equipment, thus also creating artificial barriers to entry. (Chinese-made aircraft need FAA approval if they plan to fly to the United States. The agency’s approval also signals that the aircraft meets international safety and quality standards.) Similarly, many of the major systems and components—landing gear, fuel system, and hydraulics—are also foreign-made or at least are designed by foreign aircraft parts companies, according to COMAC executives.

Similar opportunities exist in the healthcare, biotechnology, nanotechnology, oil and gas exploration, alternative energy—but not solar energy, which is already dominated by Chinese companies—and semiconductor industries. The Chinese are new to these markets, lack experience and education, see great domestic growth opportunities, and more important, cannot obtain new technologies without foreign assistance.

Avoid These 6 Mistakes When Doing Business in China Market

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China is fast becoming the consumer capital of the world. The Chinese market is large, but it is by no means easy. For the right companies, it can be massively profitable. But many other businesses have made some common mistakes and later slink away in defeat. Therefore, it is important for foreign companies to avoid the common mistakes. Jingle Office has summarized the top 6 mistakes that foreign companies should avoid in order to have a chance of success in China market.

1. Lack of due diligence

For any foreign company, no matter the size of the company, due diligence is an important and indispensable step when you decide to enter China market. Due diligence helps you know the market better, including the customer’s buying habits. Lack of due diligence may result in poorly structured, and, most of the time, failed investments. Many successful foreign companies fail in China because they do not conduct due diligence.

In 2009, Mattel built a Barbie store in Shanghai. Mattel designed a localized doll named Ling, hoping to appeal to Chinese customers. But it failed, because Chinese would not pay for expensive Barbie dolls like Americans, and Chinese prefer blond Barbie dolls to the ones with Asian features. So the store was shut down. After deep research, Mattel redesigned a Barbie doll for Chinese customers with an appropriate price. Its sales in China market tripled since it returned Chinese market in 2010.

Advice: Do due diligence before entering China market, and understand what Chinese customers need and like. Otherwise, no one will pay for your failure but yourself.

2. Not adapting products or services to fit local market demand

China is a unique country and totally different from the Western countries. Products or services that are successful in your domestic market, however, do not always meet with the same reception in China. Although there is a growing demand for high-quality foreign products, you will fail in the Chinese market unless you have a strong understanding of the local market and are able to adjust your products or services to fit the local customers. Many foreign brands are eager to share the China market, but only the companies that well combine their brand features with local tastes and preferences will succeed in China market.

A case in point would be Kraft’s Oreo cookies. When they first entered the China market, Chinese consumers did not like the cookies because they thought they were too sweet. In response, Kraft lowered the percentage of sweetener in the cookies to cater to Chinese taste. As a result of their adaptation, the company’s sales surged dramatically and Oreo achieved great success in China.

Advice: Make a deep investigation about local customers’ habits and preferences before entering in China, and adapt your products or services to meet the requirements of local market.

3. Treating China as one large, unified market

With nearly 1.4 billion populations, China is bound to be a highly diverse country. Cities in China are unofficially classified into four and even more classes. Tier 1 cities, such as Shanghai, Beijing and Guangzhou, have much higher per capita income than the other cities. And tier 2 cities are more developed than tier 3 and tier 4 cities. There are still poor regions in the west China. Therefore, do not treat China as one unified market. Make sure you design your marketing strategy and product positioning based on regional differences between these cities. Targeting China as a whole, you will likely dilute your efforts and drain your resources.

Philips shaver does well in designing its different price structures according to different areas. It sells its high-end products in the most developed cities, such as Beijing and Shanghai; While in less developed areas, it offers a less advanced product for a lower price. Because Philips realizes and values the regional differences in China, it holds the most market shares in the shaver market.

Advice: Fully recognize the regional differences, and design different marketing strategy based on per capita income, city or region and consumer behavior in different.

4. An inadequate understanding of Chinese culture

Cultural difference is an intangible but important factor for business success in the China market. The reason is that consumers grow up in a particular culture and become accustomed to that culture’s value systems, beliefs. Consequently, they respond to the messages that are congruent with their culture, reward advertisers who understand that culture and tailor product information to Chinese values. Lack of a comprehensive understanding of Chinese culture will result in marketing failure, let alone business success.

A typical example was the advertisement of Nike designed in 2004. Nike designed an advertisement in which an elderly Chinese man, a Chinese woman and two dragons were all beat by an American basketball player named LeBron James, hoping to express an encouragement of Chinese adolescents to be brave and defeat their fear. However, in fact, it was a huge failure in the Chinese market, and eventually was banned by China’s State Administration of Radio, Film and Television, because it was considered that the advertisement insulted Chinese traditional culture. The cause of its failure lies in the inadequate understanding of Chinese culture.

American fast food KFC clearly understands Chinese tradition and culture. KFC advertisements try to reveal the background of common Chinese families. KFC even uses the traditional Chinese Tang dress to attract more customers in Chinese Spring Festival. And it succeeds.

Advice: Find a local partner who is familiar with Chinese culture to offer help when designing marketing strategy.

5. Underestimating competitors in the China market

Don’t underestimate competitors in the China market. They know the market better and they have more experience than you do. Even if local companies are usually leading the low-end market and seem to be no harm, do not underestimate them because they already won Chinese consumer’s trust and this is the most important in the market. Learn from your competitors and find ways to do better than they do. Your ignoring the competition in China market may result in your failure.

In fact, many Chinese firms are winning not by competing just on price but on product quality, innovation and branding. Walmart has seen market share plummet. Its market share is not being taken by foreign competitors like Carrefour and Tesco but by large domestic chains like Lianhua that are opening small, neighborhood stores that sell key products consumers demand. Walmart did not adjust to the local competition by shrinking store sizes or selling higher margin products.

Advice: Investigate your key competitors in the China market, and figure out their strengths and weaknesses and yours. Clearly know in what aspect you can do better than your competitors. Keep an eye on the trend of your industry in the China market, and never underestimate your competitors.

6. Conflicting with the government

Do not underestimate the government power. In China, everything is connected in one way or another to it. Thus, you need to have good relations with it, respect it and adapt your strategy. Both foreign and Chinese companies can and do push the envelope from time to time, but any direct challenge to the government, or refusal to abide by its directives, is going to lead to a one-way ticket home.

Google is a classic example of this. Although the company had other problems in China, too, what ultimately proved its undoing was its failure to get along with the Chinese government. The back story here is long and complicated (and involves some alleged hacking on the part of Chinese authorities), but the endgame came when Google decided to stop censoring search results in China, which meant shutting down its mainland China search engine entirely. Since Google left China in 2010, its services are consistently either blocked or throttled to the point of being near-useless here.

When a foreign company takes on the Chinese government, there can only be one winner, and it won’t be the foreign company. Very few foreign companies have challenged the Chinese government outright in the way that Google did, but this is still something almost every company struggles with on a smaller scale. It can lead to big losses if you don’t account for it before entering.

Advice: Ideally you should select a local representative who is connected to the local government or who are experts in your industry.

Foreign companies should always keep in mind that China is different, and should have a thorough understanding of China. And Jingle Office is always here to offer advice and solution for you. 

Related reading: 12 Things to Do When Starting a Business in China

7 Potential Risks of Doing Business in China

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As the second largest economy in the world, the GDP of China continues to grow about 10 percent annually. Therefore, many articles about the China market stress the opportunity in China. Indeed, the appeal of the China market is strong, and there are great opportunities in the China market for foreign companies. However, you have to realize that with each opportunity there are commensurate risks.

Jingle Office, over ten years’ experience in China market, would like to share with you some insights about the potential risks of doing business in China.

1.  Cultural differences

You do not have to be fluent in Mandarin but you have to keep sensitivity to the Chinese culture and the way it impacts business. Chinese are proud of their thousands of years of history. They value family ties and relationships, and at the same time, have high priority in business dealings. They also place great importance on social network (guanxiwang in Chinese), personally or bureaucratically. Understanding the social network in China is challenging for a foreigner, and building your social network with Chinese is even more challenging.

2. Unfamiliar market

Confronted with a totally different and unfamiliar market, Western companies have many things to do to understand the China market before entering. A deep investigation is essential. Research everything about the market, including business environment, regional differences, consumption habits, target customers, potential distributors, etc. to make a detailed assessment of all the potential risks. Some foreign companies that are successful in their country, such as Google and eBay, failed in Chinese market. One important cause of their failure may point at inadequate investigation.

3. High cost

It is expensive to do business in China. Office rent is extremely high with advance payments, government permits and other bureaucratic procedures are time consuming and expensive; Chinese pressure for technology transfer is costly to foreign companies; Maintaining your relationships with customers, distributors, partners and government officials also cost you much. Other support services like drivers, security, office maintenance, obtaining necessary permits, etc. are also costly.

4. Inadequate infrastructure

While China has made significant progress, the infrastructure is still lacking for efficient business practices. There are still issues to deal with, such as road networks, port access, delivery schedules, dealing with suppliers and distributors, etc. This requires someone fluent in Mandarin and familiar with Chinese business practices.

5. Government involvement

The degree to which the government involves in the business is the substantial difference between China and Western countries. The Western government promotes transparency for doing business; While in China, the Communist Party exercises absolute power over legislation and economic & cultural institutions. Although China’s economic pattern is changing from the planned economy system to the gradually diversified market economy system, major business decisions are not made without some government involvement.

6. Legal challenges

Strict laws in the Western countries protect both domestic and foreign businesses; While in China the legal system is not so developed as that in the West, giving rise to various loopholes in the law. Protection of property rights including intellectual property is vague and inconsistent, and can be interpreted in many ways. These law loopholes leave room for manipulating the law further by the local lawyers against western businesses. One of the reasons that joint ventures are difficult to establish in China is that the Chinese side of the joint venture utilizes the loopholes to prevent Western partners from selling assets or ownership.

7. Inefficient negotiation

The negotiation style of Chinese is different from that of foreigners. Chinese are not pressed for quick solutions and agreements. The patience of Chinese is a strong negotiating tool which they use very effectively. Another point confusing foreigners is that Chinese seldom respond a straight yes or no answer to your ideas or suggestions. They usually use the terms such as “we will think about it”, “we have to study the case somewhat more” and “maybe”. In addition, contracts only result after a letter of intent, followed by an agreement, neither of which are binding and, finally, a contract which is not always enforceable.

To succeed in doing business in China, it is essential for foreign companies to realize these potential risks of doing business in China and do some investigation & preparations before entering the China market.

Related reading: 6 Steps to Pave Your Way to China Consumer Market

Launch Your Chinese Franchising Business: 5 Points to Consider

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Today, as many in the global market are aware, China is becoming the land of opportunity. China’s economic growth led to an increase in personal incomes, especially in larger cities. The emergence of a large middle class, often consisting of well-educated professionals, added to the consumer demand for globally recognized, quality products. While the fast developing market is driving the demand for franchising, franchising became a very popular business model in China after the Chinese government opened the door to foreign franchising investors in the 1980’s. A number of well-known foreign franchisers such as McDonalds, KFC have entered the Chinese market during the past 20 years and are operating very successfully in terms of market shares and profitability. However, Chinese franchising business is not without risks, so understanding the following 5 points before starting your Chinese franchising business is essentially important for foreign franchisers.

1. Franchising Models

Generally, Chinese franchising business is most likely to be engaged in the following three models:

Joint Venture: A limited liability corporation in which both partners invest in and manage operation through a Board of Directors. In this arrangement the partners share in the profits/losses in proportion to their investment. For example, McDonald’s. Although this form may be suitable for some franchisers, it is often problematic in that a well-know international franchiser may be unwilling to share profits with a local partner. Conversely, a strong local partner may be unwilling to work with a weak international franchiser.

Wholly Foreign Owned Enterprises: All capital is provided by the foreign investor who has full control over the operations of the enterprise. This form has become an increasingly popular entry vehicle into China. For example, Yum! Brands, which owns KFC and Pizza Hut. This option, through using a foreign direct invested enterprise, can be an ideal way to build and manage a franchise network in China. Having local presence and staff will benefit the management of business resources, the supervision of the uniform business format and the brand awareness leading to later expansion. This construction can under certain circumstances moreover be strongly advisable from a tax perspective.

Master Franchising: Many international franchisers sell master franchising rights to interested Chinese companies. This leaves the international franchiser the critical decision of finding the right local partner, and using the appropriate entry structure. In many ways, successful market entry depends upon the quality of the local partner. Local knowledge and connections are extremely valuable for both short-term and long-term success. For example, Century 21 China Real Estate.

2. Franchise Registration

According to the the Regulation on Administration of Commercial Franchises (Regulation), a franchisor must, within 15 days after signing a franchise agreement for the first franchised location in China, file an application with the appropriate commercial authority in the Ministry of Commerce (COM) to register its franchise. The registration requirement of Chinese franchising business is an administrative measure to regulate franchise activities, and also provides potential franchisees with public access to more information regarding the franchisor and its business. Although the failure to register does not impact the effectiveness of the franchise agreement, a franchisor that fails to timely file the franchise registration could face a fine from the commercial authority ranging from 10,000 to 50,000 Chinese Yuan (CNY) (approximately US$1,600-8,000). In connection with the franchise registration application, the following documents must be submitted for Chinese franchising business:

• Business registration certificate of the franchisor.
• Registration certificate of the franchised IP right: Where the franchised trademark is not owned by, but instead is licensed to, the franchisor, the trademark license must first be recorded with the Chinese Trademark Office, and the franchisor must submit the certificate of trademark license issued by the Chinese Trademark Office with the franchise registration application.
• Franchise agreement: To comply with the requirements of the Regulation and relevant laws, the franchise agreement must include certain language regarding consumer protection, quality guarantee, and training, as well as several other matters. In addition, the agreement must also grant the franchisee a “cooling-off period” during which the franchisee can end the relationship without penalty. The term of the agreement must be at least three years; however, the franchisee can waive this requirement.
• Certification for the 2+1 Requirement: To meet this requirement, the franchisor must submit a certification from a competent commercial authority or franchising association (such as the International Franchise Association). The certification must contain information about the franchised brand; the opening date, address, and business scope of the two stores; and the relationship between the franchisor and the stores, all of which demonstrate that the franchisor (or, if applicable, its parent or subsidiary) has directly operated two stores operating the franchised concept under the franchise brand/marks for more than one year.
• Marketing plan for the franchised operation.
• Other documents required by the Regulation.

If there are any major changes to the original filing (e.g., changes concerning the business registration of the franchisor, business resource, and distribution of the Chinese franchisees), the franchisor must, within 30 days, file a notice and supporting documents with the MOC for modification of its franchise registration. An annual update regarding new franchise agreements and those terminated in the past year also must be filed with the MOC by March 31.

All certificates or documents generated outside of China must be notarized by a local notary public, legalized by a Chinese Embassy or Consulate and submitted to the MOC with a Chinese translation.

3. Opportunities for Chinese Franchising Business

Many trends indicate that the China market is ripe for franchises.

The consumer class is expanding fast. The large group of middle- and upper-class consumers can afford to buy more than basic necessities, and many members want to show their wealth through what they buy — for example, by purchasing a cup of expensive foreign-branded coffee and walking around with it. They are purchasing big-ticket, branded items — often on their credit cards.

Western brands are highly regarded. Many consumers perceive Western brands as providing quality, convenience, and customer service. This is true especially in the retail and food sectors, where most major food franchises are either already present or are entering China.

Western franchises bring new and modern business systems. Successful US franchises bring a complete business system, management processes, job training, and the potential for healthy and reproducible bottom line margins. So franchises like US ones in China thus have high potential to succeed.

Second- and third-tier cities in China are open to foreign companies for Chinese franchising business. First-tier cities offer developed infrastructure, business-friendly governments, and a multitude of services and internationally standard amenities. These cities are generally “easy” for newcomers to enter, but labor and real estate prices have risen and competition has intensified in recent years. Second-tier cities have millions of potential consumers and often have lower labor and real estate costs and local governments that encourage the creation of new businesses. In addition, US food franchisors are increasingly allowing small companies to own franchises — a trend that KFC and Papa John’s started in second- and third-tier cities in the last few years.

4. Challenges for Chinese Franchising Business

Foreign franchises must also overcome problems that are specific to the China market.

Intellectual property protection is uneven. Weak intellectual property enforcement and an inadequate legal framework are key reasons early foreign brands opened as company-owned stores or JVs, instead of franchises, in China. Many US brands have seen local companies take their name and logo and open fake, unapproved outlets. For example, after a local coffee store chain violated Starbucks’s trademark by nearly duplicating its name and logo, Starbucks took the company to court and won the dispute in 2006. China has a range of intellectual property laws, and landmark court cases have defined the right of foreign brands to protect their trademarks and business systems. Intellectual property laws, however, are not uniformly enforced throughout the country.

Local managers lack strong management skills. Franchises in China often experience difficulties finding local managers who understand how to run a business. Training costs are high and so is the rate at which good employees quit to take higher paying jobs after they receive Western business training.

Finding and evaluating licensee candidates is tough. The most important part of Chinese franchising business is finding, evaluating, and signing a qualified company as the local, regional, or country franchisee. Due diligence resources to fully check on a local company are improving, but it is still difficult to find companies with the management skills, business track record, and capital to acquire and properly develop a US franchise business. To help find appropriate licensees, companies can check with various organizations, such as US Commercial Service offices in China, legal firms with US ties, consulting firms, or American Chamber of Commerce offices.

China has many markets. The sheer size of China, and its diversity of business and food culture, makes franchise development difficult. Companies that function well in one region seldom function as well elsewhere in China. Accordingly, franchisors rarely grant companies a country franchise for China. More typically, franchisors grant regional franchises (for a province or group of provinces) or first-tier city franchises (such as for Shanghai). This means the foreign franchisor must manage multiple licenses in China, requiring more time and energy.

Franchises must adapt their products to new markets. Some franchises face difficulties in China when they do not adapt — or are slow to adapt — to the needs and tastes of Chinese consumers. For example, restaurants should conduct appropriate research before planning their menu and offerings. Sales may increase simply by adding chicken dishes and rice to the menu, or by changing a spice or bread. Adding a trendy “foreign” item to the menu, such as coffee or ice cream, may also increase sales. In addition, foreign companies should take care when translating their brand names into Chinese. Ideally, the Chinese name should convey what the brand is and sound similar to the English pronunciation.

5. Suggestions to Foreign Enterprises

Despite the great economic potential, doing business in China can be difficult for many foreign companies, evident by the many failures of multinational companies. The following suggestions might be helpful for foreign franchisers to start Chinese franchising business:

Register the brand when entering the China market at inception. Without the official registration, even a well-known company can find itself in a difficult position when someone else has registered their brand name. Starbucks filed a trademark infringement suit against a Shanghai coffee chain in 2004. But lawyers and industry executives say things are moving in the right direction.

Carefully seek local partners who can help them navigate the local business environment. Needless to say how important it is to choose a partner in the same industry with channels of distribution, industrial connections and good relationship with government organizations.

Understand the cultural difference and adjust market access strategy accordingly. For those franchisers that can navigate China’s way, the prizes can be big. Unlike in other countries, where KFC helps franchisees set up stores, KFC is taking a different approach by selling well-established profit-making stores to Chinese franchisees in order to effectively reduce the risk of damaging brand names. Of course, minor modifications will be required to adapt to local habits, if they want to earn more chances of success.

Minimize the price of the final products and the franchising fee to achieve rapid expansion. The Chinese are price-conscious because their income is substantially lower than that of Westerners. It is the same for Chinese investors. Actually there are not so many Chinese people who have one million USD and are interested in franchise business. So it is important to the new-to-China foreign franchisers to lower the franchise fee.

Conclusion

Many signs indicate that Chinese franchising business will become easier over the next few years. China’s regulatory and investment environment is developing and becoming more transparent. Lower-tier cities are becoming ripe markets for franchises, and China’s rapidly rising middle- and upper-class consumer base desires Western brands with their well-known name and association with convenience, quality, and service. In addition, more Chinese are reaching an income and savings level that will allow them to invest in a franchise. Despite the challenges of the China market, the opportunities are too great to ignore, and foreign franchisors are entering China in great numbers.

Related reading: 9 Keys to Successfully Sell Your Product to China