As the second largest economy in the world and Australia’s largest trading partner, China remains an extremely attractive market for Australian companies.
However, doing business in China can be challenging. Rapid market transformation and new government reforms can make China a very difficult market to access.
If you want to succeed in China, here are five key points to consider:
1. Policies and regulations
Chinese government policy can be a major risk to Western businesses operating in China. For example, a sudden change in tax rates or new regulations can effectively close viable operations.
Additionally, China is heavily regulated, and policies and regulations can be very complex and often ambiguous. Moreover, rules and restrictions on foreign business over recent years have become more stringent to strengthen the competitive positions of their domestic companies.
Therefore, to succeed in China, it is important that Australian companies invest in understanding the regulatory environment.
For example, what licences and permits are required to do business in China? What is the process and time frame for obtaining such licences and permits? How will you protect your intellectual property under Chinese law? How will you manage your hosting and internet security for your corporate website on the mainland?
Additionally, it is important for companies wanting to establish a China-based entity to understand the different ways businesses are regulated in China. The key terms you will encounter are:
• Representative office (RO). An RO is a complicated concept for non-Chinese businesses. An RO is not allowed to directly generate revenue, including buying, selling and issuing service invoices. An RO is only permitted a limited number of representatives and requires an annual licence renewal. In addition, an RO is not permitted to hire locals.
• Wholly owned foreign enterprise (WOFE). A WOFE is an organisation that operates within China’s capitalisation rules. It is allowed 100 per cent foreign ownership and control, but is subject to restrictive currency controls.
• Equity joint venture (EJV). This is by far the easiest way to establish a business in China. An EJV is a legal entity that requires a Chinese partner. Beyond that, the rules and capital restrictions are the same as the ones imposed on WOFEs.
2. Location, location, location
When Australian companies first look to China for expanding their presence, it is tempting to want to go after the whole country. With a population of 1.4 billion people, China is a huge market full of consumer buying potential.
However, the geographical distance and provincial differences can be a complicated undertaking for a new company. As such, regardless of the product that you want to promote, it is essential to understand how it will be received by a particular Chinese audience.
China has 23 provinces, four municipalities (Beijing, Tianjin, Shanghai, Chongqing), five autonomous regions (Guangxi, Inner Mongolia, Tibet, Ningxia, Xinjiang) and two special administrative regions (Hong Kong, Macau). Within each there are also variations in language, culture and tradition. Your brand positioning and market entry strategy will therefore need to be carefully considered in relation to the specific location.
Another consideration is that it may be more advantageous to focus on a geographic location that offers the best vantage point from which to reach the broader China market. Smaller cities tend to be less saturated and may offer greater scale opportunities, especially for smaller companies new to doing business in China.
3. The e-commerce revolution
China is now the world’s largest and fastest growing e-commerce market. In just a few years, we’ve seen the Chinese distribution landscape rapidly transform.
China’s retailers used to be solely dependent on traditional brick-and-mortar outlets, even in the tier 1 cities. Now, given the huge shift in consumers buying online, many companies are already present on Chinese e-commerce platforms, such as Tmall, JD.com, Taobao.com.
Cross-border e-commerce (CBEC) is a special import channel which allows products to be sold directly online sale to consumers (B2C). The channel has exemptions to tariffs and other regulatory requirements, which apply to conventional international trade (B2B).
China’s major established e-commerce marketplaces, such as Tmall Global and JD Global, sell popular merchandise such as health supplements, luxury fashion, food, skincare, cosmetics and baby and maternity products.
Chinese online shoppers use e-commerce sites to access a wider choice of international products at typically lower prices compared to Chinese purchased ones.
4. Changing consumer behaviour
To succeed in China, you must be mindful of the rapidly changing behaviour of Chinese consumers. Chinese shoppers are becoming more sophisticated and demanding as China’s middle class continues to expand.
Chinese consumers have become increasingly more brand-conscious, and place more emphases on quality and value for money when making a purchasing decision.
To truly be successful in China, you must invest time in developing new strategies and building quality products and services to meet the changing needs of the Chinese consumer.
By having some knowledge of local policies and regulations, developing a solid distribution strategy and understanding the needs of local consumers, it is possible to achieve real success in the Chinese market.
5. Don’t forget the daigou
Chinese buyers that purchase Western products on behalf of their family and friends back in China are better known by their Chinese name ‘daigou’. This group started to gain public attention in Australia fairly recently when media highlighted the baby formula shortage and started to take notice of how supplement giants Blackmores and Swisse had been driving impressive domestic sales revenues through these Chinese buyers.
Although many of the leading Australian consumer brands operating in China, especially in the cosmetics, health supplements and infant formula categories, are fully engaged with these Australian daigous, the smaller, emerging brands or companies looking to export to China should understand how to leverage this group.
Remember, daigous are not just your buying channel but in effect become your KOLs (key opinion leaders), and their information/recommendations will start to draw interest and, more importantly, product requests back from their Chinese buyers for your products.
Dr Mathew McDougall is the founder and CEO of Digital Jungle, a marketing tech firm providing Chinese language digital and technology programs, working with Western brands to connect them with a Chinese-speaking audience living in China and abroad.