Doing business in China is becoming more and more appealing for foreigners. In the span of the past twenty years, the world has been dazzled by China’s startling economic growth and its increasing power in the international arena. In 2010, China became the world’s second largest economy, in the midst of a gradual recovery from the 2008 financial crisis. China’s vital role as a global growth engine is clear and undeniable.
China is the land of opportunities for foreign entrepreneurs. If your company is going global, you have to understand China and Chinese people very well. You need to apply best practices for doing business in the world’s largest country.
1. The role of the state in the economy
If you are planning to do business in China, you have to be prepared for the dominant role of the state in the Chinese economy.
Since the commencement of social and economic structural reforms in the 1970s, the country has undergone an extensive and thorough process of liberalization and gradual integration into the world economy. The reforms paved the way for the emergence and constant inflow of foreign business into the country.
The following facts are important to fully understand China and its success:
- China’s economy grew 6.7% YoY in 2016, which is the slowest pace of growth in 26 years. Yet, it is still within the government’s target range set for the year;
- In 2016, the US economy grew just 1.6% YoY, which is lower than the 2.6% YoY growth in 2015. This is the weakest performance since 2005;
- At this moment, the reality is that the Chinese economy is still doing quite well despite while most of the world outside China is doing rather poorly.
Before doing business in China, you have to know whether there are any restrictions on your business scope. The business scope of a company describes commercial activities that can be performed by a registered entity in China. It is also possible that your business is allowed to function only under special permits and regulations.
In 2015, the Chinese government released a new Foreign Investment Industries Guidance Catalogue. It is very important in international trade and investments with mainland China, though not with Hong Kong. It classifies all industries into the four groups: Encouraged, Permitted, Restricted, and Prohibited.
The Chinese government is actively seeking foreign investments in the Encouraged Industries. There are usually special tax incentives, cheaper land costs, and simplified approval procedures for investors in these industries. The Encouraged industries include:
- Construction and operation of grids (Chinese parties as controlling shareholders);
- Scheduled or non-scheduled international marine transportation services (limited to equity or cooperative joint ventures);
- Accounting and auditing (the chief partner shall hold Chinese citizenship);
- Construction and operation of urban subway, light railway, and other track transport;
- Aged care institutions;
- Operation of performance sites (moved from restricted category to encouraged category);
- Air transportation companies (Chinese parties as controlling shareholders, and the shareholding proportion of one foreign investor and its affiliates will not exceed 25%).
In the Restricted Industries under the 2015 Guideline, significant changes took place. A lot of restricted sectors were permitted, and the number of restricted industries decreased from 79 items to 38. This indicates the shift of the Chinese government’s regulatory approach in the field of foreign investment towards further liberalization.
Foreign entrepreneurs, who contemplate investing in such sectors as infrastructure, real estate, energy, e-commerce, services, logistics, and/or finance, will benefit from the changes in the Foreign Investment Industries Guidance Catalogue.
For example, there are notable regulatory relaxations with respect to investments in manufacturing industries. In the real estate sector, the government moved land plot development, construction and operation of high-end hotels, office buildings, and international exhibition centers from in the Restricted to Permitted category. Investments in real estate secondary market trading and real estate intermediary and brokerage companies are no longer prohibited either.
At the moment, the Restricted category includes:
- Medical institutions;
- Automobile manufacturing.
In the future, the Chinese government will continue to remove barriers for foreign direct investments. Doing business in China will certainly become easier and, therefore, will shift the paradigm in the way foreign countries look at China.
2. Relationships are the key to success for doing business in China
It is important to make acquaintance with businesspeople and government officials in any country where you are planning to do business. Yet, it is crucial, sometimes even critical, for the ultimate success of your business in China.
Despite the reforms, the importance of having close relationships with government bodies hasn’t disappeared. Rapport building is difficult, especially for foreigners in China. The standard way is meeting people at networking events or dinners with potential partners, as well as on conferences, workshops, and other events.
In China, the concept of networking works in a different way. Foreigners must know that most of the fruitful introductions in China happen via a trusted person. This tactic will open many doors for your business. It always takes a dedicated amount of time, effort, and energy to build strong and lasting business connections and relationships. In China, that can be especially hard.
In the West, it is not unusual for relationships to be initiated and delineated by legal contracts. This type of connection does not always lead to a strong, ongoing partnership once the contract itself has served its purpose. In China, people are focused on building personal contacts and rapport before entering into a partnership or a transaction. Always take this difference into account during international business negotiations.
Many Chinese and foreign companies in China succeed in business thanks to having guanxi. Develop and nurture close relationships with guanxi – social or business connections based on mutual interest and benefit. If they help you at some point, they will expect that you repay it on the basis of the reciprocity principle.
Due to the state-controlled economy, it would be highly advantageous for international businesses in China to find, establish, and develop good relationships with government officials. For example, a dinner with a mayor or the head of a local public utility may allow you to negotiate lower utility tariffs for your production plants in provinces.
While building rapport, you will certainly meet lots of people and hear many interesting personal stories. Yet, until the proverbial dust settles, you cannot know what you have actually accomplished. Just tamp down your anxiety and wait patiently for some time. Hopefully, very soon you will learn that you have buddied up with one of them.
3. Understanding Chinese culture is extremely important
If you want to do business in China, do your best to understand the business culture of this country. Then, show your partners your knowledge and appreciation of it in both social and business settings.
China is one of the most diverse countries in the world. It would be useful to have a basic understanding of the differences between sub-cultures and practices which differ in China from one place to another. There are 56 ethnicities officially recognized by the Chinese government, and many of them have their own languages.
Sadly, many business negotiations and deals often fail due to misunderstandings of the cultural differences between the West and China. The toughest thing of understanding a people is to grasp the nuances of their professional ethics, their values, their etiquette, and their protocol. Frequently, even some basic customs, mannerisms, and gestures are crucial for the successful execution of daily operations.
Westerners argue that the Chinese people will end up adapting to the western style of doing business. However, it is not going to happen in the short run. Do business in China in the Chinese way, or be prepared for mistrust and failures.
If you decided to do business in China, it is advisable that you find a reliable Chinese partner who can assist you in dealing with cultural differences. Of course, you have to choose the right marketing strategies in the Chinese market. It is highly recommended that you find a professional digital marketing agency in China that is likely to become your best business partner in exploring many exciting opportunities in the country.
4. Chinese consumer psychology
It has become crucial for foreigners to learn more about the cultural gap separating an average Chinese consumer and their Western counterpart. Companies that comprehend the nuances of Chinese consumer behavior and psychology have a better chance of winning new market niches and achieving long-term success.
1. Chinese consumers evaluate products differently from Westerners.
Chinese people remain brand and quality conscious. Unlike Western shoppers, they focus on value so intensely that brand loyalty and at times even quality come secondary. An average Chinese customer is looking for relatively inexpensive products made of good quality materials and without defects. It is common for Chinese people to compare prices at many stores or websites before making a purchase.
Many Chinese people are interested in buying products only from the companies that offer post sales support and are committed to extending excellent customer service.
2. Consumers remain upbeat despite China’s cooling economic growth.
According to McKinsey 2016 China consumer report, Chinese consumers feel positive about their future income in spite of a slowing economic growth and a depreciating currency. They also are relatively neutral to the existing bubbles in the stock and real estate markets.
Source: McKinsey 2016 China consumer report
However, consumers are responding to the above-mentioned changes. They are becoming more attentive to product qualities and more selective about where they spend their money. Consumers tend to focus their attention on services rather than products.
3. McKinsey consumer report found that an average Chinese consumer is less materialistic than their Western counterpart.
Chinese consumers continue to pursue social status and want to earn high wages. Yet, having a happy family is too important for them to exchange it for wealth and other material values. They wish to have an interesting and balanced life where family and health take priority. According to McKinsey’s report, two-thirds of consumers say that shopping with the family is the best way to spend time with them.
Source: McKinsey 2016 China consumer report
4. Word of mouth is powerful in the Chinese consumer market.
Word of mouth is a more prominent source of product information than it is elsewhere in the world. It is so thanks mostly to the high Internet penetration rate in China and to the fast-growing use of the Internet in provinces. Chinese consumers see the Internet as a credible information source, in contrast to many Western counterparts.
5. Chinese consumers have the paradox between savings and spending.
Despite the economic liberalization and the Western influences, China still remains a collectivistic culture and a hierarchical society.
Although Chinese consumers have high savings rates as compared to people in the West, many pay high premiums for luxury items, especially if these things are used in public, like fashionable clothes, accessories, or mobile phones. Wearing such expensive and branded things allows them to distinguish themselves through consumption.
6. Chinese people are more conservative.
The psychology of a typical Western consumer is such that they eagerly move towards the extremes. In Asian cultures, people have the opposite desire: they want to stay away from extremes and view them as something undesirable. Chinese consumers conform to social traditions and are more moderate more than their Western counterparts. Often, international business in China that are more risk-taking than Chinese entrepreneurs.
7. Chinese consumers tend to invest heavily in their children.
Chinese people often pay a lot for high-quality education, care, and so on. The above is attributable to China’s current demographic situation and to the one-child policy that was finally canceled in 2015 by the government.
The one-child policy, which had been in force since 1979 until 2015, made the child more important in the family unit. Parents and other family members are all trying to help their children rise up in a fiercely competitive society.
8. One of the main trends in the behavior of a Chinese consumer is that they are shifting from mass to premium products.
McKinsey 2016 China consumer report found that 50% of Chinese consumers want and seek the best and most expensive offerings. The growth rate of the premium segments is currently higher than that of the mass and value segments. Yet, it seems to be a fairer estimate for coastal cities than for small towns and villages in provinces.
Source: McKinsey 2016 China consumer report
Foreign brands have a leadership position in the Chinese market. Another remarkable trend is that more Chinese consumers display loyalty to a few brands or a single brand. The number of people that eagerly switch from one brand to another dropped significantly.
All of the above-mentioned trends bear witness to the existing differences between Western and Chinese consumers. They also imply that the Chinese shoppers are developing into some of the world’s most complex consumers.
Doing business in China and being successful means that foreign entrepreneurs need to understand Chinese consumer psychology and profile.
5. Difficulty of achieving success in the Chinese mature market
In the 1990s, the Chinese economy was still emerging, and opportunities seemed to be endless. International business in China didn’t need to invent and apply special strategies. They could enter the market and make a fast buck in the unsaturated Chinese market. It was enough to have connections or guanxi.
In the span of the past twenty years, the situation has reversed. China’s market has been growing at a rapid pace and matured. Now, Chinese consumers are behaving in a manner which is both increasingly pragmatic and painstaking. Their horizons have expanded well beyond basic concerns about product features.
Nonetheless, the country still boasts of various opportunities to do business and collaborate. China offers many of the world’s biggest growth opportunities, but only for those businesses whose executives respond to this swiftly evolving marketplace. Now only companies that make a conscious and deliberate effort to better educate themselves about Chinese consumers and their evolving tastes and psychology succeed.
When you are about to enter the market and build connections, you don’t know how to approach Chinese consumers. Most definitely, you will find yourself lost in an ocean of thoughts and guesses about effective marketing strategies in the Chinese market. You lack country-specific knowledge and understanding of Chinese consumer behavior.
Imagine that you have just started doing business in China. It is never easy! What if you don’t identify your target audience correctly? Do you know your buyer personas? What if some of your offerings or business strategies are incongruent with Chinese culture and traditions? For example, China values harmonious relationships, which is why marketers emphasize this when crafting messages to customers.
Consumers don’t forgive and forget easily and quickly. The power of the Internet provides them with a myriad of opportunities to spread bad word of mouth about your company online. The Chinese people have long become digital natives, which gives them a loud collective voice whose echo can be heard well beyond China. All of the successful businesses in China take into account that Chinese people are digital natives.
How can you avoid potential business failures and the irreparable damage of your company’s reputation in the Chinese highly competitive market? You just need to contact an experienced marketer in China! Now take action!
China in the future
China is reshaping the global economy. Its economy is an engine of robust growth that will continue to compete with the West for economic dominance and political influence.
Most of the global economy remains under pressure and economic growth is weak in the US. Nevertheless, China has continued to be an engine of growth. If the country’s economy continues to grow at a steady pace of 6.5-7% over the next ten years, China will overtake the U.S. level and become the world’s biggest economy.
Isn’t China attractive for foreign entrepreneurs and investors? Of course, it is!
The Chinese government is committed to reforms aimed at the further liberalization. As more doors will open wide for foreign companies to participate in its domestic economic growth, it is high time to think about doing business in China right now.
While the rest of the world is stagnating or is showing a less robust growth, enter the Chinese market! If you and your marketing consultant do everything correctly, your projects are likely to be a roaring success.