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Chinese Market Entry in Comparison to the West

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Chinese Market Entry in Comparison to the West

Introduction

One particular transformational change that has been witnessed in the past decades is that of China’s domineering market command, as its economy has been able to grow by a double digit (Hilmersson & Jansson, 2012). Many investors, including those from the West are flocking the economically viable nation, to either make one-time exports or foreign direct investments. As a matter of fact, China has grown to become the second largest and most economically viable nation, after the United States (Murray, Ju & Gao, 2012). While locating key parts of a supply chain as well as value chain in China may still offer numerous benefits as part of the global and regional market strategy, the focus of most businesses has shifted from an emerging labor pool, to a more lucrative emerging middle class, at least in the perspective of workers. It is no longer all about reaping benefits from cheap labor and low costs of production, but striving to tap some of the world’s strongest and sustainable market economies.

China offers such alternative, as rapid demographic changes and market forces continue to open up new sectors and opportunities in the economy that can be exploited by investors. While the reasons for entry may be compelling, finding a direct and right path into the Chinese market still bears substantial amount of challenges (Yongge, Lily & Rong, n.d). Businesses from the West which are expanding into China are usually pulled by demands which are characteristically tethered to this economy, and offer unique features from that in the Western countries. While China has been in constant change, driven by numerous legal and structural reforms, it is imperative for investors to gain comprehensive understanding of the market before entry (Papyrina, 2007). This paper discusses various intricacies regarding entry of China’s market, how different it is from the West in term s of policies, and further illustrates cultural disparities that exist between the two, which are pertinent to business operations.

China’s Market Entry

The challenge of business entry into China’s market has become increasingly crucial for western companies of all shapes and sizes. Despite the unfavorable economic climates in United States and Europe, China has toiled and sailed through to grow its economy by a double-digit. The country is poised to overtake US to become the world’s largest economy by the year 2020, and it is currently destines to remain a crucial engine of global economy growth for the next decade (Joong-Woo, Ibrahim & Jooyoung, n.d). Therefore, understanding how to gain entry onto such kind of a successful and gigantic market is particularly critical and challenging to most companies in the Business-to-Business sphere. Within the country, there are rapidly changing demographics, increased consumer incomes and spending, and increasingly open and liberal market environment, which have largely contributed to making china attractive to most Western businesses. Moreover, declining sales and market performance in their indigenous markets have compelled most European and US companies to shift from making local investments, seeking entry into China, as it offers a viable and lucrative environment (Congcong, 2012). Breaking into the Chinese market successfully can seem an almost unmanageable task to many foreign companies which have limited or virtually no experience of conducting businesses there. The proceeding parts of this paper provides a clear understanding of some of the challenges and formalities that new businesses go through while entering China’s market, and offers a few recommendations at the end.

Identifying the Chinese Market

China has a population of over 1.3 billion people, being the largest in the world, and one of the only two world population billionaires (Stalk & Michael, 2011). It has a land mass that is far much bigger than that of the United States, such that its sheer size presents unique challenges that are distinct from any other market, including Asian markets like South Korea and Japan. While it is generally agreed that China represents a huge scale of foreign market for manufactured services and goods, it is also true that identifying these opportunities and how best to utilize them can be extremely challenging (Tse, 2010). The first and foremost realization that investors into China need to embrace is that China is not a homogeneous and uniform market. Though historical studies show a solid geo-political unification among the Chinese, economic and social pictures show a huge disparity and fragmentation. Various parts of China have varying and uneven economic growth rates, which have contributed to the exacerbation of some of the existing social and economic differences in China’s provinces (Williamson & Raman, 2011). Population indexes, per capita GDP, consumer spending habits, average income levels, literacy levels, educational levels, and lifestyles all characterize these differences that businesses must understand before venturing into the market (Sajid  & Sizhong, n.d). Therefore, it is not unfounded to state that instead of representing a homogeneous, unified market, China is a conglomeration of individually diverse markets characterized by differing economic, demographic, and cultural attributes.

In addition, the make-up and nature of markets in various parts of China’s economy also have varied attributes, implying that foreign companies must be able to identify, analyze, and carefully chose which geographical location would best suit them and offer the best vantage point to the nature of business (Devuyst, 1995). Some of the coastal provinces which are considered lucrative by most investors include Guangdong, Zhejiang, Shanghai, and Jiangsu, which have higher populations than other locations, as well as higher average income per individual (Hui-Lung, Sou-Shan & Szu-Lang, 2012). Though this has been the trend, the Chinese government now encourages investment in other parts of the country to ensure devolution and delocalization of businesses. The government can be enjoined in the investment process, as it may come in to offer incentives such as subsidized land and taxation rates, to lure investors into those regions (Johnson & Tellis, 2008). The first step to gain a successful entry into China’s market is to understand the geographical locations perfectly, and identify which one offers to the most lucrative option for a business.

Choosing a Business Location

As above mentioned, over the last few years, the prevailing wisdom among almost all foreign investors in China has been to focus their attention on Tier 1 cities, including Shanghai,  Guangdong, Zhejiang, and Jiangsu (Jing, Hanqin & Jiajia, 2010). These are the most mature Chinese markets in terms of spending behavior patterns of consumers, and are considered to be the most suitable for carrying out ground tests by foreign companies. Although investing in these cities may seem to offer the lowest risk for any business, the fact that there are high competition rates and operational costs must not be overlooked. Rising incomes and economic growth in these Tier 1 cities have made it lucrative and attractive to invest in them. Not only do consumers have improved spending and income standards, but the initial set-up costs are low in many instances. Other cities that offer potential sites for investment include Wuhan, Shenzhen, Tianjin, Chongqing, Nanjing, Chengdu, Qingdao, Hangzhou, Dalian, and Suzhou. It is estimated that with time, Tier 2 and Tier 3 cities will be included in the mix, to offer more investment sites and lead to greater long-tern economic success (Chuan  & Orr, 2009).

A business may therefore be torn between the choice of investing in an already tested environment, or setting up a business in an entirely new location, but this is guided by various factors such as the extent of market research and capital base of a company. It is crucial to spend some time mapping out customer and supplier locations, understanding the variations in distribution channels from one location to another, and researching comprehensive regulatory barriers that dictate entry into a particular market location. Companies which intend to set up a local facility for manufacturing would need to conduct a broader research in a range of factors, including local transport and manufacturing, raw materials’ access, cost and availability of human resources, local policies on investment, and many other factors.

Government Regulations and Policies

Understanding policies and government regulations governing market entry is crucial in China’s investment market. China’s enlisting in the World Trade Organization has a played a crucial role in easing some of the regulations, thereby liberalizing the market to some extent, but there still exists substantial sets of regulations that govern most of the industries. Some industries are so heavily governed that they remain off-limits to any foreign investor, while some have severe limitations that discourage entry (Ardichvili et al, 2012). For instance, the field of petrochemicals, telecommunications, and energy are severely restricted. Any foreign investor, who wishes to set up a local production facility in the country, is first guided to seek the consent of China foreign investment catalogue, which categorizes investment projects into ‘prohibited’, ‘restricted’, and ‘encouraged’ classes. As the economy continues to grow, there is an emergence of industry-specific rules and regulations, to which both local and foreign companies must conform (Bo & Chan, 2012). China has set a host of various ministries and departments which are tasked with the responsibility of setting up and implementing industry regulations and standards. For instance, the healthcare sector hosts both the State Foods and Drug Administration  and the Ministry of Health, which both play a role in enacting and enforcing regulations, while other sub-organs of these two categories implement such laws at the ground level (Ardichvili, Jondle  & Kowske, 2010). In companies with stricter and more extensive requirements, companies that wish to invest in China would have to unravel the complex web of laws, and identify which bodies are mandated to implement them, so as to formally enter the market.

Regulations in this economy are actually becoming more stringent, as frequent cases of flaunting these laws become manifest. For instance, the melamine poisoned milk scandal that occurred in 2008 made authorities to tighten their watch on foreign companies; environmental concerns and lobbies for green technology has also tightened environmental legislation, where investing companies have to clearly set out how they will accomplish the required standards; and the SFDA has also moved to stiffen its rules by making companies undergo rigorous assessment programs to demonstrate their conformity to standards (Yong, 2013). Government regulations are often very critical in issues of market entry, including timeline and costs, and companies are therefore advised to take a keener look at the implications of such laws prior to entering the market (Meraz, 2011). For instance, in the Chinese pharmaceutical and medical fields, clinical and long product trials are usually required, which lead into longer cycles of sales as opposed to the Western and Asian markets (Country Intelligence: Report: China, 2013). It is also imperative to note that the basic fact that a product has been approved in Asia or the US by regulatory authorities does not offer a guarantee that it will gain direct entry into the market, but the Chinese market is autonomous and operates on its own standards.

Just as it is important to research on regulatory requirements before entering China’s market, continuous monitoring of any changes is also encouraged since the economy has been characterized by rapid an ongoing transformations, which may throw a company that has entered the market without its knowledge (Yongge, Cheng & Lily, n.d). The Chinese regulatory agencies usually operate in uniquely opaque manner that it becomes difficult for investors to anticipate and regulatory changes. Another unsettling problem is that most regulations are usually vaguely and ambiguously worded, such that they are prone to misinterpretations, as opposed to the Western culture where transparency in all regulations is a key attribute. Thus, Western investors would have to seek the indulgence of market consultants and specialists who can help them understand China’s laws.

Mode of Market entry

Choosing the right mode of entry into China’s market is one of the key determinants of success of a foreign company. Though most companies have opted to go alone/individually into the market, the joint venture model is quite popular, and has various accompanying advantages including offering a low-risk business strategy (Yung, Chyan, Sue  & Yau, n.d). Other options include setting up of local Chinese production entities, or franchising the production channel by the help of local intermediaries. Entry mode is dependent on such factors as market geographical size and scope, industry landscape, level of sales on the ground, and whether a company would wish to set up a local manufacturing point, or simply import products to China (Murray, Ju & Gao, 2012). The overall cost of hiring employees and setting up an entity must also be taken into consideration when making a decision of what mode of entry to adopt.

Cultural Differences between China and US/Asia

There are various cultural attributes of business in China that differ from other countries, especially Western and Asian countries. The cultural facts and etiquette guide the manner in which businesses are conducted in China, and it is important to acknowledge this because most Chinese citizens prefer to do business with the people they know. Confucianism is one of the widely honored practices, though it is not a formal religion (Weiwei, Robert & Param, 2012). It revolves around the essence of peaceful and harmonious relationships. It posits that if a proper behavior in the essence of duty is manifested in a relationship between husband-wife, ruler-subject, father-son, and business associates among others, then the whole society gets to run smoothly without any mishaps (Kingsley, Bergh  & Bonardi, 2012). In Western cultures, individualism is widely promoted for personal prosperity and gains, and a wide and distinct disparity between ruler-subject, such that relationships are limited to business alone. It therefore means that for a Western company to succeed in China’s market, such ideologies must be embraced. In addition, the Chinese government promotes Atheism, while in the U.S., Christianity is regarded as the ultimate religion followed by everybody (Karakaya & Stahl, 2008). Though there is freedom of worship in both nations, the majority of the people conform to the above mentioned two categories, and it is critical for an investor to adapt flexibly to the new environment so as to abolish any discriminations and prejudices associated with religion.

The culture of ‘Face’, which is roughly defined as respect, honor or good reputation, is very critical in business operations and relationships in China. One must be able to understand the subtleties of such a concept to be able to smoothly transact business in China. As compared to the United States and Asia Pacific, the creation of good reputation is undeniably beneficial to an organization, but it does not have dire ramifications as in China (Ulrich  & Harald, n.d). In the latter, ‘face’ is put in four categories: lessening of one’s reputation due to their involvement in undesirable practices like environmental degradation; giving of face to people through respect and compliment; development of face through age and experience; and increase of face through compliments made by a third party (Baocheng, 2007). This aspect is important to businesses, and it is an advice for any Western company entering China to be able to develop a positive face that would better its reputation.

Harmony is another cultural aspect that draws disparity between the markets in question. In China, it has been emphasized that building of relationships and weaving a tight fabric of business associates is key to business operations. It is considered that everything is in harmony in China’s culture, and any change is usually viewed as disruptive, owing to the multitude of its inhabitants. Conversely, in the U.S., business deals require formal arrangements and less indulgence in personal relationships. It appreciates effectiveness and efficiency in all business transactions, and usually attention is focused on the end result (Iang, Yong & Bo, n.d). The culture also applies pure logical reason based on facts, and necessary changes often have to be made to get the desired results. The ‘giving gift etiquette’ is also paramount in the Chinese culture, being used as a form of appreciation, celebrations, and as a sweetener for future considerations and favors (Aron, Liem & Nima, n.d). In other cultures, including the West and Asia, this practice has negative connotations, and may poise as a form of bribery. These, among other cultural differences, have to be fully understood and harmonized by any business entering China’s market to ensure good public relations and reputation.

Conclusion

Making an initial step into China’s lucrative market is quite an experience to many Western companies, with an endless list of potential barriers to be negotiated. Although these pitfalls are usually many and demanding, the rewards of successfully completing the tests and fulfilling the requirements are also immense. As the economy continues to grow, the rewards tend to outweigh the challenges involved, hanks to global market liberalization, and other trade unions such as the European Union and the World Trade Organization. This market is rapidly changing, such that there is no single approach that can be prescribed for its entry. Instead, a through market research is always crucial in identifying the intricacies of current market demands, policies and regulations.

 

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