Marketing Planet

Doing business in China: understanding the difficulties

China, the land of dreams for business success

Oh, yes, China is really promising, the eldorado in the land of business and new markets:

  • China has a huge market: a population of 1.3 milliard officially,
  • Over the past 25 years, its real gross domestic product has expanded at an average of 9% a year,
  • growth in foreign trade has averaged 15% annually since 1978,
  • Even Goldman & Sachs - an investment bank - predicts that China will overtake America in 2040 and become the world’s largest economy,
  • Every week more than 1 milliard of Dollars in FDI (Foreign Direct Investment) flows into the country [1],
  • Predictions maintained on the continuation of an annual growth rate of at least 7%,
  • A growing upper class with interest for Western brands
  • Increase of communication, thus connecting the population with the rest of the world and increase their conscience on consumption,
  • Progress in infrastructure, thus facilitating transports.

However....where are the results?

Doing business in China in reality is not that promising and easy. The main population is still difficult to reach and the business mentality is not like that of western countries.
Let’s see some facts: only two fifths of the population lives in urban areas, the average disposable income per person in 2002 was 4.520 Yuan (about 600 Euros). Their spending habits are far from the ones we are used to in Western countries.

Remember Maslow and his pyramid? Well, the gross Chinese population is still more preoccupied with their security and survival than with the latest sunglasses or even a car. As to compare: the GDP pp in Europe is about 22.000 Euros, in the USA 37.000 Euros. China is situated in the zone of 1000 Euros GDP pp, less even than the Philippines [2]. It seems that even the average urban households are only at a GDP pp of about 2200 Euros. Well, sorry to spoil the fun but it seems we are far from money to be spent.

Nevertheless, many companies worldwide have tried to enter the market. They stated being aware of the difficulties and the time needed before achieving profits. China has opened their market more and more but they need to for China needs to open as to satisfy their local needs.

Every year, about 12 - 15 million jobs are needed as to keep pace with the population growth [3]. Besides, the financial market seems to get a little overheated and precaution is required.
In the end, companies nowadays face a certain failure in China. Their investments are not paying of and losses are not rare.

Why is it so difficult.... could there by a cultural thing?

The chinese population is not yet used to Western products, in fact their are not necessairly looking forward to it. Many companies try to sell their winning products on the market but they turn out not to reply to the Chinese needs. Companies set up their plants with a joint venture but in their western way. The Chinese market is really different and it would probably be better to start very little and increase step by step.

Besides the Chinese consumer, there is also the Chinese employee. The working methods are not equal on both sides of the Great Wall. The Western companies are too organised, too much applying a model, how they learned it should be. This doesn’t work in China. There is no way one will succeed being Western and stubborn in their operating way.

Try to understand the Chinese, listen to them and try to understand their reactions. Your Chinese employee or manager are also potential consumers... and how do they like the product? They will most probably not tell you honestly so you will have to observe. Another cultural thing: corruption! Stories about Chinese managers, copying the foreign company plant elsewhere in China as to compete are not that rare.

To go or not to go.. that is the question?

Don’t start with huge investments and use your psychology knowledge as to approach the market. Don’t view the market as a total: it’s surface is 9.6 million square Km, more than the United States and just less than Europe. The climat is of an extreme variety and the culture is very different from one place to another.

Don’t play big, play small and try to become local. If you want to enter the market, remember that the market is your goal and don’t focus on how good you are, you’ll have to start from scratch and see what they are looking for!

«The mightiest dragon cannot crush the local snake », a 16th century favorite Chinese saying

Footnotes:

[1The Economist - China Survey

[2based on the figures from l’Expansion - World Atlas of Economy 2004

[3The Economist - China Survey