Seven steps to enter the Chinese market

If you are going to conquer the Chinese market, remember that even large international companies do not always succeed.

Andrei Prokhorovich, CEO of Eurasia Development Ltd, tells what steps need to be taken for a successful business expansion to the Middle Kingdom.

Despite the fact that Beijing and Shanghai dropped out of the top ten of The Startup Ecosystem Ranking, China still remains one of the most attractive countries for starting an innovative business. Not least due to the fact that every five years the PRC allocates state subsidies and subsidies to support key industries. Today this list includes:

• energy security,
• AI and biotechnology,
• automotive,
• robotics,
• microelectronics,
• "green" technology.

Local authorities also develop those areas of the economy that are important for each individual region, attracting investment in them and creating favorable conditions for foreign start-ups.

When entering the market of the eastern neighbor, do not rush — preparing a product for entering the Chinese market is best broken down into seven steps.

Identification of promising market segments

According to McKinsey, China leads the world in investment in a range of technology niches, including EdTech and BioTech, leaving behind France, Germany, Japan and the United States.

These niches are considered potentially promising for foreign projects in China, as evidenced by the numbers.

Education

The Chinese education market is considered the largest and fastest growing in the world, with 283 million students of all ages (from preschoolers to university students).

Language programs account for 9% of all online courses. The specificity is that the Chinese are actively using VR and AI in teaching languages (for example, the Liulishuo application), and the main users of — these are children from three years old.

Biomedical technologies

Chinese biotechnology companies saw a 12% increase in profits in 2018, according to the National Pharmaceutical Industry Information Center of China. The local population began to pay more attention to their health, which means an increase in demand for related products.

Services

The service sector remains in demand, despite the goals of the "five-year plan". Now the main direction — this is the promotion of the sharing economy. Baidu CEO Robin Li said the sharing economy is in line with the country's socialist requirements. According to forecasts, by 2020 this area will account for 10% of China's GDP.

Introduction to mentality and business culture

It must be remembered that the Chinese sacredly honor centuries-old customs and traditions. Therefore, it is so important to be attentive to the national and cultural characteristics of the country. Some features of business etiquette may surprise, and therefore it is better to get acquainted with them in advance.

For example, local partners may be late for meetings, but it is better for a foreigner not to do this so that his actions are not perceived as an intention to humiliate the Chinese side.

An important point: in China, a lot is achieved through personal connections, so networking (or as it is called in China — guanxi) is of critical importance.

It is necessary to secure profitable acquaintances in order to further expand the business network of contacts. At the same time, it is important to find common topics for conversation, and not to act too straightforward.

Selection and verification of local partners

Attracting Chinese partners — a necessary step at the scaling stage, but it is better to start a business on your own by launching a company with 100% foreign capital (WFOE). In this model, control over the situation is maintained, and, in the event of a first success in the market, negotiating positions with Chinese partners are strengthened. In addition, at this stage, you can single-handedly attract grants from the government of the PRC.

At the scaling stage, you will have to look for local investors, transforming the company into a joint venture (JV) with a share in one or another proportion with the Chinese side.

Specialized consulting companies can deal with the selection and verification of partners, many of them have representative offices in most cities of China, as well as in the CIS countries, which will simplify the negotiation process.

Company localization

Large cities, such as Beijing or Shanghai, at first glance, look the most attractive for the launch and development of the project. However, in China, business is developing in clusters, so it is worth considering the scope in order to successfully localize.

• Zhongguancong (Beijing) has a strong IT and EdTech sector,
• in Shanghai — BioTech and pharmaceutical sector,
• in Shenzhen — hardware
• in Guiyang — Big Data.

At the beginning of 2019, out of all 186 unicorns in China, 79 are located in Beijing (mainly Zhongguancun), 42 — in Shanghai, 18 — in Hangzhou and 15 in Shenzhen, accounting for 82.79% of the total. They are followed by other cities such as Nanjing, Guangzhou, Suzhou, Tianjin and Hong Kong.

You can start the launch of the project on the basis of the technopark — it is they who mainly provide versatile support during the launch of the pilot version of the project. Each technopark can include several incubators, accelerators and other service companies.

It is also worth remembering that incubators are not suitable for foreign companies to enter the market.

• Firstly, they are mostly designed for Chinese small businesses.
• Secondly, they have limited opportunities and tools for foreign projects.

Support should go to science or technology parks and, in some cases, accelerators (depending on the business model, strategy, type of project or technology, stage of development, resources).

The presence of the company on Chinese sites

According to CIW, there are about 828 million Internet users in China, which means 828 million potential customers.

As you know, they are denied access to international resources. The most popular local search engine — Baidu, but unlike Russia and Western countries, the Chinese are far from looking for all types of services and goods there. Therefore, advertising in a search engine, albeit the most popular, cannot be considered a universal method of promotion. For each project, depending on the specifics, you need to look for a point solution.

In any case, you can consider the potential of other channels.

• Chinese e-commerce sites Tmall, JD, Taobao or others (depending on the product niche).
• Popular social networks — messenger WeChat (known in China as Weixin) with more than a billion users, as well as Weibo (similar to Twitter), Youku, Douyin. Here you can use all known SMM techniques, including targeting target customers, collecting pre-orders, awareness marketing.

Bloggers should be treated with caution — The influencer boom has faded and they no longer have the influence they used to have.

Copyright protection, study of legislation

In order to protect the technology from copying, a foreign company needs to register intellectual property rights (patents, copyrights, trademarks), which are protected in China by the National Intellectual Property Administration.

If the agency discovers the fact of unlicensed copying by a local player, it will face a large fine. Violation of intellectual property rights in China is punished quite severely.

A patent has territorial validity: registered in Russia, the US, or even Hong Kong, it will not be valid in China. According to local law, a local lawyer is required to register a patent of a foreign company.

In order to obtain a patent, an invention or utility model must meet the requirements of novelty and practical applicability. The term of a patent begins from the moment of filing an application for its registration.

• Utility model and industrial design can be registered for 1 year and valid for 10 years.
• The term for registering a patent for inventions is 2-3 years, it is valid for 20 years.

Acquaintance with the legislation is not limited to the sphere of intellectual property protection. Here is a short list of Chinese laws that must be studied by a foreign company:

• "On Bankruptcy of Enterprises";
• "About contracts";
• "About the Companies";
• "On contractual joint ventures of Chinese and foreign capital";
• "On corporate income tax";
• "About Chinese-foreign capital joint ventures";
• "About enterprises of foreign capital";
• "On Industrial Enterprises of Public Property";
• "About Advertising";
• "On Assistance to Small and Medium Enterprises";
• "About partnerships";
• "About Trademarks";
• "On Labor";
• "About the employment contract".

Adaptation of the product to the specific needs of the local market

Many Western giants built their business in the Chinese market for decades before they managed to conquer it. A striking example — fast food chain Domino’s Pizza. Their main mistake was that they were based on a Western business model (branches in large cities, emphasis on product delivery).

The founders of the network of pizzerias "Dodo Pizza" immediately took into account the peculiarities of the Chinese market. Through experience, they have come to the conclusion that the Western model of pizza delivery does not work, since the delivery market in China is crowded: even a glass of coffee is delivered.

The founders have changed the concept by launching a brand new production system and unique recipes especially for the Chinese (such as durian and octopus flavored sweet pizza). The company abandoned cashiers and waiters, and moved all orders to WeChat.

Thus, when planning a strategy for entering the Chinese market, you need to mentally prepare for investing more resources — temporary, financial, human, — than might be required in other countries.

But understanding the specifics will help build a successful business model and strategy for entering the Eastern Neighbor market, attract significant investments and occupy your niche in this market.

How to get the maximum

• Analyze the market: tech niches develop unevenly. It is better to focus on your own research of foreign companies with experience of a long presence in the market, — they are less biased. The most promising directions — those supported by local government grants and those that are growing rapidly regardless of government investment policy. Today, EdTech, MedTech, Sharing economy and a number of other areas are rapidly developing in China.
• Good acquaintances — is the must. Need to find the "right" people who will introduce you to other "correct" people. This can be done on your own, through a long entry into the Chinese business world and full immersion with the risk of mistakes, or through an agent company providing internal market consulting.
• Do not rush to create a partnership with the Chinese at the start — in this case, it is easy to lose control over the further development of the company. It is better to achieve the first success on your own by launching a company with 100% foreign capital, and then bargain for shares.
• When localizing a company, it is important to choose the right city, since business in China develops in clusters. Beijing and Shanghai — far from a universal option.
• Promotion on the Internet has its own characteristics: if in Russia search advertising — this is one of the most effective tools, then in China everything is different. The main promotion channels — marketplaces and local social media.
• Don't forget about the — he really guarantees the safety of copyright, with this in China is strict.
• Do not step on someone else's rake. Many large successful companies have tried to enter China, but not all of them succeeded. Look at the experience of players in the same niche — their mistakes will be the best textbook for starting a business in China.