Getting Past The “China Market” Hype

If there is one thing which never ceases to amaze me, it’s the sheer number of overseas investors seeking entry to China, who have a hard time seeing past the most basic facts and figures about the size of the Chinese market.

Most of these firms are American, which are, generally speaking, more addicted to numeric data than their European and Japanese counterparts. Some statements they frequently quote are:

Looking at China’s economic statistics in these terms, it is very easy for executives who have little or no experience selling products outside their own home markets to think that the potential of the Chinese market is something which will fund their own retirement nest eggs.

The great danger is that more often than not, they are unable to see past these initial assumptions about the Chinese market on the board and senior management level. In fact, as many learn to their own dismay, the Chinese market is complicated, filled with traps to capture uninformed executives who fail to grasp the difficult realities of China’s markets.

Let’s take a look at some of these wrong assumptions, followed by the facts:

  • “The size of the Chinese consumer market is huge.” (True, but for the most part, there is no single national market and no way to distribute nationally; you need to negotiate deals city by city and province by province. Every city and every province wants its own unique distribution deal in order to have uniqueness in the marketplace. The main problem is not high costs, but the amount of time it takes to roll out. While the customer numbers may be huge, revenue per customer/user are usually in fact very low in the beginning for most sectors compared to other more developed markets.)
  • “If I partner with a company with national distribution, then my job will be easier.” (True, but the companies which take on partners are usually the ones who are in trouble. Many of these are state-owned enterprises which lack business marketing skills, and are trying to translate their monopoly charters into revenue with the foreign partner’s help.)
  • “Our product is so good that it will market itself”. (If you believe your own PR in this regard, your company deserves to fail.)

For the most part, the most successful companies in China’s emergent consumer market economy are firms like Suning (in consumer electronics), Shanda (in online gaming and entertainment) and Suntech (in solar energy).

What do these companies have in common? They are new, and while they did have some government backing and connections in their very early stages, they have now transformed themselves into privately-owned businesses with their own management team and CEO. For the most part, these companies are very centrally managed by their founder/entrepreneur. Unless a foreign company is able to present a very strong case for partnering with them, they will prefer to build and distribute on their own. Why should they share their profits and revenues with another company, and help to build another brand which may become a future competitor? After all, that’s how they became dominant in their own sectors; they’re not about to make the same mistake themselves.

As China’s economy becomes more market-oriented, China’s state-owned enterprises are struggling to define their roles in this new economy. It is not enough to have a government-granted monopoly charter; they need to become profitable. This pressure for profit usually comes from the Chinese government’s State Council, which is China’s cabinet.

Their preferred solution is to set up a joint venture with a foreign company, which injects startup capital since the Chinese government, as a matter of policy, does not inject capital into joint ventures, instead offering other fuzzy stuff like “markets” and “connections” into the joint venture.

Most of these joint ventures fail because the two sides fail to do the hard work to insure that there is a complete alignment of interests and accountability for their investment in the JV. Most of the time, I blame the foreign partner’s inability to see past the market hype and think and discuss the whole project through with the Chinese government partner and clearly defining which partner has responsibility to perform what needs to be done.

The endless procession of foreign companies who come to China and throw good business sense to the winds without performing proper due diligence in order to secure a footing in the “China market” never ceases to amaze me. Why is it they seemingly only do this in China? Do they think that the Chinese will throw them out of the country for asking good legitimate business questions?

Chinese SOEs are in particular need of modern management skills, especially in the areas of marketing, sales and cost accounting. Foreign JV partners would in fact be helping the Chinese companies reform by holding them accountable to reach specific business goals. The SOEs have strong connections and resources in a potentially large market.

It is only when both sides are honest about their goals and expectations that they can succeed.

15 Responses to “Getting Past The “China Market” Hype”

  1. […] If there is one thing which never ceases to amaze me, itís the sheer number of overseas investors seeking entry to China, who have a hard time seeing past the most basic facts and figures about the size of the Chinese market. … …more […]

  2. China Works says:

    Another important consideration that foreign companies often ignore, is how they should adapt their business model for the Chinese market.

    After initial failure Ebay have now moved to a ‘free’ business model (pioneered by Shanda Online), where they only charge customers for premium services, rather than standard transaction fees. Microsoft only achieved their recent success by moving from their premium pricing model (as used in the West) to a rock bottom model, aimed at combating pirates.

    Other critical success factors that must be considered, including consumer education and awareness, salesforce training and set-up, low cost sourcing and logistics, giving back to local communities and of course a close working relationship with the government.

    China Works

  3. nanheyangrouchuan says:

    There is a famous “rags to riches” story about a minority peasant who worked his way up to the board of directors of one of China’s major consumer goods manufacturers/distributors. He was asked by other board members, executives and investors how to get Chinese peasants to consume more (and mind you all of these other people are chinese, just from much better backgrounds).

    His response was to take time to watch the migrant laborers (called “min gong”) in all of China’s major cities. People laugh at the min gong because they wear clothes until they literally fall off of their backs and wiped their mouths with the sleeves of their clothes. These behaviors are considered “primitive”.

    But the migrant now millionaire told them that these people are so thrifty they won’t spend one Chinese cent on paper tissues for anything but post-defecation use. Aside from basic necessities, they won’t spend money at all, instead they send it home for their parents, spouse and the one child (remember, in China you must pay for K-12 tuition, books and uniforms yourself). Each family is one injury, illness or layoff from utter financial ruin (ie street begging and/or prostitution).

    More often than not, an entire village will pool money for one big TV if they decide to buy one at all.

    And it is THESE people who constitute the 1 billion out of 1.3 billion. Now try to sell them a tv or dvd player so they can pay higher electric bills as well or some fashionable clothes that can’t tolerate the wear and tear of rural life.

  4. corbett says:

    Glad to see you here in the motherland after our long stints over in sisterland, that other China of .02 billion. Nice site!

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