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China has celebrated great economic success for the past 30 years. It is a big market and trading partner for UK businesses. Although many UK companies have succeeded in the China market and its 1.4 billion consumers, many have also crashed on its shores. Find out the essential tips for UK companies doing business in China and make the most out of your investments in Asia.
China is the largest country in the world by population, and second largest economy in the world. Many UK businesses are attracted by the size and the increasing spending power of its consumer market. With $5.6 trillion in forecasted retail sales, China is expected to overtake the US as the world’s largest retail market in 2019.
However, China is a unique country, historically, politically and culturally, and there is a lot to understand if you are a new entrant. In this article we share some tips for UK companies who wish to enter the Chinese market.
The World Bank ranked China 46th for “ease of doing business” in 2018. This is a tremendous improvement from 78th in 2017 but opening a business in China is still not as easy as in other jurisdictions, such as Hong Kong (ranked 4th).
In a recent business survey, 31% of 338 respondents think that bureaucracy is their number one concern. Common complaints are often related to licenses and permits, and their laborious processes. Once you decide to enter China, it is very important to clearly define the entire scope of their business operations in the Articles of Association (AoA) – to avoid having too narrow a scope and transgressing the law. Mastering the laws can also help to ensure your company run smoothly, and your employees are taken care of. Intellectual property rights is another area that has been notoriously difficult in China, although recent reports suggest it is improving very quickly.
China is made up of many different regions and cities, now grouped into 4 mega-clusters (Chengdu-Chongqing in the West, Shanghai-Jiangsu-Zhejiang in the East, Beijing-Tianjin-Hebei in the North and the Greater Bay Area in the South).
About 170 cities have more than one million residents. Major cities like Beijing, Shanghai, Guangzhou and Shenzhen have a gross domestic product (GDP) and population so big they operate like countries. According to consultant AT Kearney’s Global Cities Index, the number of big Chinese cities has jumped from seven in 2008 to 27 in 2018. This did not include Hong Kong, a special administrative region of China with its own currency and legal system. Any company planning to enter China will have to consider the unique characteristics of each city. The decision should be based on a number of things, such as the industry one is involved in, a place's infrastructure, its proximity to shipping ports and customer focus to name but a few. It is recommended to pursue sourcing/logistics/IT operations sectors in the Pearl River Delta region, whereas government-related industries are a better fit in the North. It is important to start well, research the most suitable location as switching around may lead to unnecessary amendment procedures and having to de-register and re-register at different tax bureaus.
With different buying habits, China’s market environment is detached from many other economies in the world, making it difficult to take the first steps. It is estimated that 37% of products that pass for the US market fail in the China market.
Amazon recently announced its closure in China. After a 10-year struggle for a foothold in the market, the US e-tailer decided it was better to keep it simple and leverage its gains on exchanging shares with local giant Kaola (Netease Group). Amazon’s share of the market was reportedly less than 1%, versus its local competitor, Alibaba which holds 60% market share in the 2018 fiscal year.
Alibaba was able to fend off the e-commerce giant, because of its commitment to data-driven innovation and personalised customer experience, fuelled by its ambition to create and showcase a brand new marketplace. It has built the world’s fastest cloud-based streaming processing platform that can process 10 million orders per minute.
In the F&B sector, Starbucks is facing local competition from Luckin Coffee, a local brand aiming to become China’s largest coffee chain with 10,000 stores by 2021. Although Starbucks has succeeded in introducing the coffee culture to tea-loving China, Luckin recognised the need for convenience and affordability. It is now preparing for an initial public offering in the US using a revenue-based approach instead of focusing on profits.
A few market leaders managed to take the challenge and turned the competition into new opportunities. Coca-cola learned from local brand Wahaha, leading beverage company in China and its Nutri-express, a blend of juice and milk and created a brand new line of products. Coca-cola’s version of the same beverage became very successful. Some of these China-innovated products became so popular they are exported to the rest of the world.
Despite the local competition, many foreign companies continue to thrive in the China market because they innovate in China as much as they would in their own home countries.
Consumer research firm, Ipsos, reported that affluent Chinese consumers are twice as likely to download an app offered by a luxury brand, compared to affluent non-Chinese consumers. 62% of Chinese luxury consumers are also likely to purchase online compared to an average of 37% across Hong Kong, Japan, South Korea and Russia. The younger generation is buying online and is using messaging, short videos, livestreaming, and social media apps as part of the buying journey.
Businesses looking to engage with the Chinese market need a strong online presence. As internet access is regulated, local platforms such as Weibo, WeChat and Baidu for standard social media and Xiaohongshu for Instagram-style influencer ads are some common channels to expose brands in the virtual space in China.
Weibo is a mix between Facebook and Twitter, while WeChat is an instant messaging platform. The latter is akin to WhatsApp with additional features such as payments, social and civil services by government agencies, financing options, e-commerce and even visas applications. Baidu is essentially the Chinese version of Google, it holds about 70% of search engine market share in China.
Localising content goes beyond Google Translate as local language idiosyncrasies mean that the same word may be interpreted differently cross-culturally.
When Japanese game-maker Nintendo renamed one of its most famous characters, Pikachu, from Cantonese (Bei-Ka-Jau) to Mandarin (Pi-Ka-Qiu), Hong Kong people were furious. The name change was seen as a tactless and disrespectful move against Hong Kong people, whose mother language is Cantonese, a dialect of Chinese (versus Mandarin, China’s official language).
Localisation goes beyond the translation of product names, but also on product selection based on consumer preferences. Decathlon in China has had remarkable success with tents, but not until they realized that they needed to modify their products to suit the market needs. Unlike in the UK, Chinese consumers don’t buy tents for camping overnight, but rather for a day out in the park. Decathlon China’s best-selling tent is a family tent with only light rain protection, but UPF 50 sun protection, a product that is not even available in the UK market.
To ensure successful rebranding in China, it is recommended to hire local experts to make sure all communications are clear and product selection is well researched.
There are no shortcuts in China
Registering and setting up of a WFOE in China can be a lengthy process. Many foreign companies look for consultancy services to help them register WOFEs, the ultra-cheap price and promises are often too good to be true. Before you appoint a service provider, it is important to first check their background and website, for a high level of transparency regarding their services and good command of the English language. Customer testimonials are great and straightforward ways to find out whether the company is reliable.
Your company is a direct representation of who you are as a businessperson, so choose carefully and work only with those who understand your unique needs and challenges so you can make the most out of your expansion in China.
We have the local knowledge to help you navigate your business. Whether you want to set up in China or just streamline your China operation.
Hawksford, with the headquarters in the British Isles and office in the UK, has many years of experience in setting up business in China and across Asia. Hawksford is experienced in meeting the regulatory compliance, tax, HR services and other outsourced needs of global clients who are seeking to invest in Asia. We helped the UK companies in a wide range of industries with a focus on manufacturing, retail, tech, innovation, trade and luxury fashion.
Our client servicing teams across Asia are multilingual professionals who speak fluent English, Mandarin, Cantonese, Italian, Spanish and French. We can help you understand and navigate the regulatory and tax environment and guide you through the steps of starting and managing a business.
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