“Know before You Go”: Devising Your China Strategy

China’s market and business environment is very particular and dynamic in its essence. It welcomes all types of enterprises from different countries and with varying skills, commitment, and strategies. It can be very rewarding for many foreign businesses, especially those who conduct proper market research and craft adequate strategies to execute right from the start. China being a very diverse country with several unique market segments, it should never be seen as a single market. Even cities are divided into tier cities. While Shanghai and Beijing are considered first-tier cities, cities like Chengdu, Hangzhou, and Dalian are considered second-tier cities and a large number of small cities are considered third- and fourthtier cities. When crafting your China strategy it is important to ensure that what you are trying to do is perceived to be in the interest of some important local political entity. If no particular government industry is excited about the project, if no Chinese partner thinks it’s a good idea, then you can be sure that it is not going to be easy. It is equally important to keep in mind that for Western businesses targeting the Chinese market there are certain battles not worth fighting. My suggestion is that you avoid to compete against domestic cost-based products.

These are a few pieces of advice I believe China newcomers need to have in mind:

Choose to fight “winnable” battles

Some industry sectors are dominated by Chinese companies, offering competitive quality products at prices fairly lower than those most foreign companies would be able to offer. These sectors are nearly impossible for international companies to penetrate when targeting the country’s mass market. In other words, there are certain battles not worth attempting. For instance, for foreign companies seeking to compete in the consumer electronics industry, for example, washing machines, refrigerators, and air conditioners, they will find it very hard to enter because it is a volume game and winning it proves extremely difficult.

Innovate

A growing number of Chinese firms are becoming expert at creating products and services on par with those introduced by global companies. In this case, the best survival strategy is just to keep moving, by continually upgrading as a way to stay ahead of the domestic firms. Chinese competitors study foreign companies, their products, and how they market them. They study and learn what they do and are very good at determining what works. It is, in fact, this adaptability combined with a deep understanding of the local market that gives Chinese businesses the best of both worlds. Keep in mind that social innovation is a must. Given that domestic companies know the local culture much better than foreign businesses they can be very strong competitors. Therefore, constant innovation is a must. You need to keep moving and improving your products and services as well as your understanding of your customers’ evolving needs.

Beware of overinnovation

One common dangerous tendency among foreign companies operating in China is to target the Chinese market by introducing higher-end products which are not only priced out of range but also include features that Chinese consumers do not need. It is essential that high-tech companies try to avoid what is called “misdirected overengineering.” For instance, a few years ago, an international consumer electronics company introduced cellphone handsets built to last 10 years and phone batteries with 20-year long warranties. But who would use a cellphone for more than two years? When these products were marketed in China, local manufacturers responded by creating product versions with very similar features but sold at much lower retail prices.

Merge, don’t fight.

As the famous saying goes “if you cannot beat them, join them.” One popular—and often very effective—method of meeting the growing competition challenges coming from Chinese companies is to join forces instead of continuing to fight. A very popular strategy among many Western companies is to acquire or merge with domestic firms. In fact, for many Western companies, mergers and acquisitions offer the advantages of a JV partnership without the threats and risks that the latter might involve.

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