2020 Chinese Consumer Report: A Summary for Busy People

McKinsey has just released their consumer and insights report “Meet the 2020 Chinese Consumer”, that hopes to identify trends that may influence companies´ long to medium term strategic thinking. You may download this report from here.

If you want a brief recap of what you will find there, these are some highlights:(but I encourage you to read the full version)
Introduction:

-Consumption, rather than investment, will be the driving force for GDP growth. It will account for 43 percent of total GDP growth by 2020, compared with a forecast contribution from investment of 38 percent, internal research suggests.

-Transition from investment-led to consumption-led growth will depend on several factors: continuous rapid urbanization, government measures to improve social security and boost private consumption (aggressive measures to boost private consumption are a key plank of the latest five-year plan), and financial sector and industrial reforms that will lead to the creation of service sector employment and increase income.

Changing Demographics:

Many of the changes taking place are common features of rapid industrialization: rising incomes, urban living, better education, postponed life stages, and greater mobility, for example. But there are also some unique factors:

1.Shift in Consumer Profile: from Value Consumer to Mainstream Consumer

-Per capita disposable income of urban consumers will double between 2010 and 2020, from about $4,000 to about $8,000.

-“Mainstream” consumers (relatively wealthy households-annual disposable income of between $16,000 and $34,00) is expected to reach 51 percent of the urban population compared to 6 percent at present.

-Why is this important for companies?
82% of the consumers fall currently into the “value” category ($ 6,000 to $16,000 annual disposable income), which has clear implications for companies that must decide between targeting the smaller group of afluent/mainstream consumers or stretch their brands to serve value consumers. This will not be the case in 2020.

-Currently, around 85 percent of mainstream consumers are living in the top 100 wealthiest cities. Another 10 percent of mainstream consumers live in the next 300 cities today, but this percentage will swell to nearly 30 percent by 2020.

2.Aging Population

-Life expectancy rises and birth rates fall—the latter the result of the one-child policy that was introduced in the 1970s and remains partly in effect today.

3.Postponed Life Stages

-In 2020, 40 percent of high school students will enroll in college (25 percent in 2010). This will have some implications:
-postponing marriage and having a family
-more time for recreation, entertainment, and travel
-more time to spend with friends and colleagues, changing the tone of family relationships as peers become increasingly influential.

4.Increasingly independent women

-Despite this historic bias toward male children, women are playing an increasing role in the economy (67 percent of the workforce compared to 58 percent in the United States in 2009).

-The one-child policy has freed many women from caring for large families, indicating that workforce participation rates will rise further.

-Income gap between men and women, already smaller than in many developing countries, may narrow further. Women will be increasingly independent and become equal partners in financing their family’s purchases, as well as attractive consumers in their own right.

Mainstream Consumer: New Spending Patterns:

Some key trends in spending patterns in the next decade.

1.High growth in discretionary categories

Higher incomes and government efforts to boost consumption will benefit all consumer-facing companies, although to varying degrees depending on their product portfolios. Discretionary categories will show the strongest overall growth.

2.Tendency toward trading up to better versions of goods and services

This trend will be driven increasingly by consumers aspiring to improve themselves, the way they live, and their perceived social standing

3.Emergence of a senior market

-In 2020 there will be extra 126.5 million citizens above age of 65, clearly an important consumer segment.

-Spending patterns of older people in 2020 will differ from those of older people now, with less inclination to save and more willing to spend on discretionary items such as travel, leisure, and nice clothes than today.

4.Evolving geographic differences

-Geographic disparities in spending will remain significant over the next ten years. While the gap in basic necessities will narrow it will widen for discretionary categories such as consumer electronic products, reflecting differences not just in wealth but taste too.

-Strong, regional differences in tastes and attitudes will remain, which means some regional companies, are likely to dominate locally, helped by strong, regional economies of scale.

 

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Retail in China: Choosing your Business Model & 10 Tips for a Successful Set Up

This post compiles a series I published a few months “Retail in China: Choosing your business model & 10 Tips to help a successful set up”. I´ve compiled it to help shareability and bookmarking. I have also included some valid comments from the readership. I hope you find it useful.

Has the Chinese retail boom lured you to consider this market for your products? You are not alone. The rapid growth of the Chinese middle class is increasing this market’s attractiveness.

I had been wanting to write a series about retailing in China so when I met Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai, I thought she would be the right expert to contribute to a series of articles on the topic.

What you will find here:
(I): Choosing your Business Model (Distributor/ Agent/ Franchise/ Corner/ Shop / Internet)
(II): 10 Expert Tips to Help a Successful Set Up

 

CHOOSING YOUR BUSINESS MODEL
1. DISTRIBUTORS & AGENTS:

Selling your products through distributors or agents is the “easiest” way to penetrate the Chinese market. It does not require a high investment and it allows assessment of the Chinese consumer’s reaction to your product.

It is not free of risks, though, as you may find yourself in the middle of a chaotic distribution network that is difficult to control.

a) Distributor vs Agent: Different Roles/Responsibilities

– Distributors buy and sell the products; their profit is the difference.

– Agents act in the name and on behalf of the foreign investor; they receive commissions on sales.

– Degree of trust: The agent generally enjoys a higher degree of independence and is able to change certain conditions without the explicit consent of the principal.

b) Tips on how to deal with agents/distributors in China

– Tip #1. Licences: Ensure your distributor/agent has the required licences to retail your products.

– Tip #2. Exclusivity: Try to reduce the exclusivity territory (you may attach a map to the contract). Generally, exclusivity for all China is a bad idea.

Note from Foreign Entrepreneurs in China: When I first posted this article I got a comment from a reader who strongly opposed this tip. I think he made very valid points (real life experiences) to ponder when making a decision. These were his words:

As a matter of fact companies who chose more than 1 distributor regret it and changed their strategies later, after assessing that:
1 – no one of the distributors was willing to advertise the brand because others distributors may enjoy the benefits as well;
2 – no one would share the leads gained during National trade shows. A distributor based in Shanghai would collect leads of visitors from all China and you honestly believe that he is going to share those contacts?
3 – No one will respect the territorial limits because they do not want (especially if you set sales targets);
4 – even if the distributors are willing to respect the territorial limits they customers will not. eCommerce has no boundaries within mainland China, and retailer chains are selling all over China;
5 – no one would feel responsible for the price control, resulting in price wars. Especially distributors located where the operating costs are lower can and will cut prices the most.

– Tip #3. Establish sales targets and regulate your rights in case they are not met (e.g. termination or end of exclusivity).

– Tip #4. Commissions: describe clearly the calculation basis for commissions in the agency agreement.

– Tip #5. IP Rights: Define the use of IP rights, promotion and publicity materials. Do not grant property on IP rights; grant instead a licence of use.

– Tip #6. Termination: Reasons for termination are a key issue in distribution/agency contracts. Do not forget to regulate the consequences of such termination (e.g establish sale of stock to third parties / to the foreign investor, destroy / return the promotion materials, etc.).

– Tip #7. It is quite common for entrepreneurs and SMEs to initially “test the waters” with a distributor or an agent, and once they understand the market better and how their product works, they take it to the next level.

2. FRANCHISE:

a) Franchisors: Laws & Regulations

Under applicable laws and regulations, there are certain conditions imposed on franchisors in China:

– Legal form: Having a commercial company in China (JV or WFOE) or abroad. Individuals cannot establish a franchise in China.

– Previous experience: Having at least 2 own shops operated directly by the franchisor (in China or abroad), for more than one year.

– Business model: Having a business model and the ability to render assistance and give instructions to the franchisee, as well as technical support, training and other services.

– IP rights: Having a trademark, patent or know-how (suggestion: register your IP in China).

– Registration of confidential business information: For every signed contract, franchisors must register with the competent authorities highly detailed (and usually confidential) information, such as: original franchise contract, marketing plan, franchisee manual, etc.

b) Franchisees: Some things you should know about their rights

Your Chinese franchisee has some rights that you should be well aware of:

– Your franchisee has the right to unilaterally terminate the contract without paying an indemnity if:

1) the franchisee claims that the information supplied is incomplete or untrue.

2) after a “reflection period” the franchisee decides to back out.

c) Tips on how to deal with your potential franchisee

– Tip #1. Make the franchisee sign a receipt acknowledging that the information received is complete.

– Tip #2. Clearly define in the contract how long this “reflection period” will last and try to make it as short as possible (i.e. within 1 day from the execution of the franchise contract).

– Tip #3. Enter a non-disclosure agreement (“NDA”), as you will be sharing all your business information.

d) China Franchise: Main issues

– Lack of payment by the franchisee is common; there is not a real franchise culture in China.

– Lack of confidentiality.

– Difficulty in controlling brand image.

– Legal uncertainty due to:

a) franchisee’s right to unilaterally terminate the contract.

b) reclassification risk: if, in order to avoid the disadvantages, the franchisor has established a distribution network that works as a franchise in practice, authorities may reclassify the legal relationship and impose a penalty (RMB10,000 to RMB500,000).

e) Recommendation

– If possible, enter the market initially managing your own stores, so that you can fully understand the market before you start granting franchises.

f) Conclusion

For obvious reasons, the franchise regime is very restrictive for franchisors and inevitably favours franchisees. As a result, some companies establish a distribution network that works de facto as a franchise. As we have pointed out, there is a risk of reclassification into franchise and the consequent sanction. In addition, in the new draft of the Catalogue for Foreign Investment (which regulates which are the encouraged, permitted, restricted and prohibited activities to be carried out by foreigners in China), the franchising business is now encouraged, which make us think that in the future the regime will be less restrictive and more favourable for foreign investors.

 3. CORNER

This is an individually tailored mini-shop whereby the company rents a small space in a mall. The rent has often a fixed element (based on the number of sq. m. occupied) and a variable part (that is a percentage of the sales made).

a)Laws and Regulations

– You don’t need to establish a company in China to start your business through a corner – you may do it through a local agent.

– Your agent needs to have the so-called “Tax Payer General Status” (1).

– The term of these contracts is usually from 6 months to 1 year.

– Renewal is subject to sales targets being met.

b) Advantages

It is a small investment; it allows making the products known, understanding the potential client profile and checking consumers’ reaction.

c) Tips

-Tip #1 You should be aware that many malls impose restrictive conditions in terms of the brand (e.g.it must be a reputable international brand).

-Tip #2 The tenant must ensure a minimum profit in the first months.

-Tip #3. Often the contract (which is usually short term) may be terminated unilaterally by the landlord.

4. SHOP LEASE

This could probably be, from a financial perspective, your riskier option. The main advantage, though, is the full control you have on your operation.

a) Laws & Regulations

– Shop equals Branch: So, for every shop that you open, you need to register a branch (it takes 1-2 months if branches are on the same city and 3 months when it is in a new city)

– Contract Length: 3-5 years

b) Advantages

– Not subject to specific sales targets being achieved. You pay a rent and a deposit

c) Tips on how to negotiate a shop lease

-Tip #1 Understand who is renting the space to you (i.e. the owner or a lessee) – you might be renting the space from a person who is not actually the landlord (but, for example, a tenant who is trying to sub-lease the premises). In such case, if the tenant does not manage to renew the contract with the landlord, you may be forced to leave the shop, after having invested in decoration, marketing, etc. You should therefore always ask the supposed landlord for his/her certificate of ownership of the premises.

-Tip #2. Understand what is the legal use of such premises (e.g. residential, commercial, etc.). In the certificate of ownership, you will be able to check what is the use of such premises. Please note that if the premises do not have a commercial use and, for example, they have a residential use instead, you are not supposed to locate a shop in such place- the authorities would deny the registration of this shop as a branch or as the registered office of a company. Furthermore, if you have an inspection, you will be exposed to sanctions.

-Tip #3. Try to negotiate renewal conditions in the initial lease contract (e.g. a maximum percentage rise per year) so that you don’t see a big hike in rental cost when the renewal time arrives

– Tip #4.If your shop will be in a mall that is currently under construction, we advise you to sign a letter of intention first and to negotiate the lease once the mall has the required licence.

5. INTERNET SALES

a) Recent history

Joint Ventures and WFOEs have been allowed (theoretically) to engage in retail activity through the internet since 2004. The reality has been quite different though. Central MOFCOM had to approve these activities and approvals have either been put on hold or suspended.

Foreign companies used to navigate this difficulty in two ways:

– Avoiding setting up in China: but there are a number of hassles (logistics, currency exchange …)

– Partnering with a local broker

b) Update on Law & Regulations

This type of retail activity has now seen some encouraging signs. MOFCOM issued on 19 August 2010 the ”Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Sales via the Internet and Automatic Vending Machines”. The main changes that this circular represents are:

1. For established FIEs:

Internet sales are regarded as an extension of an FIE’s regular sales activities and can be conducted without any need to obtain additional approvals.

2. For Companies trading only through the internet:

Applications for the establishment of an FIE specialising in Internet sales are to be submitted for approval to the appropriate provincial-level agency under MOFCOM instead of central MOFCOM, which has two positive implications:

-speeds up the approval process, and

-promotes competition among regional administrations to capture foreign investment.

3. Some requirements on-line businesses should meet:

-display its business license in a prominent position on its website home page or on the website where it conducts sales activities.

-establish a comprehensive system for the return or replacement of goods.

-strictly protect consumers’ personal privacy.

-abide by China’s consumer laws and regulations.

 

 

(II) 10 EXPERT TIPS TO HELP A SUCCESSFUL SET UP

Before we start operating retail activities in China, there are a few things we should know as they may affect our business success.

1. Register brands /patents as soon as you decide to enter the market

Chinese distributors often “believe” they have the right to register the brands they are marketing. This is the reason why we recommend brand or patent registration as soon as a company starts considering doing business in China, and definitely before they start contacting potential distributors. Although it is a lengthy process (at times it may take up to 2 years) the application grants priority to the first applicant. Intellectual and industrial property protection may not be easy in China, but enforcement has been improving lately.

2.- Choose carefully your brand’s Chinese name… and register it

The brand’s Chinese name should not just be a phonetic rendition of the original brand, it should also be adequate to the image we want our products to communicate. Some distributors may refuse to market our products unless they have a suitable Chinese name.

3.- Become familiar with Chinese negotiation tactics

Chinese negotiation style is quite different from the Western style to which we are so used. When negotiating a contract in China, you will often encounter situations like this (just to mention a few):

-your Chinese partner tries to re-negotiate points that have already been agreed upon

-you see yourself interacting with a number of negotiators and you are not too clear who is the real decision-maker

-a company representative is flying into China to sign an agreement and the Chinese party waits until the last day to raise important issues, so as to get them solved to their advantage (they are the masters of the “time factor”).

All this can easily generate frustration and uneasiness, but understanding the Chinese negotiation tactics will help you be better prepared. We can’t give a “negotiation course” in two lines, but we can advise the following:

3.1) Expect long negotiations (and renegotiations) – so make allowance for delays in your timelines.

3.2) Try to keep your cool.

3.3) Try to assess who is the decision maker.

3.4) Evaluate how much information you need to release (Information is Power: the other party should not be clear about your constraints or when you are reaching your final deadline …)

3.5) Brief your organisation back home about “the Chinese way” so that they are ready in case any contingencies arise.

4.- Get adequate / sufficient information about your potential distributor or partner

Get a financial report about your potential partner, so that you can verify who they really are, what are all their business lines, whether they can become competition to your business, if they have the required business licences, what their experience is … And it is always advisable to visit their offices, warehouses and/or factories (do not rely on a website, which may contain false information).

5.- Don’t rely 100% on the Chinese partner to follow all the administrative processes/steps

Often companies delegate all the administrative, legal or tax procedures to the Chinese partner. It is important not to blindly trust that all procedures and licences are in place, to avoid later surprises like product being stopped at customs, fines, tax issues, etc. …

6.- Ensure your potential partner’s alignment with your business mission

Companies need to ensure the Chinese partner or distributor understands and shares your business vision and objectives, so that all efforts are focused on achievement rather than re-discussing everything all over again.

7.- Customize your product to local demand

Before we hit the market, we should research consumer reaction to our products. A lot of international brands have adapted their products to better suit the Chinese consumer and guarantee success (e.g. MacDonalds has customised menus for its franchises around the world).

8.- Set the right price point &be conservative about it

The Chinese consumer is very price sensitive and will not pay a premium price unless there is a clear selling point / advantage (quality, brand image …). We tend to recommend avoiding very premium price points in initial stages (unless very clearly justified), to devise loyalty programs (discount cards, VIP promotions …) and to invest in marketing.

9.- Watch out for the internet response

China has the highest number of cybernauts in the world, and they are also extremely engaged in forums, blogs and other internet social networks. This also includes those forums where products and brands go under scrutiny / review. Companies should ensure that the internet is part of their marketing strategy, as a mistake in their brand positioning may affect their reputation / business.

10.- Include location as a factor in your overall China strategy

Another decision that companies need to make is where to locate their retail businesses: tier 1 cities like Shanghai, Beijing or Guangzhou, or tier 2 and 3 cities. Companies like Nike or Adidas started marketing their products in Shanghai and Beijing and have now progressed into tier 2 cities. Other brands have followed the opposite strategy, for example the Chinese brand “Peak” started by capturing the smallest municipalities and has been adding market share through medium range products.

Another example would be the Chinese brand Eno. They follow different strategies in tier 1 and 2 cities. Their objective in tier 1 cities is to improve / build brand image, while they make money in tier 2 cities where costs are lower. Quoting Eno’s founder, Renee Hartman, “look pretty in tier 1 cities, make money in tiers 2 and 3”. Their products, designed for a young urban consumer, have succeeded in that market segment and the company was selected “most innovative”company in China” by Fast Company Magazine.

 

(1) Small scale taxpayer – ordinary taxpayer
When can a company apply for qualification of VAT ordinary taxpayer?
A trading company (wholesale or retail) after its setting-up, having achieved an annual turnover of no less than RMB 800,000.
According to a circular promulgated by the State Administration of Taxation, effective as of 20 March 2010, a trading company having not obtained an annual turnover of 800 000RMB may also apply for the qualification of ordinary taxpayer if it cumulatively satisfies the two following conditions:
a) It has a fixed place of operation.
b) It can establish accounting books in accordance with the Chinese regulations on accounting, and possesses legal and valid accounting vouchers, and can present exact accounting tax documents.

 


 

Taobao.com and Online Shopping in China

Very interesting article on The China Observer about Taobao.com, the largest C2C/B2C e-commerce platform in China.

I quote below Joel Backaler´s key message. You can read the full article here:

 The China Observer View
Marketers seeking to sell their products online in China should think twice before investing in independent online shopping portals. Taobao is where Chinese consumers prefer to shop online – rather than try to convince them to shop on your site, consider opening a branded online store on Tian Mao where consumers are already shopping.

Additionally, marketers should keep an eye on the rise of mobile e-commerce in China. “M-commerce” will continue to grow in importance in the coming years; however, for now it is a form of payment limited to relative early adopters.

 

And if you are considering starting online sales in China, I capture here a few lines from a previous post entitled “Retail in China:Choosing your Business Model

INTERNET SALES
a) Recent history
Joint Ventures and WFOEs have been allowed (theoretically) to engage in retail activity through the internet since 2004. The reality has been quite different though. Central MOFCOM had to approve these activities and approvals have either been put on hold or suspended.

Foreign companies used to navigate this difficulty in two ways:
– Avoiding setting up in China: but there are a number of hassles (logistics, currency exchange …)

– Partnering with a local broker

b) Update on Law & Regulations
This type of retail activity has now seen some encouraging signs. MOFCOM issued on 19 August 2010 the ”Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Sales via the Internet and Automatic Vending Machines”. The main changes that this circular represents are:

1. For established FIEs:
Internet sales are regarded as an extension of an FIE’s regular sales activities and can be conducted without any need to obtain additional approvals.

2. For Companies trading only through the internet:
Applications for the establishment of an FIE specialising in Internet sales are to be submitted for approval to the appropriate provincial-level agency under MOFCOM instead of central MOFCOM, which has two positive implications:

i) speeds up the approval process, and

ii) promotes competition among regional administrations to capture foreign investment.

3. Some requirements on-line businesses should meet:
i) Display its business license in a prominent position on its website home page or on the website where it conducts sales activities.

ii) Establish a comprehensive system for the return or replacement of goods.

iii) Strictly protect consumers’ personal privacy.

iv) Abide by China’s consumer laws and regulations.

 

So, do you have an online presence in Taobao? What about online presence?

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When Doing Business in China Means Doing the Right Thing : Helping the Little Ones in Need.

Olivia’s Place is a paediatric therapy clinic in Shanghai that offers occupational, physical, and speech therapy as well as educational psychology and learning support services.

Olivia’s Place has also set up a charitable foundation in order to provide access to therapy for families in need of such services.

I have unfortunately needed their paediatric therapy services but was extremely fortunate to find them. And as the three founders, Quynh Chow, Nelson Chow, and Maggie Tai Tucker are foreign entrepreneurs (from the U.S.) in Shanghai, I could not help but devote an article to them. Today I will share with you a bit of their experience, the lessons they’ve learned, some tips for those wanting to follow their example, and a way to contact them in case you wish to help.

The Market Need: A Paediatric Therapy Clinic Where a Multidisciplinary Team Can Work Together to Better Fulfil Their Little Clients’ Needs

Quynh and Nelson Chow had suffered the lack of quality service in their own lives. Their elder daughter, Olivia, has Down Syndrome, so they had to go through the nightmare of running from one clinic to another in order to give her all the therapy she needed. They felt and knew that that was not the type of support they wanted for her, and they decided that, if not available in town, they would make it happen themselves.

That’s how Olivia´s Place started to take shape. They knew what they wanted:

  • A Centre where all paediatric therapies are available
  • The best therapists
  • Standardised assessment tools and protocols
  • A multidisciplinary team in-house
  • Clean and healthy environment
  • Optimised treatment rooms

This may all sound like basics to those of you who know about this topic and can enjoy it back home, but if you live in China and have ever been in need for this type of service, you may have found yourself spending a lot of money on suboptimal services. Moving from one provider to another, as clinics who provide one service don’t provide others, or in less than optimal settings (like a hospital room where nobody cleans the floor your child is crawling on between therapy sessions) and without access to a real assessment (a lot of professionals can do treatment but are not able to do assessment – so will treat your child without first working out what really needs to be done). There is a lot of room for improvement.

8 Business Challenges & Decisions They Faced (or are Facing)

1. Deciding Upon the Right Legal Entity

Olivia’s Place’s founders initially desired to register under a medical clinic and educational license. That would have allowed them to expand their services into other activities like a kindergarten … But they soon discover the number of hassles that would entitle:

– A huge capital requirement

– Receiving regular visits by local authorities (e.g. the Ministry of Health, Ministry of Education).

They ended up registering under health consulting, which has a wide coverage, is health related and perfectly covers the type of activity that currently takes place in their clinic.

2. Local vs. Foreign Company

A lot of foreign entrepreneurs go through this decision process. And you often get warning signs about the dangers of fully relying on your local partner (e.g., if things go wrong, you may find yourself at a disadvantage when you claim your rights).

Olivia’s Place’s is registered as a local business. The registered owner of Olivia’s Place does not get involved in the day-to-day management of the clinic. He leaves that up to the founders to do. He is someone who the founders truly trust. This has allowed the clinic to be set up with a lower capital requirement.

And as they simply put it: “we are not in this for the money”. They want this for their daughter and for other families in the same situation. Quynh has been volunteering for no salary while the clinic reaches financial stability, and Nelson has another job, which actually brought them to Shanghai.

3. Recruiting the Right Staff

Olivia’s therapists hail from all over the world. They have expertise and experience from the United States, Great Britain, Chile, Germany, and Taiwan, just to name a few. Some have dual degrees in education as well as in therapy.

Quynh Chow tells me “It is not easy to recruit the type of highly committed professionals we are looking for. Still we feel fortunate because we have been able to attract people who realise we are giving back a lot to the community. They see it and help us.”

4. Bringing the Clinic to Full Utilisation

Parents are quite reluctant to bring their children during school hours. That means that the clinic is fully booked from about 2:30 – 3:00 p.m. onwards, and on Saturdays, but goes quiet the remaining time.

There is also a seasonal factor. Clients simply leave the country for weeks during the summer holiday.

5. Reconciling the Desire for Affordable High Quality Therapy with the High Costs Involved

Olivia’s Place has always aspired to provide “the highest quality services at affordable prices and to be able to subsidise families in need, too”.

This aspiration caused them initially to have “too optimistic business projections”. Quynh tells me “Our budget did not account for the long summer months when none to low activity would hit us. Plus, staff are highly qualified and a scarce resource in town [hence expensive]. Equipment is pricey too. We initially mispriced our services and dragged along the situation for months till we finally decided to increase fees so that we could ensure survival. Our fees are still lower than other providers but the type of service we provide is nonetheless cheap”.

6. Building a Reputation

“It takes time to get a reputation. In our initial days, we struggled to arrange meetings to introduce ourselves and our project. Some schools would not even meet us to talk about our services. Thanks to our work since we opened the clinic, this situation has changed now. We are already collaborating with schools and sending our therapist to their campuses to provide therapy, either in the classroom or as pull-out sessions. Most of the therapy sessions involve table-task activities and do not need large spaces or specialized equipment. For those children who do need our equipment, we asked the parents to bring them into the clinic as the therapy would then be most effective.”

And in order to continue building a solid reputation, they have also brought on board a person responsible for the marketing side of the business.

7. Having the Right Location for a Scattered Clientele

“No matter where you place your clinic, you always hear parents “complaining” about how far we are”. Shanghai is a huge city, and expats, whom at this stage represent eighyty percent of the clients, are spread all over the city. The clinic is located in the middle of town.

8. Getting the Right Equipment in China

Olivia’s Place prides itself on having the highest quality standards. This applies not just to their recruitment standards but also to the equipment utilised in the clinic. This proved to be also a bit of a challenge because, although labelled as “Made in China”, a lot of the equipment needs to be imported as it is not sold here. Olivia’s Places currently imports most of the equipment from the United States.

9. Setting Up a Foundation… and Making the Donations Happen

Quynh and Nelson set up a foundation, donating US$10,000 themselves, in order to expand the clinic services to families in need that could not afford them. The foundation has ensured that eight families get access to Olivia’s Place services, either through free assessments or at low fees. A reviewing committee comprising of three doctors reviews the cases and decides who gets the funding based on a series of criteria like who is going to benefit more from the therapy. Now they have seventeen families on the list awaiting consideration and could do with more funding.

This post is especially dear to me, as I really admire the efforts (personal and financial) Quynh and Nelson are doing to offer a much needed community service and to help those who can’t afford it.

If you want to know more about them, you can visit their website:
www.oliviasplace.org

And if you wish to support them, please email contact@oliviasplace.org. Someone will respond to your inquiry within 48 hours.

 

Share this article with people who may find it useful/interesting!:

 

Retail in China (III): 10 Expert Tips to Help a Successful Set Up

This is the third post in collaboration with Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai. You may read our previous posts on Retail in China in the following links:
Retail in China (I): Choosing your Business Model (Distributor/ Agent/ Franchise)

– Retail in China (II): Choosing your Business Model (Corner/ Shop / Internet)

Retail in China (III): 10 Expert Tips to Help a Successful Set Up

Before we start operating retail activities in China, there are a few things we should know as they may affect our business success.

1. Register brands /patents as soon as you decide to enter the market
Chinese distributors often “believe” they have the right to register the brands they are marketing. This is the reason why we recommend brand or patent registration as soon as a company starts considering doing business in China, and definitely before they start contacting potential distributors. Although it is a lengthy process (at times it may take up to 2 years) the application grants priority to the first applicant. Intellectual and industrial property protection may not be easy in China, but enforcement has been improving lately.

2.- Choose carefully your brand’s Chinese name… and register it
The brand’s Chinese name should not just be a phonetic rendition of the original brand, it should also be adequate to the image we want our products to communicate. Some distributors may refuse to market our products unless they have a suitable Chinese name.

3.- Become familiar with Chinese negotiation tactics
Chinese negotiation style is quite different from the Western style to which we are so used. When negotiating a contract in China, you will often encounter situations like this (just to mention a few):
* your Chinese partner tries to re-negotiate points that have already been agreed upon

* you see yourself interacting with a number of negotiators and you are not too clear who is the real decision-maker

* a company representative is flying into China to sign an agreement and the Chinese party waits until the last day to raise important issues, so as to get them solved to their advantage (they are the masters of the “time factor”).

All this can easily generate frustration and uneasiness, but understanding the Chinese negotiation tactics will help you be better prepared.  We can’t give a “negotiation course” in two lines, but we can advise the following:
3.1) Expect long negotiations (and renegotiations) – so make allowance for delays in your timelines.
3.2) Try to keep your cool.
3.3) Try to assess who is the decision maker.
3.4) Evaluate how much information you need to release (Information is Power: the other party should not be clear about your constraints or when you are reaching your final deadline …)
3.5) Brief your organisation back home about “the Chinese way” so that they are ready in case any contingencies arise.

4.- Get adequate / sufficient information about your potential distributor or partner
Get a financial report about your potential partner, so that you can verify who they really are, what are all their business lines, whether they can become competition to your business, if they have the required business licences, what their experience is … And it is always advisable to visit their offices, warehouses and/or factories (do not rely on a website, which may contain false information).

5.- Don’t rely 100% on the Chinese partner to follow all the administrative processes/steps
Often companies delegate all the administrative, legal or tax procedures to the Chinese partner. It is important not to blindly trust that all procedures and licences are in place, to avoid later surprises like product being stopped at customs, fines, tax issues, etc. …

6.- Ensure your potential partner’s alignment with your business mission
Companies need to ensure the Chinese partner or distributor understands and shares your business vision and objectives, so that all efforts are focused on achievement rather than re-discussing everything all over again.

7.- Customize your product to local demand
Before we hit the market, we should research consumer reaction to our products. A lot of international brands have adapted their products to better suit the Chinese consumer and guarantee success (e.g. MacDonalds has customised menus for its franchises around the world).

8.- Set the right price point &be conservative about it
The Chinese consumer is very price sensitive and will not pay a premium price unless there is a clear selling point / advantage (quality, brand image …). We tend to recommend avoiding very premium price points in initial stages (unless very clearly justified), to devise loyalty programs (discount cards, VIP promotions …) and to invest in marketing.

9.- Watch out for the internet response
China has the highest number of cybernauts in the world, and they are also extremely engaged in forums, blogs and other internet social networks. This also includes those forums where products and brands go under scrutiny / review. Companies should ensure that the internet is part of their marketing strategy, as a mistake in their brand positioning may affect their reputation / business.

10.- Include location as a factor in your overall China strategy
Another decision that companies need to make is where to locate their retail businesses: tier 1 cities like Shanghai, Beijing or Guangzhou, or tier 2 and 3 cities. Companies like Nike or Adidas started marketing their products in Shanghai and Beijing and have now progressed into tier 2 cities. Other brands have followed the opposite strategy, for example the Chinese brand “Peak” started by capturing the smallest municipalities and has been adding market share through medium range products.

Another example would be the Chinese brand Eno. They follow different strategies in tier 1 and 2 cities. Their objective in tier 1 cities is to improve / build brand image, while they make money in tier 2 cities where costs are lower. Quoting Eno’s founder, Renee Hartman, “look pretty in tier 1 cities, make money in tiers 2 and 3”. Their products, designed for a young urban consumer, have succeeded in that market segment and the company was selected “most innovative”company in China” by Fast Company Magazine.

 

Would you like to add your tips?

Chinese Consumer: Confident and Not that Loyal

This week I´ve read an article at McKinsey Quarterly entitled “China´s confident consumers” written by Yuval Atsmon and Max Magni, principals at McKinsey Shanghai and Honk Kong respectlively. Their article is based on McKinsey´s report 2011 Annual Chinese Consumer Study. It focuses on three findings in the report:

1. Chinese consumer´s confidence rises. Chinese consumer´s confidence in their financial future rises compared to 2010 (58% expected their incomes to rise next year vs. 39% in 2010)

2. Chinese consumer…not that loyal. Although they place high value in brands as they guarantee quality, safety and reliability, that does not seem to translate into loyalty. The number of brands in their “repertoire” keeps rising.

3. Growth drivers: first-time buyers lose importance. First time buyers used to be the main growth driver ten years ago. Currently it is not the case for mature categories and developed areas but it is still an important driver for less mature categories, big ticket items or less developed geographical areas.

Read their full article here.

 

 

Retail in China (II): Choosing your Business Model (Corner, Shop Lease, Internet)

This is the second post about Retail in China in collaboration with Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai. If you have not read our previous article entitled “Retail in China (I): Choosing your Business Model (Distributor/ Agent/ Franchise)” you can read it here.

This new post  will lay down some facts and tips to help you assess what business structure works best for you in China, completing our previous post with information about corners, shops and internet retail.

3. CORNER
This is an individually tailored mini-shop whereby the company rents a small space in a mall. The rent has often a fixed element (based on the number of sq. m. occupied) and a variable part (that is a percentage of the sales made).

a)Laws and Regulations
– You don’t need to establish a company in China to start your business through a corner – you may do it through a local agent.
– Your agent needs to have the so-called “Tax Payer General Status”  (1).
– The term of these contracts is usually from 6 months to 1 year.
– Renewal is subject to sales targets being met.

b) Advantages
It is a small investment; it allows making the products known, understanding the potential client profile and checking consumers’ reaction.

c) Tips
-Tip #1 You should be aware that many malls impose restrictive conditions in terms of the brand (e.g.it must be a reputable international brand).
-Tip #2 The tenant must ensure a minimum profit in the first months.
-Tip #3. Often the contract (which is usually short term) may be terminated unilaterally by the landlord.

4. SHOP LEASE
This could probably be, from a financial perspective, your riskier option. The main advantage, though, is the full control you have on your operation.

a) Laws & Regulations
– Shop equals Branch: So, for every shop that you open, you need to register a branch  (it takes 1-2 months if branches are on the same city and 3 months when it is in a new city)
– Contract Length: 3-5 years

b) Advantages
– Not subject to specific sales targets being achieved. You pay a rent and a deposit

c) Tips on how to negotiate a shop lease
-Tip #1 Understand who is renting the space to you (i.e. the owner or a lessee) – you might be renting the space from a person who is not actually the landlord (but, for example, a tenant who is trying to sub-lease the premises). In such case, if the tenant does not manage to renew the contract with the landlord, you may be forced to leave the shop, after having invested in decoration, marketing, etc. You should therefore always ask the supposed landlord for his/her certificate of ownership of the premises.
-Tip #2. Understand what is the legal use of such premises (e.g. residential, commercial, etc.). In the certificate of ownership, you will be able to check what is the use of such premises. Please note that if the premises do not have a commercial use and, for example, they have a residential use instead, you are not supposed to locate a shop in such place- the authorities would deny the registration of this shop as a branch or as the registered office of a company. Furthermore, if you have an inspection, you will be exposed to sanctions.
-Tip #3. Try to negotiate renewal conditions in the initial lease contract (e.g. a maximum percentage rise per year) so that you don’t see a big hike in rental cost when the renewal time arrives
– Tip #4.If your shop will be in a mall that is currently under construction, we advise you to sign a letter of intention first and to negotiate the lease once the mall has the required licene.

5. INTERNET SALES
a) Recent history
Joint Ventures and WFOEs have been allowed (theoretically) to engage in retail activity through the internet since 2004. The reality has been quite different though. Central MOFCOM had to approve these activities and approvals have either been put on hold or suspended.

Foreign companies used to navigate this difficulty in two ways:
– Avoiding setting up in China: but there are a number of hassles (logistics, currency exchange …)
– Partnering with a local broker

b) Update on Law & Regulations
This type of retail activity has now seen some encouraging signs. MOFCOM issued on 19 August 2010 the ”Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Sales via the Internet and Automatic Vending Machines”. The main changes that this circular represents are:

1. For established FIEs:
Internet sales are regarded as an extension of an FIE’s regular sales activities and can be conducted without any need to obtain additional approvals.
2. For Companies trading only through the internet:
Applications for the establishment of an FIE specialising in Internet sales are to be submitted for approval to the appropriate provincial-level agency under MOFCOM instead of central MOFCOM, which has two positive implications:
i) speeds up the approval process, and
ii) promotes competition among  regional administrations to capture foreign investment.
3. Some requirements on-line businesses should meet:
i) Display its business license in a prominent position on its website home page or on the website where it conducts sales activities.
ii) Establish a comprehensive system for the return or replacement of goods.
iii) Strictly protect consumers’ personal privacy.
iv) Abide by China’s consumer laws and regulations.

Would you like to share your retail experiences?

(1) Small scale taxpayer – ordinary taxpayer

When can a company apply for qualification of VAT ordinary taxpayer?
A trading company (wholesale or retail) after its setting-up, having achieved an annual turnover of no less than RMB 800,000
.

According to a circular promulgated by the State Administration of Taxation, effective as of 20 March 2010, a trading company having not obtained an annual turnover of 800 000RMB may also apply for the qualification of ordinary taxpayer if it cumulatively satisfies the two following conditions:
a) It has a fixed place of operation.
b) It can establish accounting books in accordance with the Chinese regulations on accounting, and possesses legal and valid accounting vouchers, and can present exact accounting tax documents.

Update: This series has now been completed. All the links shown bellow.

* Retail in China(I): Choosing your Business Model (Distributor, Agent, Franchise)
* Retail in China (II): Choosing your Business Model (Corner, Shop Lease, Internet)
* Retail in China (III): 10 Expert Tips to Help a Succesful Set Up

Retail in China (I): Choosing your Business Model

Has the Chinese retail boom lured you to consider this market for your products? You are not alone. The rapid growth of the Chinese middle class is increasing this market’s attractiveness. AmCham 2010-2011 China Business Report shows Retail performs highest in all indicators analyzed in their survey (Success, Confidence, Welcoming).

I had been wanting to write a series about retailing in China so when I met Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai, I thought she would be the right expert to contribute to a series of articles on the topic.

We will divide this topic into the following 3 posts:
Retail in China (I): Choosing your Business Model (Distributor/ Agent/ Franchise)
Retail in China (II): Choosing your Business Model (Corner/ Shop / Internet)
Retail in China (III): 10 Expert Tips to Help a Successful Set Up

(*Update: this series has now been completed. Links provided at the end of this article)

And today we will kick off with Retail in China (I): Choosing your Business Model 

1. DISTRIBUTORS & AGENTS:
Selling your products through distributors or agents is the “easiest” way to penetrate the Chinese market. It does not require a high investment and it allows assessment of the Chinese consumer’s reaction to your product.
It is not free of risks, though, as you may find yourself in the middle of a chaotic distribution network that is difficult to control.

a) Distributor vs Agent: Different Roles/Responsibilities
– Distributors buy and sell the products; their profit is the difference.
– Agents act in the name and on behalf of the foreign investor; they receive commissions on sales.
– Degree of trust: The agent generally enjoys a higher degree of independence and is able to change certain conditions without the explicit consent of the principal.

b) Tips on how to deal with agents/distributors in China
– Tip #1. Licences: Ensure your distributor/agent has the required licences to retail your products.
– Tip #2.  Exclusivity: Try to reduce the exclusivity territory (you may attach a map to the contract). Generally, exclusivity for all China is a bad idea.
– Tip #3. Establish sales targets and regulate your rights in case they are not met (e.g. termination or end of exclusivity).
– Tip #4. Commissions: describe clearly the calculation basis for commissions in the agency agreement.
– Tip #5IP Rights: Define the use of IP rights, promotion and publicity materials. Do not grant property on IP rights; grant instead a licence of use.
– Tip #6.  Termination: Reasons for termination are a key issue in distribution/agency contracts. Do not forget to regulate the consequences of such termination (e.g establish sale of stock to third parties / to the foreign investor, destroy / return the promotion materials, etc.).
– Tip #7. It is quite common for entrepreneurs and SMEs to initially “test the waters” with a distributor or an agent, and once they understand the market better and how their product works, they take it to the next level.

2. FRANCHISE:
a) Franchisors: Laws & Regulations
Under applicable laws and regulations, there are certain conditions imposed on franchisors in China:
– Legal form: Having a commercial company in China (JV or WFOE) or abroad. Individuals cannot establish a franchise in China.
– Previous experience: Having at least 2 own shops operated directly by the franchisor (in China or abroad), for  more than one year.
– Business model: Having a business model and the ability to render assistance and give instructions to the franchisee, as well as technical support, training and other services.
– IP rights: Having a trademark, patent or know-how (suggestion: register your IP in China).
– Registration of confidential business information: For every signed contract, franchisors must register with the competent authorities highly detailed (and usually confidential) information, such as: original franchise contract, marketing plan, franchisee manual, etc.

b) Franchisees: Some things you should know about their rights
Your Chinese franchisee has some rights that you should be well aware of:
– Your franchisee has the right to unilaterally terminate the contract without paying an indemnity if:
1) the franchisee claims that the information supplied is incomplete or untrue.
2) after a “reflection period” the franchisee decides to back out.

c) Tips on how to deal with your potential franchisee
– Tip #1. Make the franchisee sign a receipt acknowledging that the information received is complete.
– Tip #2. Clearly define in the contract how long this “reflection period” will last and try to make it as short as possible (i.e. within 1 day from the execution of the franchise contract).
– Tip #3. Enter a non-disclosure agreement (“NDA”), as you will be sharing all your business information.

d) China Franchise: Main issues
– Lack of payment by the franchisee is common; there is not a real franchise culture in China.
– Lack of confidentiality.
– Difficulty in controlling brand image.
– Legal uncertainty due to:
a) franchisee’s right to unilaterally terminate the contract.
b) reclassification risk: if, in order to avoid the disadvantages, the franchisor has established a distribution network that works as a franchise in practice, authorities may reclassify the legal relationship and impose a penalty (RMB10,000 to RMB500,000).

e) Recommendation
– If possible, enter the market initially managing your own stores, so that you can fully understand the market before you start granting franchises.

f) Conclusion
For obvious reasons, the franchise regime is very restrictive for franchisors and inevitably favours franchisees. As a result, some companies establish a distribution network that works de facto as a franchise. As we have pointed out, there is a risk of reclassification into franchise and the consequent sanction. In addition, in the new draft of the Catalogue for Foreign Investment (which regulates which are the encouraged, permitted, restricted and prohibited activities to be carried out by foreigners in China), the franchising business is now encouraged, which make us think that in the future the regime will be less restrictive and more favourable for foreign investors.

Would you like to share your retail experience?

Update: This series has now been completed. All the links shown bellow.

* Retail in China(I): Choosing your Business Model (Distributor, Agent, Franchise)
Retail in China (II): Choosing your Business Model (Corner, Shop Lease, Internet)
Retail in China (III): 10 Expert Tips to Help a Succesful Set Up

9 Business Tips from Shanghai Toy Club Owner

Cristina  Rueda runs two on-line businesses in Shanghai: Shanghai Toy Club and Bumps & Babes. Shanghai Toys Club is an imported children’s products online store. Bumps &Babes is a support initiative targeted to expat mothers and about-to-be new mothers who need advice and information on health and safety issues.

She was very generous in devoting some time to me and sharing some of her business tips. Lessons learnt on the ground.

 

 

 

 

 

 

Tip # 1. Be ready to do everything
You have to be ready to do anything, from a business plan to packing boxes. During a start-up’s initial stages you may need to do it all by yourself. I come from a corporate background, and it takes some time to get used to it.

Tip # 2. Look around. There may already be opportunities out there.
Sometimes you do not need to start a business from scratch. I bought Shanghai Toy Club from its owner who was leaving the country.
B&B has also existed since 2006 and it was going to die … so I took over the support group. I started writing a blog about the topics the speakers had talked about in our events, added links to interesting resources. I was pregnant, had my babes here, so decided to target women in the same situation (pregnant or with kids) and put up a website for them..Then I had all those vendors who wanted to sell products through us …
Shanghai Toy Club has more than doubled its size since then. And we get a very decent traffic flow to our B&B support website.

Tip # 3. Start slow …
We are currently targeting just the expat community. We feel this is a good tactic because it has allowed us to start slow,  figure out how things work, what the business potential is, what structure you need and what resources are required to grow our business.

Tip #4. And then think big.
In retail it is difficult to succeed with just an expat clientele … you need to access the Chinese consumer. Our Shanghai Toy Club business has more than doubled since I took it over, but we have still not started tapping into the Chinese market. It is a logical next step but we still needed to have the right product. I think we are much closer now.

Tip # 5. Listen to your consumers.
You may think a product is great but you need to listen to what your consumers say. More than once we’ve brought products to our portfolio feeling we had real winners and they’ve ended up being great disappointments. I remember a case in which we were importing really good Australian sun glasses for kids and later realised people were more than happy to buy fakes in the kids’ market.

Tip #6 . Be flexible and make tough decisions if required
When you realise something you are doing is not working you may need to make tough decisions. Our business initially had a rental activity. It was part of the business identity at that time and it was bringing in some money. It was difficult to give up but we realised we had to because it was a headache and it was not scalable.

Tip # 7. If you decide not to go alone… Choose the right partner.
Being an entrepreneur can be overwhelming at times and it often makes you feel lonely. It is nice to have a soundboard when you are making decisions and in particular, to share the responsibility. The right partner will help alleviate the weight of your decisions and compliment your ideas. But with that said, choose wisely your partners. It is better to be alone than to have a partner you don’t see eye to eye with, you feel you move at a different pace, or you feel that they are too expensive (both in terms of money and dynamics) for what they are bringing in to the business. When choosing a partner, make sure you do your due diligence before, identify exactly what/how/why they will add value to the business. An employee is a much better option than any partner. Entrepreneurs are a bit of control freaks and this can lead to a lot of tensions in partnerships. If you decide to have a partner, keep in mind than the dynamics of a partnership are very different from the dynamics of an employer/employee relationship and the dynamics of a 50-50 venture are very different from the dynamics of a majority/minority venture. The right partner will bring a lot of value to your business, the wrong partner can be very costly in terms of money, but most importantly, in terms of your time and energy.

Tip #8. You are the face of your company.
This may sound obvious to some people, but when you are an entrepreneur you can’t hide behind the wheels of a corporate structure. You are the face of the company and some people do not like that type of attention.

Tip # 9. Quality Control. It also applies to imported products.
We often hear horror stories about Chinese products and the need for quality control. We could say it applies to all suppliers. I remember we brought in an imported “Lead test kit” and decided to test it to see how it worked.  It came sealed and I did not initially check it. I sent it to a number of customers for feedback and it turned out lots of the kits were empty. The liquid had evaporated! … So I guess the learning is that bad things can happen with any supplier … not only Chinese!

 

Would you like to share your tips?

Exporting to China… not as easy as some people think

A few months back I met an entrepreneur working for an SME that was planning to start exporting into China. Their products are used in the building industry and they need their machinery to be tested and approved by a Chinese lab. It all looked good; their products are in good demand and they followed the right steps: registered brand, registered a product lay-out (they did not own a patent), identified a good distributor (financial reports included), negotiated a good contract (with exit clauses in case of low sales) and got the required certificates and approvals to start exporting…
So, today I met them again to clarify a few things for the post I was planning to write about their success story and surprise…., but not really surprise, things have not gone as expected.
Reasons:
– in the last two years, local manufacturers doing similar products have “mushroomed”
– there are multinationals producing similar products locally
– the same labs that certify products in this category, also offer in the market “their own technology” which happens to look a lot like a mix of several products available in the market (guess how they acquire their know-how, … some people say that stripping down machines during certification tests provides a lot of know-how)
– with all the above, the premium price that clients seemed to be willing to pay (justified by the higher quality that a foreign brand provides) is no longer a reality…

So, I looked at them and asked: what lesson did you learn from all this?
And their answer was: start with a good market research, understand competitive situation, market potential and consider producing locally if the numbers work out ok… And whatever you decide, move fast.

Does this story sound like something you’ve heard? Does it make sense to you?