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 (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?