China 101: Market Entry Strategy. 6 Points to Consider

By Andrea Cristancho, Senior Business Development Manager at JLJ Group

China’s business environment is dynamic and particular in its essence. It welcomes business from different nations and demands skills, commitment and long term planning to stay afloat. It can be rewarding for many foreign companies, especially those who conduct the proper research and carefully craft a strategy to execute.

Here are some main points to consider:

1.Regulatory environment.
In China, the Foreign Investment Industry Guidance Catalogue last revised in August 2011 regulates foreign investment. It’s a document issued by China’s National Development and reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), which oversees foreign investment in Chinese companies. Depending on the business activity, the catalogue classifies direct investment as encouraged, restricted, prohibited or permitted. Therefore, one should look into China’s regulatory environment and find out the regulations on their particular business type, licenses required to operate in compliance with the local authorities, costs and duration of the set up process, among others.

2.Market Assessment.
China is a diverse country with unique regional market segments, which should never be looked at as just a single China. In addition cities are divided into tiers cities including tier 1 such and Shanghai and Beijing, and tier 2 cities as Chengdu, Dalian, and Hangzhou, as well as numerous smaller tier 3 cities. When looking at the market, companies should consider target customer and size, generation groups, consumer demands and purchasing behavior, as well as market trends, barriers and key competitors.

3. Location and Distribution Channels.
Whether you decide to go solo, represent your firm, or partner up with a local investor, you would need to spend some time and resources researching your ideal location within China; particularly at the district level and perform some due diligence before choosing your office location. Companies should also be communicating and negotiating with a short list of potential partners, or dealing with a third party provider; while trying to understand cultural differences and working within the demands of the Chinese style. There isn’t only one ideal way, it requires you to find which best fits your business model and is in line with your long term business model and head quarters vision.

4.Internal Assessment.
At the initial pre-entry level, a lot of time and resources are invested on evaluation phase. Most of the time, reports are presented at head quarters or to a board of investors for final approval. At this stage, it is advisable to evaluate how ready is the management and main decision makers of your corporation to invest in China, including financial consideration, IPR, relocation, staffing and management soft issues, and execution planning. In addition, assigning key points of contact is a priority as the approach to china market entry is being developed and communicated across the organization.

5.Entry Modes
Having your business plan and China Market Entry strategy at hand, consider your market approach evaluating the strategic importance for your head quarters and your ability to exploit the market once invested. There are four primary entry modes:

Export Entry.
Using an intermediary agent for the entire process or handling export –in house and a local Chinese distribution partner for import and sales in China. It doesn’t require a large capital expenditure but provides limited control.

Contractual Entry.
Licensing your brand to individuals and companies in China or sub-contracting with local manufacturers. Requires less capital expenditure but again provides limited control.

Equity Entry.
Entering the market by equity includes Wholly Foreign Owned Enterprises (WFOE) such as Manufacturing, Trading, or Service WFOE (examples are consulting, training, restaurants and management service companies), a Foreign Invested Commercial Enterprise (FICE allows greater flexibility in terms of business activities that include retail, wholesale and franchise), or through a Joint Venture or M&As.

Representative Offices.
A Rep Office represents the interests of the foreign investors acting as a liaison office legally established for the parents company. It may conduct market research, develop partnerships and business channels; however, all business transactions are handled by parent company, mainly the issuance of commercial invoices. Rep Offices do not have a minimum investment requirement since they are not considered a Foreign Investment Enterprise.

6.Registration Steps.
Below is the typical process for setting up both Foreign Invested Companies and Rep Offices. The government offices involved in this process includes the Ministry of Commerce, Administrative Bureau for Industry and Commerce, State Administration for Foreign Currency, Taxation Bureau, The Customs Office, and the Statistics Bureau.

In brief, entering the China Market requires experience and long term planning, as any other market, but developing the aforementioned points and assessing your company entry mode should take you closer to success. Therefore, having a solid team on the ground, including your team and your advisors, a solid network of contacts Guanxi will also help you navigate China’s business environment during pre-entry, execution and growth of your business in China.

By: Andrea Cristancho
Senior Business Development Manager
The JLJ Group – solutions for China Market Entry

What do you think?

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