Why the Standard Way to China…
I often see foreign companies approaching the Chinese market with a recurring strategy applied with small variations:
- Select a mature product that was successful, more or less obsolete.
- Start up a company in China and produce taking advantage of:
- low production costs
- interest and support from local government, clients and employees
- low taxation level
- Hire experienced local managers that know how to deal with the domestic environment
- Grow fast taking advantage of high demand, superior quality and technical level
- Expand the sales in neighbouring countries and possibly reach low cost client in middle east and western countries
…Is the Wrong Way
China’s environment is changing fast and is difficult to apply this schema to the actual reality.
The production costs are not anymore competitive for the low cost market, at least in the developed eastern regions: the salaries increased approximately 10 folds in the recent 20 years (100 folds in last 40 years!) and the cost of infrastructures and equipment are also increasing fast.
Western companies are not welcomed as in past:
- Local authorities select companies based on their taxpayer status, technological level and development plan. If you do not reach the given targets you may be threatened to have tax increased and licenses not renewed.
- Western brand is not anymore synonym of higher quality and better technology. Local brands have reached a remarkable good level, with the advantage to be better integrated in the local business environment.
- Employees do not always prefer foreign companies. Even though the international experience is still a good asset for them, employee sometime prefer high technological level, which they may find in local companies that on the other side offer benefits unattainable by foreign companies. Foreign companies not used to the fast salary increase may also lose the pace and find their offer not attractive anymore.
HSE rules and taxes are day by day more stringent and expensive, sometime posing serious threats to companies operation.
Successful local managers may not ensure smooth operation in the actual situation. Since the business environment is changing, a middle age Chinese may have problems to understand the new situation. They answer to risks in a somehow “old fashioned” way that does not anymore suit the actual conditions.
Moreover export is not a priority anymore for the Chinese government. Therefore foreign companies focused in producing cheap product for export will have far less support than in past.
China Is a Planned Economy
It is worthy to remind something obvious but sometime underestimated in the emphasis of celebrating the New China: despite the deep reforms this country is still not a market economy, but a planned economy in which the demand is not the main force that drive the market, government’s policy play a big role in it. You may have a successful product and a large potential market, but if your company is out of the planned development path, or worse you are pushing in the wrong direction, you may find difficult to grow or even to survive.
Small players (compared to Chinese market dimensions) may have difficults to even make the governement aware of their existence, not mentioning having a dialog or defend their interests. Therefore it is important to form lobbying groups that may introduce themselves as a credible partner to reach the targets of Chinese establishment.
New Opportunities
As stated above in China do not still exist the conditions that made many foreign companies develop themselves in the last decades. Nowadays even large international groups if not correctly positioned are challenged to maintain their position. Many opportunities disappeared, but even more are arising every day:
- The general wealth improvement made the internal demand growing at an unprecedented pace.
- Protection of the environment, “clean” energies and power saving are priorities set forth for not repeating the mistakes of western countries.
- Technological level is improving fast and new technologies find applications on a scale not available anywhere else.
- Internal rural areas are developing and the government try to replicate there the same model successfully applied in the oriental developed regions.
- The Belt and Road Initiative (BRI) the Made In China 2025 plan (Mic2025) and the 13th Five Year Plan (13FYP) describe the future targets of the actual leadership and define the sectors where the resources will be concentrated
In order to succeed in China you should opportunistically choose the right path and place yourself in the correct direction.