Breaking into China as an overseas startup is tempting as every industry here is a booming market. However, setting your foot in the Chinese market as a startup for the first time may give you a headache. It is even trickier when you are an outsider attempting to start on your own here.
The Chinese market is complex due to its size, cultural differences, the language barrier, lack of understanding (what works elsewhere does not often apply here) and weak networks.
China is not a single market. Each region and city is profoundly different to the next. Huge variations exists in terms of population levels, per capita GDP, average income levels, consumer spending habits, education levels, literacy rates, lifestyles, culture and so on.
Additionally, Tier 1 cities (Shanghai, Beijing, Guangzhou, etc) have much higher per capita income than Tier 2 or 3 cities. Thus demands, needs, and consumer preferences are different. These differences can be as vast as the differences between English and Portuguese people.
Many experts in the Chinese market note that 100 percent localization is needed in order for foreign companies to succeed in China. As a result, numerous international brands have changed significant aspects of their branding or products in order to localize their business to the Chinese market. For example:
One of the most important aspects of localisation for foreign companies is the understanding of cultural differences. Many multinational corporations and brands have failed in China due to an inability to mediate the cultural differences within the Chinese market.
For example, Ebay and Amazon couldn’t understand the consumer needs of the Chinese online shopper. Whilst Ebay and Amazon provided helpful product reviews for each listed item, the local online shopping competitor Taobao had an added chat feature which allowed Chinese shoppers to contact the seller instantly. Chinese consumers preferred Taobao to Ebay and Amazon for this reason as it allowed them to haggle before buying a product. What could have easily been taken for a minor detail, was in fact an example of different buying experience and mindset.
Additionally Home Depot, a DIY store, also failed to grasp the local culture and imported an alien business model to China that was better suited to other countries. In the eyes of the Chinese consumer, the concept of DIY seemed ridiculous as cheap labour and the habit of hiring labour was commonplace.
Many multinational corporations and brands have failed in China due to an inability to mediate the cultural differences within the Chinese market.
The Chinese market is massive and has immense variations in languages, culture and consumer preferences which foreigners may overlook. This leads foreign companies to fail when pitted against local companies that operate a similar business, as local companies have the advantage of knowing the pulse of their crowd.
Tried and tested Western business strategies do not work in China . For example, Uber’s market strategy to flow in money to capture the market was a success in other places but did not work in China. Uber lost $1 billion a year battling against a profitable and well-connected local competitor in Didi Kuaidi. After two years and more than $2 billion in losses, Uber agreed to sell its Chinese business to Didi.
Another popular example is Groupon. When Groupon entered the Chinese market, it used an aggressive strategy to find the best employees. This included offering big salaries to its competitors employees. This strategy which was successful in other countries flopped in China. Groupon partnered with Tencent on a 50/50 basis but it turned out as expected. It left after few tries.
Adapting to Government Policies
The country has strict laws and regulations for businesses. Limited access to information is a norm in China and the Chinese government often makes decisions for collective good that are not open for discussion. For example, Google was denied access to the Chinese internet. It started to act against wishes of the Chinese government, specially in this very sensitive issue which is data collection.
There are a vast array of different social values in China which have to be respected. International startups wishing to open business in China need to understand this mindset and adapt as it is no use playing against the system.
When operating a business in China, being surrounded by the right people is invaluable. Local talents, especially a localised senior management team can navigate the expansion in the Chinese market. Many foreign companies that perform well in China often maintain a foreign top-level management whilst employing a local middle management. By incorporating both foreign and local spheres these companies often have deep industry knowledge on workforce, business management, and a wealth of local contacts.
Partnerships with local Chinese companies are also playing a vital part in the international startup scene. For example, partnerships between Yelp and Groupon, and Lufax and Meituan-Dianping have helped both companies earn billions of dollars in recent months.
Another example is LinkedIn China which entered the market recently as a joint venture with a Chinese enterprise to innovate locally. In doing so, LinkedIn incorporated distinctly Chinese elements, including Wechat and Weibo, in order to connect to a larger user base.
Chinese networking takes place through the local networking system of family and friends known as Guanxi. This is an age old tradition that many Chinese follow. Guanxi helps is business and government networking. The Chinese society highly regards Guanxi as it brings out a sense of connection, mutual obligation for strong interpersonal relations. Whether the company is Chinese or foreign, the key to a successful business is appeasing the right powers.
As mentioned earlier, the concept of “Guanxi” applies most importantly to building strong relationships with the government and local administrations. Administrative bodies are often extremely influential and positive relations with these bodies can help companies remove regulatory red-tape and save time.
Many foreign companies that perform well in China often maintain a foreign top-level management whilst employing a local middle management.
Investors and Venture Capitalists are also helpful friends to maintain when operating a business in China. VCs and investors are not just walking cheque books, they are also industry veterans with a wealth of market knowledge and experience.
Once they see that a company has a well laid out revenue model for a quick cash flow, VCs and investors can boost your business by helping you manage capital, infrastructure, and guide your businesses decisions.
The venture capital market in China is witnessing growth. While Chinese was about 9 percent of total global investments between 2006 and 2013,it increased to 18 percent from 2013 to 2014. This leap earned China a spot as the second-largest venture capital market in the world.
As a startup you might not get a venture capital firm backing you in the initial stage. However, a new wave of angel investors has come in who can bring individual expertise, if not plenty of resources. The high net worth individuals , i.e those who have individual assets of more than $1.6 million has doubled since 2010 here.
The success of foreign startups in China depends largely on two factors: localisation and being surrounded by the right people. In terms of localisation, having a thorough culturally-based understanding of Chinese market as well as the expertise of local employees can give you a clear roadmap of the risks involved. Additionally, when it comes to surrounding yourself with the right people, knowing the right investors and VCs as well as forming partnerships with businesses and administrative bodies can greatly expand your business.
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