Expanding Into an Uncertain Market
The slowing down of China’s economy has sparked vigorous debate, with many experts predicting hard times ahead for the world’s second-biggest economy.
Nevertheless, China still managed to achieve 6.9 percent GDP growth in 2015 – the slowest in 25 years, but still well ahead of other developed economies. And then there’s the recent announcement by Starbucks CEO Howard Schultz that his company will be opening thousands of stores across China over the next five years. Furthermore, a BT poll of 1150 businesses around the globe found that China remains the third-most-desirable market for international expansion, after the US and UK.
However, the general consensus is that China is undergoing a major economic transition, driven largely by weakening demand for its manufactured goods and a record-high debt-to-GDP ratio. So what does this mean for US-based enterprises looking to expand into this vast but volatile market?
Focus on services
To meet the needs of a growing middle class, China’s economy is shifting its focus from low-cost manufacturing to higher-value services and consumer goods. This creates a wealth of opportunities for service-focused companies that can offer innovative solutions to Chinese consumers.
This includes high-tech startups, which are currently riding high on a wave of entrepreneurship triggered by market reforms that are designed to help jump-start the economy. New company registrations jumped 19.4 percent between 2014 and 2015, with service firms accounting for over 80.3 percent of the increase. This is encouraging news for US companies looking to make inroads in China, but they may want to consider starting in more provincial cities where the potential customer base is still large, but competition less intense.
Use online channels
In percentage terms, China’s internet usage is still nowhere near the US, but the figures are still impressive – 649 million online users at the end of 2014, with 86 percent using handsets. This has helped create a thriving e-commerce economy, dominated by a customer demographic that Forbes describes as “young, urban, educated and affluent.” Most of these users fit the profile of the omni-channel consumer – often turning to social media, shopping sites and mobile apps to research and purchase products and services.
One company to benefit from this is Airbnb, which has so far chosen not to operate directly inside China, but to instead target outbound travellers looking for accommodation in countries where the apartment-sharing company operates. This strategy gives the company access to a lucrative customer segment (Chinese tourists spent $165 billion abroad in 2014) without having to navigate China’s strict foreign investment laws.
Collaboration remains important
Most companies aren’t Airbnb, though, which makes a physical presence inside China a necessary part of their expansion plans.
Therefore, they must be able to work effectively inside a business culture that is very different from that of the US – one where excessive bureaucracy and the concept of guanxi (the time-honored tradition of cultivating close relationships) can see deals take several times longer to complete than in the West. And, although many Chinese speak English with high proficiency, many delicate business negotiations still end in failure due to the subtleties of communication being lost in translation.
These factors make strong and strategic local partnerships vital to businesses that are planning to expand into China. This was the approach taken by video game publisher Riot Games, which picked a Chinese strategic partner to distribute and localize its product.
For most businesses, however, searching for the perfect Chinese partner can be a perilous exercise without the right local knowledge. That’s where a partner-matching platform like Powerlinx can provide the necessary insights and intelligence that were previously only available through management consultants and other middlemen.
Businesses that can expand into China with strong local talent and the right investment partners have a better chance of gaining a foothold in one of the world’s fastest-growing consumer markets.