SERIES: Connecting Australia and China
You know from last week’s post that there is a huge market for foreign goods in China, one that’s still growing. While this information is exciting for you as a foreign company, it remains that the China market is thought to be fairly daunting. One reason for this could be the number of big companies that have tried tackling the market with their considerable resources and failed. Well, we’re here to help make your journey into China a bit easier with this post. Let’s take a look at the different ways foreign companies can enter China, and what would be the method best suited for your company.
Direct export refers to the practice of exporting goods and services from one country to another directly to the final customer. In order to export directly to Chinese consumers, a company must first be registered in China and hold an exporting license in accordance with Chinese laws. Direct export is more suited to unique products where a fully developed distribution network would not be needed. One of the advantages of using this method is that because you will be cutting out the middleman, you will be saving costs. On the flipside though, you’re on your own in a new market where you’ll have to conduct your own market research and make sure your goods or services enter the market with the right certification, labelling and licensing. You’ll come out of the entire process with a much more comprehensive understanding of your customers, processes and market, but is it worth the effort?
Direct export is a great choice if you’re a big company with a fair amount of experience when it comes to expansion into new countries. This way you would have the know-how and the foundation to be able to feel your way through the process of setting up in China.
Entry through an agent
An agent is a direct representative hired by your company to help sell your product in a new region. They are usually paid a commission for their work. Agents local to China will have access to contacts to promote foreign products, knowledge about the market and can also help you overcome barriers such as language and culture. When you enter the Chinese market through an agent, they keep track of policy and regulatory changes, both national and international, for you, while also collecting market data and devising a way to respond to the changes. It’s important for you to find the right agent, and therein lies the problem because a reliable, credit-worthy and dedicated agent is difficult to find. It’s best to be wary of those agents who approach you on their own as there is a chance your goods might end up in the black market.
This option is best suited for SMEs and startups as it’s a cost-effective way to have someone on-hand that has knowledge about the region and the target market.
Entry through a distributor
A distributor is not that different from an agent in the sense that they too act as your representative to customers in a new region; however while agents work more closely with you, distributors work more closely with your customers. It is better to have more than one distributor so that your credit risk is evenly spread across multiple entities. The advantages of using a distributor include not needing to establish a place of business in China, handing over any risk involved, and not having to deal with the end consumer. Instead, you will just need to monitor your distributors. Keep in mind though that you don’t have control over the actions of your distributors and they carry your risk, so if something goes wrong with them, you stand to lose quite a bit.
Using distributors is a cost-effective method ideal for businesses with a varied product line (e.g. fashion or cosmetics). Distributors can ensure wider distribution and reach a broader audience.
Entry with a Chinese partner
What better way to do business with China than with a Chinese business partner? Having a local partner gives you intimate knowledge of the market, business culture and regulations. There are many ways you can enter into a partnership with a Chinese company to grow your business, however we’ll primarily be looking at foreign-invested partnerships and joint equity ventures.
In the last few years foreign-invested partnerships have become increasingly popular in China and it has become the most convenient way for foreign investors to begin doing business with China. A foreign-invested partnership is a business entity with unlimited liability and no minimum requirement for registered capital. With partnerships, the advantages are that they are easy to establish and in China they involve no corporate tax. Partnerships are also low risk and have no capital requirement; Chinese government policies are actually encouraging the formation of partnerships between Chinese companies and foreign companies. The downside of this arrangement is that the partners will have to take up unlimited liability.
An equity joint venture is created when Chinese and foreign partners agree to hold joint ownership and operation of a company with limited liability and divide the risk among themselves. In an equity joint venture, the foreign company gains local knowledge, contacts, market data, etc. while the Chinese company gets full access to the foreign IPR (intellectual property). The Chinese government regulations state that foreign companies must contribute a minimum of 25% of the registered capital for an equity joint venture.
Both partnerships and equity joint ventures are more suitable for those companies that already have a solid reputation in other parts of the world. A known brand name will attract more experienced partners in China, a huge win no matter how you look at it.
Going over the options presented to you, which do you think would best suit your company’s market strategy? It might be helpful to check out earlier posts on the laws applicable to companies entering China and different organisations that can help smooth over the process of tackling the Chinese market.
Reference: Ways to enter the Chinese market - EUSME Centre