Should I expand to China? 3 questions to ask before committing to enter the Chinese market

19 Sep 2017

Angelica Anton, founding partner of SILK Ventures, explains the questions tech firms should ask themselves before even considering trying to expand to China with UKTN (formerly Tech City News).

 

China’s fast and furious emergence as the tech capital of the world has changed the old question “Should I expand to China?” that entrepreneurs have been asking themselves into “How do I win in China?” and “When and where should I start?”.

 

For over a decade, tech entrepreneurs have been trying to decode the puzzle of doing business with the Chinese. Time and time again, we have been surprised to see who has survived and who has not. Although there is no prescriptive checklist to determine whether China is the right market for your company, here are three questions founders should ask before jumping into the booming Asian market.

 

1. Do the Chinese want your product?

 

Assessing the demand for your product requires an astute understanding of Chinese consumption patterns and work culture. For instance, Swedish contactless payment giant iZettle has made big waves across Europe, but how would it fare in Beijing? Not well. Chinese consumers have moved on from cash and credit cards, relying almost exclusively on mobile payment systems. (The Chinese mobile payment market size ($5.5tn) is more than 50 times bigger than that in the US ($112bn)).

 

What else should foreign entrepreneurs know about the Chinese? When it comes to technology, they love innovative ecosystems. WeChat is a prime example, combining the capabilities of Instagram, WhatsApp, and Apple Pay into a single app. Xiaomi is another great example of a company that is building an entire ecosystem around its core business as a mobile manufacturer. If your product can add value to China’s existing tech ecosystems, then expanding eastward may be the right move.

 

The Chinese also have a penchant for products that enhance the way they live and work. Alibaba’s recent investment in WayRay, a Swiss augmented reality navigation technology, made this clear. If your product can enrich day-to-day life in China, offer efficiency and higher quality, there’s probably room for you there.

 

Of course, Chinese consumers may want your product, what about their government? The nation’s economy is tied to state-level economic planning, the policy being a critical shaping force, so you’ll need to make sure you’re on the government’s good side.

 

Made in China 2025, for instance, is a government initiative that prioritises next-generation IT, robotics, space and aviation equipment, and advanced railway transportation, among other high-tech investments. The country’s Next Generation Artificial Intelligence Development Plan demonstrates China’s determination to be a world leader in AI by 2030.

 

Companies operating in sectors the government has deemed critical to national development will benefit from greater attention from domestic commercial players and support from local governments such as approvals and licenses to operate, as well as grants, subsidies and tax incentives.

 

2. Friend or foe?

 

In 2013, Baidu took on SoundHound with its own music recognition software. Blocked in China, the SoundHound app failed to penetrate the Chinese market. However, earlier this year, SoundHound was back, announcing a partnership with Shenzhen Tanscorp Technology Co and the launch of Robot LQ-101 – a family service robot for Chinese consumers.

 

What can we learn from SoundHound’s comeback? First, business in China is all about choosing the right partners (just think Alibaba and SAP). Companies should always consider how a potential competitor could be transformed into a collaborator. Secondly, if you can present your service as a benefit to existing Chinese firms, you’ll get much further than trying to contend with the competition on you own.

 

Intellectual property theft is a common concern of foreign businesses in China. If you find someone else is making and selling your new product for half the price, you shouldn’t be shocked: you should have been prepared.

 

Foreign businesses must conduct thorough market research to identify the unique challenges and opportunities they can address. Fortunately, businesses aren’t alone: they can seek advice from respected international consultancies, law firms and organisations like the Department for International Trade and China Britain Business Council. Groups like SILK also provide their own expertise based on operational experience building companies in China.

 

3. Are you flexible enough?

 

Some founders are set in their ways: they have a tried and true approach they only wish to plug in and play. If this sounds like you, China might be a struggle, as simply saying “this is how we do it in America/England/Germany” will not win friends.

 

Doing business in China requires a creative, adaptive, ready-for-anything mindset. You need to be able to navigate a complex regulatory environment and an array of unfamiliar challenges.

 

Businesses also need to adhere to the country’s unique regulatory requirements. For cybersecurity firms, for instance, that means being ready to decrypt your cyber data for the government when necessary.

 

Most importantly, to do China right, you’ll need to tailor your product to the Chinese market. Evernote is a classic success story: they hired locals, leveraged localised marketing strategies, and collaborated with domestic partners Weibo and WeChat. They also succeeded in branding themselves with a witty and memorable Chinese name. (Google “Airbnb Chinese name” for lessons on how not to choose a Chinese brand name.)

Businesses eager to head east should make sure they take these questions to heart. A journey to China holds tremendous promise, but it’s no place for shortcuts.