It is almost impossible to enter Chinese market for a local firm stand-alone. There are several ways for a non-local company to start doing business in China:
A non-local company could find an agent in China, who would represent them as a partner while establishing on a Chinese market. The challenge with the agents are that this is so complex, that only well-experienced individuals/companies could help starting business in China
Joint Venture in China
Entering a Chinese market with a Joint Venture with a local company is the easiest and most popular ways to enter the market. According to the article “How do you enter the Chinese market? “ by scandicsourcing.com, it is easier for companies to start partnership with well-established companies with their own developed infrastructure in the same field.
Wholly Foreign Owned Enterprises are also very popular choice to enter the market. It has several benefits, like easiness to control, working in currency, which meand the profits in the local currency could be converted in other currencies. etc but it is very time-consuming to receive the license for opening the company.
In the free-Trade Zones the Chinese government is now experimenting with simplifying this process and recent updated company registration procedures will shorten the registration process.
Once a WOFE is in place it requires maintenance. Not only does the tax bureau want results and balance sheets every month, there are also frequent reports to the industrial bureau, the labor bureau etc. The administrative team and the man hours in administration is normally at least double to what is required in western countries.
Other ways to enter the Chinese market are representative and business support office as well.
They are not that popular as the three mentioned above, but still options to enter the market
In order to make the analysis more interesting, it will be based on the example of two major world-wide companies – LEGO and JWD, – two international companies, who successfully entered and established themselves in the Chinese market.
How did these two companies manage to succeed in Chinese market in a long-run, while other companies could not? In order to understand the specifics of entering Chinese market and the difficulties, CEOs face while expanding the business there, first of all, let’s review brief history and success of LEGO and JWD in Shanghai.
LEGO is a Swedish company, known world-wide by producing and selling colorful brick toys for children and adults. LEGO has a division, that concentrates on education of children. LEGO is the abbreviation of Swedish words, meaning – “Play Well”. It was established in 1916, Sweden but started creating toys in 1932.
LEGO opened manufacturing factory in Jiaxing, China. They announced entering Chinese market in 2013 and planned 35% revenue increase on Asian market.
We visited LEGO office in Shanghai – the office is bright, colorful with open space working environment – more western-style. There are bright colors, private rooms, each named after and representing the core values of LEGO – Creativity, Imagination, Learning, Fun and Quality. The employees have stress-free environment, unlike other Chinese traditional working spaces. The employees can even do yoga or attend dance classes at the office. There are rooms to make personal calls, or to relax, to talk to someone if you feel depressed. They believe in new ways of working – simplicity, collaboration and coherence. They have ABC working – work is divided around people and activities. There are space on the walls, where you can express yourself, stating – “Something to say?”
The mission of LEGO is to inspire and develop builders of tomorrow, which matches the environment, safety of the place, the educational part, caring part, etc. As a result, the turnover of the staff is very low.
Culture is very important for LEGO. Despite the fact, that the working environment is more western, the culture among the employees compliment the Chinese traditions. The employees speak Chinese, value the traditions, value each other’s privacy, time and working environment.
Despite the fact, that western parents think learning while playing is very good for the child’s development, while in Chinese culture, pupils are supposed to study hard to achieve success by spending long hours studying.
This was a challenging issue for LEGO, as they believe, that LEGO’s educational division is a very important part of the business. What LEGO did, was market the products as very safe for the children. LEGO understands, that Chinese consumers are different from others. What attracts moms is that the toy should be safe. Moms make the decisions for children. LEGO used the cultural thing China has – more family-oriented – and announced how safe LEGO was for children to play with, what was the advantage of the colorful toys in development of child’s mind and imagination and boosts creativity. This helped LEGO increase sales in Asian market by 50% in two years.
LEGO values fare, transparent and honorable environment for the employees, which matches the values of the company and the culture of the country they are in – China.
JWT is a world-wide advertising company, who entered Chinese market in the early 1900s – first in Beijing, than – Shanghai. With the help of the skilled and talented CEO, Tom Doctoroff, JWT became one of the most successful advertising companies in Asia.
They started as a small agency with only three clients, while in 2008, JWT raked as the largest advertising agency in US and the fourth largest marketing communications network In the world, while being the leader in the Asian market. With the managing team from all over the world, JWT managed to become one of the largest advertising agencies by creating a “solar system” – a group of local companies and understanding the needs of the Chinese clients – the growing need for advertising, as the middle-class was growing rapidly, ready to spend money on different goods on the market.
Despite the fact, that when JWT entered the Chinese market, marketing and advertising was an undeveloped concept, the prices for advertising company services were extremely low, JWT managed to create the demand on high quality advertising campaigns, that cost more than the market average. JWT understood the culture well, for advertising, the price-sensitivity was very high, while creativity was not on demand at all, the taste of the advertising campaign customers were not creative, but more traditional. JWT caught the moment, when the middle-class started increasing and the spending habits started to change. This was the opportunity to build a successful advertising company.
Despite that, JWT had several failures on the Chinese market, as they did not foresee the reaction that certain ads would cause. The best examples are Nike’s Chamber of Fear ad, where LeBron James fought a KungFu master.
The reaction from the public was not favorable, as Chinese people saw the advertisement as undermining the cult of the KungFu master.
JWT entered Chinese market by revenue-sharing strategic alliance with two local companies – Identica and Linksus, while LEGO entered China without any alliance partners, on their own – WFOE. JWT seek expanding the business by creating a “solar system” alliance with other local companies, using their experience, infrastructure, client base, benefits to be successful, while LEGO operates stand alone, manufacturing the toys, employing Chinese people and creating the Shanghaihub.
There are several factors, that should be considered before or while entering the Chinese market. For example, in order to succeed in China as a foreign company, is vital to understand the nature of the market, value their culture, people and management style, understand legal environment, demand, understand the best way to enter the market – if necessary, find the reliable local partner for entering, be prepared for constant changes.
But out of these success factors, there are three most important ones that should be carefully analyzed and decided:
Understand the Nature of the market
By nature of the market, I mean the demand of the local customers, understanding the complexity and diversity of the Chinese culture, it is very important to match the consumer behavior. A careful research should be conducted, favorably divided by region, the company should understand the market, the customer, the needs and demands before entering the world’s one of the fastest growing, appealing, but complex market. JWT saw the opportunity of the market – the growth of the middle class, development of the internet era , readiness to spend more money on advertising, that’s why they succeeded in China.
Understand the Legal environment and government
It is also very important to understand the nature of the legal environment, how to deal with the local government, – for example, LEGO has a very good relationship with Chinese government, as it aims to the manufacturing investment, that is encouraged by the Chinese government – green production. There are some business industries, which are impossible or very hard to enter legally. If you want to do business in china, you should understand the government, the legal system. This is why, there is a special staff member in Chinese companies, who are responsible for negotiating with the government. In LEGO, the marketing manager was also the person, who was the intermediary between the company and Chinese government. As for the JTW, their mission was to offer and maintain the highest standard of transparency in a non-political work environment. This means, that they tried to emphasize the fact, that transparency is more important than politics for them while operating in Chinese market.
During the visit at the LEGO office, the representative frankly declared, that it was different for management to understand how to do business successfully in china. But the fact, that they were aware of the political climate, helped them succeed. As they mentioned, Denmark is friendly with Chinese government so they have less problems than other big brands. This shows, how much influence the government has in China and how the foreign companies are under pressure.
Understand and adapt management style
Because of the nature, culture and psychology of Chinese workforce, it is very important to understand how to manage the local staff members. For example, in JWT the main working language was Chinese and English, the CEO even learned Chinese because he understood the importance of it. In LEGO, the management team is changed in several months, but despite the fact, that the company is established without local partner, the company is managed from the head quarter, they see the importance of having a local manager in the office in order to understand the people’s needs they work with. JWT offered the professionals from different backgrounds to work in their marketing division despite the fact that they did not have any knowledge or experience in the field. As long as the individual was bright and smart, he/she was welcome in the company. This emphasizes the management style of the CEO, who believed in people, not titles.
Now, as China understands the importance of cooperation with the global business trading, being part of one belt one road initiative, increasing the global trade and discharging the artificial barriers, taking into consideration the fact, that China is one of the fastest growing economies with the GDP if 11 trillion USD, 6.7% GDP growth rate, it is the best time to enter the Chinese market. There are so many avenues of development in Chinese economy. In March, 2018 the National Peoples’ Congress of China introduced some constitutional amendments. They plan to change the bureaucratic levels in the local government. The most interesting thing is, that they introduced the list on new ministries, most of them connected to the environmental health, nature, agriculture and ecology. Due to the pollution problems, the government helps green companies develop. This is the time for the foreign businesses to start doing green business in china, help with environment, pollution, greenings , etc. This is the reason, LEGO has a good relationship with the government as I have already mentioned.