Below are descriptions and solutions for the top 8 problems for foreign businesses operating in China today:
- Cultural Problems – Adaptation and Localization
- Regulatory Hurdles
- Protecting Intellectual Property Rights (IPR)
- Logistics – Establishing Resilient Global Supply Chains
- Building Trust with Overseas Partners
- Managing Sales & Distribution
- Gauging an Increasingly Competitive Market
- Fake marketing challenge
China… paradise of hell for foreign Businesses?
China’s consumer goods market is massive. It is expected to overtake the U.S. to become the world’s largest consumer of goods this year despite a slowdown in the economy and retail sales, according to a research report. Analysts from eMarketer showed that China ended 2020 with total retail sales of $5,074 trillion, exceeding that for the U.S. by more than $100 billion.
However, China continues to be a challenging market to businesses and marketers due to a variety of factors. In this article, we would discuss the top challenges facing foreign companies generally and marketers, particularly when doing business in this country.
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8 Challenges of foreign Businesses in China
1. The Chinese Cultural challenge: Need for Localization
You might think these problems don’t apply to your business, but actually, 95% of our clients are facing these problems.
- China is one of the big emerging markets which boasts strong leadership, hardworking and intelligent people, and a habit of self-reliance.
- China represents political, traditional, and business cultures with their own unique characteristics and distinctiveness.
Cultural misunderstandings leading to miscommunication are one of the biggest challenges that foreign companies face in China. Although there is an increasing number of Chinese people highly proficient in English, it is uncommon to find someone who understands the subtleties of the language and possesses a strong enough understanding of both Chinese and western culture to navigate delicate business negotiations.
What started as a promising prospect for both sides often breaks down due to misunderstandings. To avoid such problems, it is important to have an international team in place which can bridge Chinese and western cultural differences
See more on business culture in China:
- Sell to Chinese Men … not that simple
- how to deal with Chinese Companies
- B2B in China, totally different
2. China Regulatory Hurdles
The lengthy administrative procedures, especially with respect to permits, registration, and licensing, remain a constant challenge in China. Most businesses are required to have a standard business license, which contains a “scope of business” that details the activities the firm is permitted to undertake and is issued by the municipal Administrations of Industry and Commerce.
Example Health Firms in China
A distributor of medical devices will need both a business license with the appropriate scope of business from the Agency of Industry and Commerce as well as a permit from the local Food and Drug Administration.
Despite significant Chinese government efforts to streamline bureaucracy and reduce red tape, foreign companies continue to complain about bureaucratic barriers that hinder their plans to expand in China.
In addition, a lack of transparency in the regulatory process and inconsistent & unfair interpretation of regulations makes it further difficult for foreign businesses to compete.
International marketers also face unfair market access due to strict testing and standards requirements for some imported goods, foreign manufacturers, and foreign services providers, while offering substantial government guidance, resources, and regulatory support to Chinese industries.
In China, rules are changing all the time…
3. Intellectual Property Right (IPR) Challenge
China has long been the number one source of counterfeit goods marketed across the globe. 80% of the world’s counterfeit goods come from China and many of the market’s consumers are in China as well.
Foreign firms have long complained that enforcing their intellectual property rights in China is difficult due to local judicial protectionism, challenges in obtaining evidence, small damage awards, and a perceived bias against foreign firms.
Since joining the WTO in 2001, China has strengthened its legal framework and amended its laws and regulations regarding IPR, but weak enforcement continues to impede the IPR system prevalent in China.
As Chinese firms, focusing on global expansion abroad and high-tech innovation at home, increasingly demand effective IP protections from the government, we can be hopeful that legal reforms and new enforcement mechanisms would improve the situation.
4. Logistics in China – Establishing Resilient Global Supply Chains
Despite the government’s recent progress in improving the nation’s logistics environment, shipping goods to consumers in China can be costly and complicated. Logistics in China is a highly fragmented industry. With more than 730,000 registered logistics operators, according to the Global Supply Chain Council, coordinating supply chain capacity and material handling often affect material flows.
Additionally, large trucks are restricted from some urban areas during certain times of day, so product shipments have to be transferred to smaller vehicles before they can reach consumers. This complicates distribution and batch shipment optimization.
Besides, most of China’s warehouses, distribution centers, shipping yards, and cargo hubs are outdated and lack automation while a wide range of complex and frequently conflicting logistics rules and regulations makes it further challenging for foreign consumer product companies to get their products into the mass market in China.
5. Building Trust with Overseas Partners
Having trustworthy and reliable partners overseas in China is absolutely invaluable. Contrarily, a low-quality partnership can negatively affect a business in a wide variety of ways. Establishing a relationship with factory managers, distributors, and other key leaders within a company’s supply chain is well worth the effort and time put in.
Building this trust takes time and there are many challenges that are inherent in conducting business overseas. First and foremost, the language and culture barrier makes it difficult to adequately and fully express and understand sentiments that are exchanged between the two parties. Valuable information can be lost in translation and the process for establishing a deep relationship takes much more time than in a typical business relationship within one’s own country. Navigating social and cultural norms can also be difficult especially when dealing with China which has an extremely nuanced business culture that differs greatly from that in western cultures.
Especially during a time when business travel to Asia is nearly impossible due to the COVID-19 pandemic, building these relationships is even more difficult. Not being able to sit face-to-face with someone creates a disadvantage to prior relationship establishing practices. As a solution, companies have turned to source agencies and other types of services to help bridge the gap between their companies and overseas partners. A sourcing agent typically is bilingual and can serve as a bridge between a company and its overseas partners. They can also go do factory inspections and conduct quality control on behalf of their client, the company.
6. Managing Sales & Distribution
With 1.4B people, there is a customer in China for any product in the world. The challenge is finding the right distribution channels to reach them and knowing how to manage these channels.
There is still a void between Chinese distributors and western brands. A lot of brands have been abused by their distributors. Chinese distributors have a history of selling copied and fake products or just dumping clients when other brands are more profitable with better margins.
Meanwhile, it is difficult for brands to have a discussion with Chinese distributors because of the language and culture barriers. The expectations from both sides are also usually different: Chinese distributors often want to see quick and significant profits whereas brands want to set up their business in the medium-long term.
Therefore, it is advisable that companies ensure partners are reliable, have the right motivation, can perform everything specified in the contract, and are allowed by law to fulfill the promises in the contract by checking the reliability of partners via independent third-party sources. Local partners you trust can help you access quality distribution networks.
Brands should also invest to develop a strong relationship with distributors since “guanxi” or relationship is fundamental to business culture in China.
7. Gauging an increasingly competitive market
China’s market is viciously competitive and competition comes not just from global corporations but also and increasingly from “national champions” that China aims to build to compete with foreign companies. The rising incomes of Chinese people over the past years have both increased the size of China’s middle class as well as their purchasing power.
Moreover, the Chinese government also aims to continue its economic growth through domestic spending due to the US-China trade war. So more multinational companies come to China and domestic rivals attempt to take advantage of that growth in consumer spending. This intensifies the competition, making it more difficult and costly for brands to recruit and retain their customers.
7. Fake marketing challenge
Roughly one-third of Weibo’s 337 million users have shared or liked Chinese pop idol Cai Xukun’s new music video Wait Wait Wait, but it is almost certainly a bogus figure.
Fake followers are a fundamental part of Chinese social media platforms, threatening e-commerce credibility and eroding trust among consumers.
Chinese consumers trust peer reviews more than brand advertisements. Before making purchases, they usually check how well and often the products were mentioned on social media as well as how popular and active the brands are. They also check product reviews on e-retailer platforms.
As buying decisions are influenced significantly by such social indicators, KOLs or merchants buy fake accounts or fake reviews to increase their credibility. These services are cheap, currently around US$0.003 per account. Many of the agencies that buy and deploy bogus accounts also sell the services of low-paid humans employed to spend their days liking and forwarding content.
When Western brands open their Chinese social media accounts, they may not even be aware of the practice of fake followers, let alone how much of the engagement they seem to be getting is from fake accounts.
This problem not only raises the costs of marketing in China but makes it harder for brands to measure the real ROIs and also forces Chinese consumers to be cautious against branding and marketing in general, which will hurt brands in the long run.
SMCP “ have been through all sorts of scams, fake companies, fake products, fake services, etc. They have reached a point where they don’t trust what a brand says about itself,”
8 Challenges Facing Foreign Businesses in China today: Conclusion
Despite numerous challenges, many international brands have managed to yield admirable achievements in this market. The key to success is to keep your brand DNA while being flexible enough to adapt according to China’s unique business, media, and consumer culture.
Having a reliable local partner who not only knows Chinese market and culture but can also understand and work well with their foreign clients would be invaluable to guide you along the way and help you avoid unnecessary mistakes.