3 ways businesses can expand into China (and why!)
From John D. Rockefeller’s early adoption of kerosene to Steve Job’s wager on personal computing, the best business minds change the world by finding an edge.
One move that could give your business a huge leg up on the competition is going global. (After all, the world’s biggest Starbucks is in China and New Zealand has almost as many McDonald’s restaurants per capita as the United States does.) Even if your business doesn’t aspire to world domination, now’s a great time to consider expanding into the Chinese market — and it could be easier than you might think.
Why China? Why now?
While there are other markets that may be easier to get into, none have the potential that the Chinese market has for your brand. Why?
China’s shifting demographics
Consulting firm McKinsey & Company estimates that by 2022, 76% of China’s urban population will be middle class — double the size of the entire U.S. population! Plus, they’re more globally-minded and spend more than their parents. In other words, the average 24-35 year old middle class consumer is shifting their behavior to become more and more like their American counterpart.
Increased demand for Western goods
This new generation of consumers has been brought up in a much more open society than their parents and grandparents. Social media has made it possible for Western culture to be seen, heard, and desired by the internet-savvy youth of China — just ask Apple or Coach.
In addition, Chinese consumers are beginning to not trust products made in their homeland due to items such as baby formula being recalled for various reasons, including plastic contamination. With domestic product safety a concern, demand for western imports has gone through the roof.
Fewer import regulations
In the past, China has required U.S. companies to go through testing and regulation before being allowed to enter the Chinese market, which can take time and be fairly expensive.
However, in 2016, China created different regulations for cross-border ecommerce. When products come from a free-trade zone inside of China or are shipped directly to consumers from overseas, many domestic regulations aren’t required. This means that if you’re willing to be a purely ecommerce business, you won’t face the same hurdles to begin selling in China.
Government push for importing
In 2017, China’s government instituted a variety of programs aimed at increasing international imports to help balance the trade surplus and temper the booming economy, which is growing dangerously fast. President Xi Jinping asked China’s largest companies to participate in this countrywide effort to import more goods. He also announced the first China International Import Expo, which will be hosted in Shanghai in November 2018. This nationwide mission aims to loosen Chinese import regulation and hopefully create a gold rush for businesses to export to the largest market in the world.
How can businesses enter the Chinese market?
While expanding to China may seem daunting, there are actually a few different options for your business:
If you have a well-known brand, going direct to consumer will probably be the best route. Retail gives you the most control of your brand and distribution channel. However, in exchange for control, it does require a considerable amount of resources and risk.
Going this route, you’d probably make a higher margin than selling wholesale, but you’d also need to create brand awareness and drive traffic into your store. Because of this, if your brand isn’t as well-known, opening a flagship store could cost more in marketing than the sales you’d drive. Instead of operating at a loss, you may want to consider building up brand awareness through other incubation channels before opening up a retail store in order to make sure you can at least break even.
Another solution is to work with a traditional distributor in China. Since traditional distributors often sell to brick and mortar stores, you may need to go through the proper Chinese regulatory agency (depending on your industry). However, in exchange for your effort, you get the advantage of having a local distributor’s knowledge of the landscape.
If you don’t want to be subject to import regulations, you may be able to work with a new type of ecommerce distributor that only sells products online, such as through a Taobao Global store. However, distributors may choose not to work with you if your brand isn’t already well-known, as these distributors are looking to gain exclusivity and work with companies with the highest amount of demand to create quick wins.
3. Incubation programs
Alternatively, you may want to consider applying for an incubation program that’ll guide your expansion into China’s market (even with little brand recognition), such as the Tmall Rising Star Program. You’ll work directly with multiple business units within Alibaba Group — which includes Tmall, OpenSky, Cainiao, and Alimama — to determine your entry strategy.
This particular program provides logistics, translations, and marketing, offering a full-service entry strategy in partnership with the largest retail company in China. Unsurprisingly, this program is highly competitive — the team reviews factors such as pricing, the competitive landscape, potential demand, regulations, and more, and those identified as having maximum potential in the Chinese market are offered a partnership.
The Rising Star program consists of a three month market test. Then, the team will review how the market reacted to your products and potentially move forward with a longer-term business plan.
In order to apply for the Rising Star Program, use promo code FC1 and skip the line — you’ll be scheduled for an interview shortly.
If you have any questions about any of these programs or would like a free consultation on the best options for your business, please contact Alibaba’s North American SME team, OpenSky, at email@example.com.