Red Points outlines 5 guidelines for companies considering selling products in China, covering market-specific, cultural and legal information.
Representing almost a fifth of the global population, and with an increasing tendency to consumerism, China offers a lucrative market. However, as Tesla founder Elon Musk well knows, whilst selling in China offers potentially enormous profits, western companies would be wise to tread carefully in China's unique business landscape. The entrepreneur, who has previously shown reluctance in expanding into the country, made headlines recently with a stealth visit to China.
However, there are ways to sell in China and protect your company's best interests. We've compiled a list of guidelines for companies considering selling products in China:
1. Check out the opportunity first
First, ensure that you have conducted thorough research into the opportunity and competing market. Chinese products already dominate many market sectors, and it may prove difficult for an emerging product to break in and gain a loyal customer base. Certain products manufactured in the west may achieve more success; western cosmetics, food and health and beauty products are considered to offer a greater guarantee toward safety than some Chinese counterparts.
2. To WFOE or not to WFOE?
A Wholly Foreign-Owned Enterprise, or WFOE (pronounced “woof-ee”, by the way) is a vehicle by which individuals or companies foreign to China can own a private limited company in China. If you want to hire employees in China, or make money inside China, you need a WFOE (see: how to obtain a WFOE) but the process is costly and very time-consuming: in all it takes between 6 and 12 months to finalise.
Alternatives to a WFOE include a joint business venture and operating with a distribution agreement. A joint business agreement with a Chinese company should be considered with scrutiny, as Chinese business models work differently and many foreign investors have been burned by the process. A business proposal should be clear, supported by financial projections, terminable with a simple contract and allow for control over the company seal and legal representatives.
Agreements with distributors will usually result in double taxation, as products are exported and then re-imported into China. Some Chinese manufacturers will push dubious services to avoid the tax, but these schemes are rarely prudent for a western company and they may prove difficult to get out of. A standard distribution model still makes sense and an agreement protects your rights. Your distributor in China may establish a third-party interest in Hong Kong to handle operations, and again a standard distribution agreement here will protect your interests and offer control.
3. Be ready for culture clashes
You should bear in mind that Chinese culture is likely very different from your own. In China, working relationships are of a great emphasis in conducting business, for example, and it is much more common to do business face-to-face.
There is also great deviance in social behaviour, and it is important to be educated on this so as not to cause offense. Many westerners are perturbed by personal questions relating to background and income, which are not usually considered rude to Chinese people. Within China, in business and personal relationships it is uncommon to receive a direct 'no' from someone, which is a sign of disrespect.
It is highly advisable to learn a little about the Chinese culture before expanding into the country. In addition to benefiting working relationships, it will improve understanding of how to 'bridge the gap' between cultures, and thus integration of your own brand.
4. Consider sales routes carefully
The ecommerce market in China is the largest globally, and a report details that in 2015 over 40 percent of ecommerce expenditure was generated in China. The online market is growing rapidly along with mobile payment options such as Alipay, and should not be ignored by companies planning to sell in China.
Planning to use your own website to sell to a Chinese audience means you should ensure there is a Mandarin language option for the website, and that the site offers mobile payment options and fast delivery and returns. Marketing a website differs in China compared to western norms; Google is blocked by the Great Firewall of China, but the most popular search engine Baidu has specific SEO optimisation guidelines to adhere to if you aim to avoid steep marketing costs.
Additionally, indirect sales channels present options for foreign sellers, and Alibaba and JD now provide ecommerce options for foreign sellers without WFOEs. These cut out much of the legwork involved for foreigners exporting, but are not suited to every company size: Alibaba's Tmall and JD Worldwide both charge commission costs and fees, and will only operate with companies with a certain amount capital. In addition to this, currently Tmall operates on an invitation-only policy for foreign merchants.
5. Protecting IP is a priority
In China, IP is viewed differently. 'Shanzhai', production of high-quality counterfeits, shows how counterfeiting is a deeply-rooted part of modern Chinese culture and intended as a compliment to the products and companies it knocks off. Of course, brands emerging in China may not wish to respect this cultural institution, particularly as China improves its manufacturing capability, and there are several steps that companies can make in order to maintain their brand protection.
Speaking to Quartz, IP lawyer Song Zhu recommends that companies wishing to avoid copycats should first apply for patents anywhere that they hope to sell. Zhu also recommends that companies sign 'NNN agreements' with Chinese partners: the contract “prevents partner factories from using the intellectual property themselves after first view ('non-use'), sharing it with others ('non-disclosure'), or inking a partnership and then selling extra units on their own ('non-circumvention')”.
As Zhu affirms, these protections will only go so far to stop counterfeits, especially given the expensive, time-consuming legal battles which tend not to yield any real profit. Therefore it may be prudent to research into a comprehensive digital solution, which can work to fight counterfeiters at their root capability as well as to remove products over ecommerce platforms.