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Mastering China Business in 2023: How to Overcome Challenges with Confidence

With its sheer scale, expanding middle class, and growing disposable incomes, China is still a compelling choice for those seeking profitability and long-term returns. In the first quarter of this year, the number of newly formed foreign-invested enterprises hit 10,000. The increase represents a year-on-year growth of 25.5 per cent.

Navigating China’s business landscape in 2023 requires, however, a reconfiguration. The post-pandemic marketplace has witnessed significant changes in consumer behaviour, digitalisation, and supply chain networks. These transformations have fundamentally altered the way of doing business in China, posing a different set of challenges to companies.

On 19 May 2023, CW gathered a dozen of experienced business leaders and moderated a session to discuss the opportunities, challenges, and important trends shaping the current business environment in China. The event is part of a series of collaborative sessions, the objective of which is to cultivate a vibrant community of likeminded professional individuals and companies. Their collective knowledge and expertise can be harnessed to support aspiring entrepreneurs to do business in China.

This article will provide useful insights and practical tips on how to overcome some of these challenges. We will also share snippets of lessons that business executives who attended the event have gleaned from operating in China.

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Common challenges faced by businesses operating in post-pandemic China
Intensely competitive marketplace with discerning consumers

Against the backdrop of persistent trends, such as urbanisation, technological advancement, and demographic changes, the pandemic has caused a seismic shift in consumer values and behaviour in China. Shunning impulse purchases, Chinese consumers now increasingly value sustainable, long-term gratification. Priorities, such as wellbeing, family, and career, have taken pride of place. The pandemic has led to a re-conceptualisation of consumption, with purchase experience, long-term value, product quality, and brand image playing a key role in purchasing decisions. These shifts indicate that the world’s economic powerhouse is on the verge of transitioning into a fully developed consumer society.

Catering to the highly diverse needs of sophisticated Chinese consumers is, therefore, no easy feat. In recent years, global and domestic brands alike have needed to expedite product enhancements to provide unique, personalised experiences tailored to individual customers. Among some Chinese consumers, there is a strong preference for domestic brands, which offer better value for money. Nonetheless, foreign brands continue to be the top choice across the board, except in food and beverage. Chinese consumers’ penchant for foreign brands is particularly pronounced in beauty and skincare as well as electronics. Pitted against established and emerging domestic brands, foreign brands will have to level up when vying for Chinese consumers’ attention.

A Portuguese diplomatic representative stationed in Guangzhou offered valuable insight. He emphasised the importance of building brand awareness and the uphill battle faced by players without sufficient differentiation. While it is true that Chinese consumers now ascribe greater weight to a product’s attributes and functionality, brand image as well as a company’s values and mission still hold considerable sway in the buyer decision process. 

Keeping up to date with regulatory changes

Fulfilling ongoing as well as annual compliance obligations can present a challenge to many foreign companies operating in China. The country’s complex regulatory landscape necessitates a dynamic and agile approach to compliance management to meet the host of changing requirements. Several participants at the event emphasised the importance of keeping up with policy developments.

In particular, China has tightened its grip on enforcing environmental compliance to align with its metamorphosis into a green economy. A leading representative of the French business community in South China spoke about how prospective investors were awaiting the release of further guidelines on pollution prevention for manufacturing enterprises.

Other attendees also mentioned the need to monitor and pay close attention to the evolving regulatory framework in the digital field. Due to the extensive application of new regulations bringing in sweeping changes in IT compliance, it is possible for violations to go unnoticed, resulting in heavy penalties. A recent set of measures introduced by the Cyberspace Administration of China – with wide reverberations for all businesses – concerns the country’s cross-border data transfer regime. The measures stipulate that entities making outbound transfers of personal information must conclude a prescribed contract with offshore importers. As evident elsewhere in the world, the implementation of such regulatory frameworks has brought about notable changes in how organisations handle, store, and safeguard the data of their staff, customers, and other personnel.

Lack of local knowledge

The pandemic has brought to the fore the perils of operating in China without sufficient on-the-ground knowledge. As remote modes of operation, enabled by accelerating digitalisation, continue to replace more direct, in-person forms of management and doing business, the lack of local intelligence has become a growing issue. Without on-the-ground, physical presence, it is often more difficult to ascertain whether a piece of information is genuine. It is also harder to verify the legitimacy of a prospective business partner’s credentials.

Further, venturing into a new market brings new opportunities and risks in equal parts. Hence, it is crucial to have a holistic and in-depth understanding of the extensive list of potential risks involved. Inadequate local knowledge can limit your perspective and impair your ability to quantify and assess risks properly. The danger is that decisions based on incomplete information will be more susceptible to error, which may lead to missed opportunities, financial losses, and other issues with serious implications for business success.

A delegate from an investment promotion body expressed a similar view. Additionally, he added that a sizeable proportion of European SMEs were still feeling “very nervous” about expanding to China. He attributed their apprehension to the lack of access to on-the-ground experts, especially after the pandemic. Evidently, having insufficient local knowledge can also constitute a barrier to market entry and inhibit business success.

Strategies to address and tackle challenges
Have on-the-ground support

Navigating the Chinese market is not exactly a walk in the park. Entrants as well as established players must contend with a wide array of complex issues, especially regarding compliance matters. While international business has acquired new digital dimensions with many companies now opting for a predominantly remote mode of management, it is still highly advisable to have someone on the ground to act as your “eyes and ears”. Attendees also concurred with the above observation and shared similar views on the necessity to hire local staff, especially for managerial positions, and to team up with local partners.

Relaying information through multiple intermediaries takes time. The pandemic has exposed the vulnerabilities of a remote-only presence when operating in China – without access to real-time information. In the absence of on-the-ground support, it is significantly more difficult to react and adapt swiftly to market fluctuations. Unforeseen circumstances that demand an immediate response can be tricker to handle due to a time lag. It may take longer to gather information, assess the situation, and take appropriate action promptly.

More importantly, to ensure that your offering fits like a glove, possessing excellent knowledge of the local market’s preferences is a non-negotiable requirement. Hiring local talent is by far the easiest way to access local intelligence. Further, having local managers on board, who are well versed in social rules and conventions, facilitates the building of relationships with stakeholders on the ground.

When it comes to compliance management, enlisting the services of a local professional service provider to take care of the nitty-gritty of dealing with all the legal and technical intricacies can greatly reduce your exposure to risk and enhance efficiency. Armed with local expertise, a professional firm can help you address the operational risks that are specific to doing business in China.

Add value to your offerings

As Chinese consumers’ demands continue to become increasingly complex and multifaceted, the frontier of value creation and addition is shifting towards multidimensionality. According to a sales manager at a European-owned company that provides production services to overseas customers, value addition was critical to the survival of a German-owned company operating in the automotive industry. He added that the company was able to charge a premium price compared to its local competitors – thanks to its higher value-added products.

Another participant, a purchasing manager working for a French company that sells high-end furniture, commented on how the company was facing competition from all sides, especially from other parts of Southeast Asia. The company was, therefore, extending its efforts to acquire new customers through product upgrades, for example, by incorporating natural and eco-friendly materials.

In a fiercely competitive arena, it is necessary to continuously revamp offerings to stay ahead of the game. Instilling a culture of constant improvement is, therefore, imperative. To consistently deliver value to customers, it is essential to not only collect customer feedback, but also to actively incorporate it into your operations. As daily users of your products or services, your customers serve as your most valuable allies in the process. After collecting responses, you should implement them in demonstrable ways and communicate these improvements to your customers. This can reinforce the message that you value their input and are genuinely committed to addressing their diverse needs.

On a related note, while value-added products and services can cater to evolving consumer needs, it is important to clearly define how these products and services go beyond the “bare minimum” or core offerings to fully capitalise on the value addition. This involves forming a precise understanding of how value-added offerings meet customers’ needs. 

Embrace digital channels

Value addition and accelerating product upgrades have become all the more important not just to keep hungry market contenders at bay, but also as a response to the growing dominance of e-commerce platforms. While speed to market has increased, online platforms have led to a decline in customer loyalty, as comparisons between different brands can be done with a single swipe. Given the role of e-commerce in re-sculpting the entire retail landscape, addressing the needs of digital-savvy consumers should form part and parcel of your business strategy.

Home to a gigantic consumer base of digital natives making up one-third of Asia’s consumption, China is unsurprisingly a bellwether for the adoption of certain behaviours that are set to endure in the post-pandemic era. The pandemic has expedited changes in buying habits, with consumers now flocking to online stores from their own homes. While foot traffic to brick-and-mortar stores has picked up since China’s re-opening, it has yet to return to pre-pandemic levels.

To thrive as a retailer in China, you will need to learn how to strategically position yourself within a highly advanced and integrated digital infrastructure. Apps, such as WeChat, that bundle different services together and provide an end-to-end solution, have become a staple in Chinese consumers’ daily lives. Therefore, it is important to assess how your offering interacts with the wider digital ecosystem and evaluate its compatibility. Nowadays, Chinese shoppers expect an omnichannel shopping experience, where they can effortlessly transition between digital and in-person retail channels.

Find out how you can leverage the power of digital marketing trends to sell to the Chinese market.

Be on the lookout for preferential policies on offer

Leveraging preferential business policies can oil the wheels of operating and investing in China. To incentivise foreign businesses to set up shop in China, the government has rolled out a clutch of preferential policies. Economic development zones have been set up to facilitate foreign investment, offering a wide range of goodies to investors.

In addition to national-level development zones, there are demonstration zones and special districts at municipal level. With policies that differ from those applied in the rest of the country, these zones generally offer a more friendly investment environment. The various incentives include tax breaks, streamlined administrative procedures and approval processes, lower administrative fees, and rental subsidies. Further, the provision of infrastructural, financial, and intellectual property protection support enables businesses to cut costs, increase efficiency, and establish presence in China more easily, thereby enhancing their overall competitiveness in the marketplace.

A spokesperson for the Guangzhou Development District (“GDD”) Investment Promotion Bureau introduced the GDD and highlighted the investment opportunities available to fellow participants. Located in the eastern region of Guangzhou, GDD, also known as Huangpu District, lies at the heart of the prosperous delta region encompassing Guangzhou, Hong Kong, and Macao. The GDD’s GDP surpassed USD 62.88 billion, representing a year-on-year rise of over 8.2 per cent. Additionally, foreign investment totalled USD 2.57 billion, while foreign trade value hit 326 billion yuan. 

According to the spokesperson, the GDD’s industry focus mainly revolves around IT, artificial intelligence, biomedicine, new energy, and new materials. The GDD is home to different industrial clusters: three clusters to the tune of 10 trillion yuan each for electronics, automobiles, and chemicals; four clusters worth 50 billion yuan each for new materials, food and beverage, metal manufacturing, and bio-health; six new clusters for IT, intelligent devices, new materials, biomedicine, and e-commerce.

Move beyond first- and second-tier cities

Another way to stand out from the crowd is to explore lower-tier cities. With many flocking to megacities, it is easy to neglect markets that do not usually bask in the spotlight. At the event, a senior representative of a major Hong Kong-based bank commented on the strong purchasing power of residents in first-tier cities. Even though shoppers in lower-tier cities do not have pockets as deep as those in higher-tier cities, they are at the forefront of steering consumer demand. Home to over 70% of China’s population, these cities are experiencing exponential growth. Consumption in these burgeoning markets is expected to rise to USD 6.9 trillion by 2030.

While consumers in lower-tier cities tend to be more price conscious, the price tag of a product or service has diminished in significance and is no longer the determining factor in purchasing decisions. A product’s outward appearance has outstripped price in importance. According to a survey from 2022, 78 per cent of respondents in lower-tier cities prefer an aesthetically pleasing product appearance. Nevertheless, purchasing decisions are still largely influenced by a product’s cost-effectiveness and practicality compared to those in higher-tier cities. On the other hand, consumers in the latter are more prone to “vanity spending” with the purpose of flaunting their social status.

Although international brands have yet to sharpen their competitive edge in lower-tier cities, these markets could provide an enticing, untapped avenue for expansion. As indicated above, it would be wrong to assume that consumers in lower-tier cities only emulate the behaviours and spending patterns of their metropolitan counterparts. Businesses seeking to establish a foothold in lower-tier markets must be receptive to local consumers’ behavioural quirks and preferences, and adapt their offerings accordingly. Those that can win the hearts of consumers in lower-tier cities will reap a very handsome reward.

Localise your offerings

As illustrated further above, staff localisation through building competent local management teams is crucial to business success. The concept of localisation is by no means confined to people, however. Its importance is exemplified by the frequent mention of it by participants over the course of the event. China’s expansive and richly diverse landscape is reflected in its highly segmented and heterogenous market, characterised by different consumer preferences and varying levels of discretionary spending power, as evident in the above section. This makes it, therefore, even more important to localise your products or services.

Generally speaking, product localisation encompasses three main areas: linguistic, cultural, and software or hardware adaptations. Linguistic localisation entails translating text or copy into the target market’s language. The message may need to be revised to appeal to the local market. Cultural localisation involves modifying aspects of the product to align with cultural norms and established customs, such as using a particular colour scheme. For example, the colour red is considered auspicious in China. Lastly, software or hardware localisation refers to functional adjustments of a product to enhance usability, such as configuring an application so that it is compatible with a country’s preferred operating system. Together, these aspects help products resonate better with the target market.

But localisation should be done selectively, strategically and in moderation. If taken to the extreme, excessive localisation can “dilute” your brand, depriving it of its authenticity and unique edge. More importantly, localisation should not become a distraction, drawing your attention away from addressing and meeting your customers’ most pressing needs.

Learn more about how to do business successfully in China

CW regularly hosts events centred on topics that are of interest and relevance to business professionals operating in China. Our events provide a unique opportunity for you to gain valuable insights into the latest developments, connect with high-level business leaders, and establish new connections with like-minded individuals from the business community.

If you are interested in participating in the next event organised or moderated by CW, register your details with us here. Don’t miss out on the upcoming opportunity to connect with other business professionals and expand your network in China!

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