Understanding Entry Modes into the Chinese Market
Based on viewing the accompanying video, please answer the following
questions:
1. What factors do companies consider when determining the best form of
operation to use when entering a new market?
2. What have been the challenges and opportunities for foreign companies in
establishing collaborative arrangements in China?
3. How have Chinese government policies and attitudes towards foreign
businesses
evolved? How have these changes affected foreign companies' forms of
operations in China?
Video Narration
With a population exceeding 1.3 billion, continued economic growth, and a large
supply of inexpensive and productive labor, China lures businesses from around
the world. Despite criticisms of its unwieldy bureaucracy or lack of disclosure of
corporate accounting practices and governance, most global companies agree that
you can’t be globally successful if you ignore this emerging market.
It’s clear that the Chinese business landscape is changing. As economic and
political reforms continue, China is charging ahead in its efforts to become one of
the key global economies. At the same time, companies looking to do business in
China need to keep in mind the impact of its long and complex history as well as
its rich cultural traditions, all of which continue to exert a strong influence on
virtually every aspect of Chinese life, including how business is conducted. The
key to doing business in China is flexibility, patience and persistence, much as
you’d need in most emerging markets, but with a few unique twists.
Companies considering doing business with China have to first determine the best
way to enter the market. Most foreign firms utilize some form of collaborative
arrangement with local firms when entering China.
In this segment, we’ll talk about how companies can enter the Chinese market; the
various factors they need to consider if they enter into a collaborative
arrangement, and some of the tactical steps they need to take in the early stages of
their Chinese operations.
There are four key ways to enter the Chinese market:




exporting to China
licensing, including franchising
Equity joint ventures
Wholly owned foreign enterprises (WOFEs or Woofies)
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These are not mutually exclusive ways to enter.
It’s clear for those experienced in dealing with China that there isn’t one best way
to enter China. Companies have to consider a number of financial, operational and
resource factors. For example, some companies start by considering how much
control they wish to retain while for others, the primary concern is how much of
their own resources they're willing to commit. As companies develop more
experience doing business with China, they’re likely to reassess the way they do
business in the country, particularly in terms of collaborative arrangements.
Companies that aim to have a stronger and more profitable presence in the
Chinese market need to increase their commitment of resources.
Exporting to China
Exporting may be effective, especially for smaller and mid-size companies that
can’t or won’t make any significant financial investment in the Chinese market.
Companies can sell into China either through a local distributor or through their
own salespeople. Many government export trade offices can help a company find
a local Chinese distributor or producer. Increasingly, the Internet has provided a
more efficient way for foreign and Chinese companies to find one another and
enter into commercial transactions.
Using distributors can have its own challenges. For example, some companies
find that if they have a dedicated salesperson who travels frequently to China,
they’re likely to get more sales than by relying on a China-based distributor.
Often, Chinese distributors sell multiple products and sometimes even competing
ones. Making sure that the Chinese distributor favors your product over another
can be hard to monitor. Further, some companies often find that culturally,
Chinese consumers may be more likely buy a product from a foreign company
than from a local distributor, particularly in the case of a complicated, high-tech
product. Simply, the Chinese are more likely to trust that the overseas salesperson
knows their product better.
There are risks with relying on the export option. If you merely export to China,
the Chinese distributor or buyer might switch purchases to a cheaper supplier or
even just threaten to in order to get a better price from you. Or, someone might
start making the product within China and take the market from you. Also, local
Chinese buyers sometimes believe that a company which only exports to them is
not very committed to provide long-term service and support once a sale is
complete. Thus they may prefer to buy from someone who is producing within
China. At this point, many companies begin to consider having a local presence,
which moves them towards one of the other three entry options.
Licensing and Franchising
Under a licensing or franchising agreement, a foreign company grants rights on its
intangible property, like technology or a brand name, to a Chinese company for a
specified period of time. In return, it receives a royalty. The Chinese sometimes
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call this a contractual joint venture. While the foreign company usually has no
ownership interests, they often provide ongoing support and advice.
Most companies still consider this market entry option of licensing and
franchising -- a low risk option because there’s typically no upfront investment.
However, foreign companies are sometimes concerned about the protecting their
intellectual property. In fact, until 1992, any technology that was part of a joint
venture could be accessed by a local Chinese company through a government
agency. Though today there’s still concern over the protection of intellectual
property, China’s inclusion in the World Trade Organization has encouraged the
government to focus attention on how best to protect property rights for
everything from software, videos and DVDs to brand names for consumer
products.
Equity Joint Ventures
The next option for companies entering China is some form of equity joint
ventures. In the past, joint ventures were the only relationship foreign companies
could form with Chinese companies. In fact prior to 1986, foreign companies
could not wholly own a local subsidiary.
The Chinese government began to allow equity joint ventures only since 1979,
which marked the beginning of the Open Door Policy, an economic liberalization
initiative. The Chinese government strongly encouraged equity joint ventures as a
great way to gain access to the technology, capital, equipment and know-how of
foreign companies. The risk to the foreign company was that if the venture
soured, the Chinese company could end up keeping all of these assets. Often
Chinese companies only contributed things like land or tax concessions that
foreign companies couldn’t keep if the venture ended.
Equity joint ventures pose both opportunities and challenges for the companies
that choose this option. First and foremost is the challenge of finding the right
Chinese partner – not just in terms of business focus, but also in terms of
compatible cultural perspectives and management practices. We’ll talk more
about these kinds of factors companies need to consider later.
Wholly Owned Foreign Enterprises
The last entry option requires the highest commitment by the foreign company,
which also must assume all of the risk, financial and otherwise. In 1986, the
government began to permit wholly-owned foreign enterprises -- WOFEs –
sometimes called woofies – as an alternative to joint ventures. Even then, the
government banned wholly owned enterprises that were either strategic, like
utilities or transportation, or were in industries where Chinese companies already
had sufficient capabilities, like production of blue porcelain. The government also
traditionally required woofies to be high tech companies that export at least 50%
of their production. In reality, this rule has not always been uniformly enforced.
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Some foreign companies believe that owning their own operations in China is an
easier option than having to deal with a Chinese partner. For example, many
foreign companies still fear that their Chinese partners will learn too much from
them and become competitors. However, in most cases the Chinese partner
knows the local culture – both that of the customers and workers -- and is better
equipped to deal with Chinese bureaucracy and regulations. Additionally, even
woofies cannot be totally independent of Chinese firms, who they might have to
rely on for raw materials and shipping as well as maintenance of government
contracts and distribution channels.
Collaborations offer different kinds of opportunities and challenges than selfhandling Chinese operations. For most companies, the local nuances of the
Chinese market make some form of collaboration desirable. The companies that
opt to self-handle their Chinese operations tend to be very large and / or have a
proprietary technology base such as companies in high-tech or aerospace – for
example Boeing or Microsoft. Even then, these companies tend to hire senior
Chinese managers and consultants to facilitate their market entry and then help
manage their expansion. Nevertheless, navigating the local Chinese bureaucracy
is tough, even for the most experienced companies.
Just about any large venture in China will at some point comes into contact with
the Ministry of Foreign Trade and Economic Development. China has a vast
bureaucracy, although its being revamped, and a maze of government agencies
and regulations.
Many foreign companies choose to enter China via Hong Kong. They may set up
a Hong Kong company or use a Hong Kong based Chinese company as a partner.
For decades, this was the only legally permitted option as the Chinese government
strictly controlled access to its local markets. Even with China’s liberalization,
many companies continue to enter via Hong Kong because Hong Kong places
very few restrictions and red tape on foreign investment, is well-regulated, offers
operating efficiencies, and has transparent operating rules and regulations.
However, the handover of Hong Kong to China on July 1, 1997 has weakened
some of these attributes.
Entering through Hong Kong does have its problems. These days, some mainland
Chinese, especially those from Beijing, complain that Hong Kong Chinese have
taken advantage of them, and thus are reluctant to deal with them. In such cases,
foreign companies are better off choosing a different way to enter the Chinese
market. Further, most people in China speak Mandarin, which is not the primary
language in Hong Kong. But over 400 million speak one of the other seven
dialects such as Cantonese which is the main language in Hong Kong and is
commonly spoken throughout the southern part of China.
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Regardless of which entry strategy a company chooses, several factors are always
important.
 Cultural and linguistic differences (pause) – these affect all relationships
and interactions inside the company, with customers and with the
government. Understanding the local business culture is critical to success
 Quality and training of local contacts and / or employees (pause) –
evaluating the skill sets and determining if the local staff is qualified is a
key factor for success
 Political and economic issues (pause) – policy can change frequently and
companies need to determine what level of investment they are willing to
make, what is required to make this investment and how much of earnings
they can repatriate
 Experience of the partner company (pause) – assessing the experience of
the Chinese company in the market, with the product and in dealing with
foreign companies is essential in selecting the right local partner
One of the most important cultural factors in China is guanxi (pronounced guan
shi) (pause) , which is loosely defined as a connection based on reciprocity. Even
when just meeting a new company or partner, it’s best to have an introduction
from a common business partner, vendor or supplier – someone the Chinese will
respect. China is a relationship-based society. Relationships extend well beyond
the personal side and can drive business as well. This stands in sharp contrast to
the West where relationships have less importance. With guanxi, a person invests
with relationships much like one would invest with capital. In a sense, it's akin to
the Western phrase, "You owe me one."
Guanxi can potentially be beneficial or harmful. At its best, it can help foster
strong, harmonious relationships with corporate and government contacts. In its
worst, it can encourage bribery and corruption. Whatever the case, companies
without guanxi won’t accomplish much in the Chinese market. Many companies
address this need for guanxi by entering into the Chinese market in a collaborative
arrangement with a local Chinese company. This entry option has also been a
useful way to circumvent regulations governing bribery and corruption, but it can
raise ethical questions, particularly for American and Western companies which
have a different cultural perspective of gift-giving and bribery
Once a meeting has been set up, foreign companies need to understand the local
cultural nuances which govern first meetings, from physical and verbal gestures to
seating order.
Selecting an entry strategy for China is easier said than done. We’ve covered the
structural options as well as some of the issues that foreign companies need to
consider when they decide to enter the Chinese market.
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Overall, foreign companies need to:
 Research the Chinese market thoroughly and learn about the country and
its culture (pause)
 Understand the unique business and regulatory relationships that impact
their industry, whether its consumer products or mining and forestry
(pause)
 Use the Internet to identify and communicate with appropriate foreign
trade corporations in China or their own government’s embassy in China.
Each embassy has its own trade and commercial desk. For example, the
U.S. embassy has a foreign commercial service desk and officer who
assists American companies on how best to enter the local market. These
resources are best for smaller companies. Larger companies who have
more money and resources usually hire top consultants to do this for them.
They’re also able to have a dedicated team assigned to China who can
travel there frequently in the beginning of the relationship to meet with
government representatives. (pause)
 Once a company has decided to enter the Chinese market, it needs to
spend some time to understand the local business culture and how to
operate within it. (pause)
China joined the World Trade Organization in December 2001 and it’s clear that
it will be drawn even more into the global economy as companies continue to vie
for access to its 1.3 billion consumers and cheap and productive labor pool. Most
companies expect that dealing with China will now become more straightforward
if not easier. Whatever the future brings, the Chinese economy continues to be a
powerhouse of growth and opportunity.
Discussion Questions
1. What factors do companies consider when determining the best form of
operation to use when entering a new market?
There are four key ways to enter the Chinese market:




exporting to China
licensing, including franchising
Equity joint ventures
Wholly owned foreign enterprises (WOFEs or Woofies)
These are not mutually exclusive ways to enter.
Companies have to consider a number of financial, operational and resource
factors. Some of the key factors that companies consider when determining the
best way to enter a market include:
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1. How much control they wish to retain while for others
2. The extent of resources, financial and other, that they are willing to
commit to the new market.
3. Physical and social factors
4. Market nuances
5. Prior experience in foreign collaborations
2. What have been the challenges and opportunities for foreign companies in
establishing collaborative arrangements in China?
Opportunities
1. Large domestic market of consumers for products and services
2. Cheap labor pool for manufacturing collaborations
Challenges
1. Language and culture
2. Need for guanxi (connections)
3. Previous government restrictions on ownership and repatriation of gains
4. Previous lack of convertibility of currency
5. Unwieldy bureaucracy
6. Lack of disclosure of corporate accounting practices and governance
7. Protection of intellectual property
3. How have Chinese government policies and attitudes towards foreign
businesses evolved? How have these changes affected foreign companies'
forms of operations in China?
The Chinese government has become more open to foreign companies over the
past two decades. However, foreign companies are sometimes concerned about
the protecting their intellectual property. In fact, until 1992, any technology that
was part of a joint venture could be accessed by a local Chinese company through
a government agency. Though today there’s still concern over the protection of
intellectual property, China’s inclusion in the World Trade Organization has
encouraged the government to focus attention on how best to protect property
rights for everything from software, videos and DVDs to brand names for
consumer products.
Prior to 1986, foreign companies could not wholly own a local subsidiary. The
Chinese government began to allow equity joint ventures only since 1979, which
marked the beginning of the Open Door Policy, an economic liberalization
initiative. The Chinese government strongly encouraged equity joint ventures as a
great way to gain access to the technology, capital, equipment and know-how of
foreign companies. The risk to the foreign company was that if the venture
soured, the Chinese company could end up keeping all of these assets. Often
Chinese companies only contributed things like land or tax concessions that
foreign companies couldn’t keep if the venture ended.
426
In 1986, the government began to permit wholly-owned foreign enterprises –
WOFEs – sometimes called woofies – as an alternative to joint ventures. Even
then, the government banned wholly owned enterprises that were either strategic,
like utilities or transportation, or were in industries where Chinese companies
already had sufficient capabilities, like production of blue porcelain. The
government also traditionally required woofies to be high tech companies that
export at least 50% of their production. In reality, this rule has not always been
uniformly enforced.
Additional Exercises
1. Divide the class into teams. Have each team pick one market and determine
what factors are important in reviewing market entry strategies
Market entry strategies
a. Export/import
b. Management contracts
c. Licensing
d. Franchising
e. Joint ventures/strategic alliances
f. Turnkey operations
g. Wholly owned subsidiaries (DFI = direct foreign investment)
Additional Discussion Questions
1. Why would a company choose a particular market strategy over another? Can
a company have more than one strategy? Why or why not?
2. In the country and market selected above, what are the local cultural nuances
to doing business?
3. Have the students pick a global company, American or other, and one country
in which it operates. Ask them to research how the company is currently
performing in that market and what factors the company most likely
considered when first entering that market. Operating conditions change over
time. Would the students evaluate the market differently if they were to enter
it now versus when the company originally entered that market? Has the
company’s strategy in that market changed over time?
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Online Resources
http://www.tdctrade.com/chinaguide/index_e.htm -- Hong Kong TDC is the
global marketing arm and service hub for Hong Kong-based manufacturers,
traders and service exporters.
www.worldinformation.com - overview per continent/region; current events;
trade, etc.
www.nationsonline.org - general information on countries/regions/continents;
history, business and finance information
www.executiveplanet.com
country
- information on business etiquettes/protocols per
www.nationbynation.com - information on geography, history and people of each
country
www.culture-quest.com – business and cultural information on countries and
regions around the world
www.businesstravelogue.com - information on business etiquettes for each
country
http://www.economist.com – information on global issues, countries, economics
and politics
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