Marketing in China
Marketing to the PRC is no simple task. It requires gaining contacts in both business and industry. Government permits and approvals can prove to be an extremely time consuming and frustrating task. However, like anywhere else, perseverance and flexibility will often be rewarded. China Unique provides both information and resources to help you in this endeavor.
Domestic Sales Rights:
To market goods or services in the PRC, you must obtain approval for Domestic Sales rights from the government bureau that oversees your product or industry. Often times this is a complex, and time consuming task.
For a foreign company to sell in to the PRC, you must obtain an import sticker. This sticker is a small, round, holographic sticker that after gaining government approval to sell your goods or service in country .
The PRC is far more likely to allow your products into their market if the domestic market does not provide the product or if it is a high technology product.Correspondingly, should you decide to enter the market via an assembly operation, high technology products and little domestic production increases the likelihood of your factory gaining domestic sales rights.
Gaining actual Domestic Sales rights is often a two step process. In setting up a manufacturing operation, you may fairly easily obtain approval and verbal promises or assurances. Your business license may also quite easily be approved with provisions for a certain percentage(usually 20 to 50%) of your output to be sold domestically. In actuality, this is only the first and easiest step in the process. The second step is to gain approval to market a specific product(product by product).
A wholly owned foreign enterprise(WOFE) will usually have an extremely difficult time in gaining this approval to market domestically. The Chinese government clearly desires foreign corporations to enter into Joint Venture agreement with a local Chinese partner.
A Joint Venture(JV) is the common route for smoothing the way for domestic sales rights. Entering a joint venture will, of course, come at a price. Joint ventures can be established in a number of different ways. The percent of ownership by the local partner can also vary significantly. Impatience in cutting the deal, will only result in terms less favorable to you. Chinese businessman are well aware of the impatience of outside businessmen, and in particular those from the U.S. They will not hesitate to take advantage of this weakness. You need to exercise lots of patience to extract the best deal.
The joint venture can take many forms. A silent partner may be the best for your operations. Be creative if need be. You may be able to cut a deal where your domestic partner is a silent partner. In exchange, you guarantee the partner a set return regardless of the profitability of your endeavor. This often times works well in a manufacturing situation where your transfer prices are set relatively low and may not otherwise offer the domestic partner an acceptable return.
Important: Without domestic sales rights you can not sell your product inside of China, even if you manufacture in China. Of important note you can not even sell from one of your subsidiaries(separate legal entities) to another.
Importation via distributors: One avenue for importing product is to self your product to a Chinese distributors in a location outside of China. The distributor then moves the product into the domestic market. The distributor then faces the same difficulties in importation, but it is beyond the point of your sale. Obviously this has many, many implications, is at a significant cost(lower revenue), and often works in only small quantities. We do not recommend this approach.
Joint Venture-Partial Assembly/Manufacturing: In this option, you enter a joint venture with a Chinese company and perform a minor amount of manufacturing. It offers some of the benefits of manufacturing in country and some of the benefits of a joint venture. It is a hybrid option that may work in a few cases.
Marketing by the Numbers:
WOW! There are 1.2 billion people in China ready to by my product!, Or is that 1.3 billion people in China. And, everyone of them might buy my product! .. Wrong!
Now let's do the calculation of the market potential:
1.2 billion people times , lets say 1 out of 10 can afford your product.....Why that's a market size of about 120 million customers! Now, let me see, 120 million customers times X many units a years times Y price per unit.....
DO NOT GET CAUGHT UP in the numbers racket on this calculation. Yes, it could be a very sizable market base for your product(s). But it is extremely important to really understand your market size, where your customer base will be, how to bring the product to market, and at what price.
You could argue that market research is even more important to assure sell thru of your products. You must also keep n mind that the primary goals of the Chinese government is to better themselves and their country and people. Therefore, they will encourage your manufacturing and assembly investments that bring jobs and tax revenues, but it's their strong desire to keep domestic sales to local enterprises where possible. The market is not open and the government sets, and frequently changes the rules
The nature of this market base is different than other countries. You can not use ratios from other countries in determining market potential. There are far more bicycles per person than in other countries, but I have yet to see a mountain bike. The ratio of automobiles per person is also one of the lower ones in the world, even though that number is now increasing. Also the mix of automobiles is much different. From a percentage, there are more higher priced vehicle and limousines. This is because the average person does not own a vehicle.
Market research efforts should thoroughly examine the market potential for your product line. Price, quality and need all play an important role. Some newcomers to the market believe the poor quality image of Chinese goods(not necessarily substantiated) and the lack of consumer wealth translates to sales of low cost, low quality products. Not so! During one visit to China, we were showing our local marketing staff one of the low cost products we were about to assemble in China and seek Domestic Sales rights. The marketing person said no way would it sell in the country. He said most people who had money to buy this product did not want something "cheap" like this. They wanted quality and a certain level of features. He then went on to point out some of the mid range models offered as a the most likely candidates for the domestic market.
In addition, Chinese consumers with a little money to spend are brand and fashion conscious. Keep in mind their purchase statements are not automobiles and homes in the suburbs. Just stroll down one of the major streets in the largest cities and you will find international retail outlets and world famous brand names. When visiting the U.S., a Chinese visitor will invariably shop for designer brands which can carry 100% import duty rates into China.
You will most likely need to acquire a local distributor for your products. Caution should be used to assure that the local distributor has the capabilities that he is promising. A little due diligence here will assure you have a quality distributor with the regional or national channels to the marketing outlets that you are targeting to.
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