Developing a Smart Approach to Market Entry for American SMEs

US small businesses should research opportunities and the business culture before entering the China market.

By Christopher Hayes

When Xi Jinping gave his inaugural speech as general secretary of the Chinese Communist Party (CCP) last month, many China-watchers interested in market entry were paying attention to both what he said and how he said it.

Xi indicated that change will come to China and that the party intends to rebuild trust, both hallmarks of the new Chinese leadership. He also noted that his country needs to learn more about the world and that the world needs to learn more about China. Those words convey honesty and indicate that China is open for new business.

The CCP Congress set the stage for the 12th National People’s Congress and Chinese People’s Political Consultative Conference in March. New state and government leaders will be announced and, perhaps most significantly, new policies will be introduced with the potential to impact various industries. Even though the CCP Congress has ended, it is important to watch what happens in China in March.

Foreign companies are entering new markets like China at a blistering pace and foreign direct investment (FDI) is skyrocketing. The World Bank reports outbound FDI deals from emerging economies alone will grow from 1,400 in 2011 to more than 4,500 by 2025. The need for market intelligence and strategic insight is greater than ever for small- and medium-sized enterprises (SMEs)—companies with fewer than 500 workers—looking to enter or expand in China.

AN AMERICAN OPPORTUNITY

As the Chinese middle class grows, so does the opportunity for American SMEs expanding into China. The US International Trade Administration says that 29,699 SMEs exported to China in 2010, a nearly 10-fold increase since 1992. Of all the US companies that exported to China in 2010, 92 percent of them were SMEs. For perspective, SMEs now account for 99.9 percent of all US businesses.

A number of economic indicators suggest that the Chinese business climate may actually be improving for American SMEs. A Brookings Institution study predicts the Chinese middle class could grow by more than 400 percent over the next decade. The result would be more than 500 million newly minted members of the middle class, who will likely play a significant role in the global economy. And these consumers could play a significant role in the American economy as well, given the 13 percent increase in US exports to China in 2011.

Another indicator, mobile phone usage, paints an even more compelling portrait. According to China’s Ministry of Industry and Information Technology, the country’s mobile phone penetration rate surpassed 50 percent in 2009. And now, the government says that rate will reach 100 percent for the first time by 2015.

Joint ventures are by far the top market-entry strategy in China. Among stakeholders surveyed about technology companies specifically, a majority agree joint ventures are the most effective route into China. Partnerships are essential to navigating the governmental and cultural hurdles to market entry. “If a foreign company sets up a joint venture in China, it is able to operate under some special policies established by the Chinese government … [allocating] some preferential treatment or subsidies in finance,” according to one China investor. However, to take advantage of all these favorable factors, SMEs have to get smart about both the marketplace and their potential stakeholders and customers.

OPPORTUNITIES FOR INVESTMENT

Omar Hamid, head of Asia forecasting for Exclusive Analysis, a forecasting and political risk analysis firm, says he sees new foreign investment opportunities opening in several specific areas.

For example, the Chinese leadership has been trying to limit the economic downturn and stimulate the economy, injecting money through state investment companies and reallocating finance from state-owned to private SMEs in an effort to trigger consumer spending and demand. In addition, the China Securities Regulatory Commission is considering implementing several proposals that would encourage greater foreign investment in capital markets. Hamid says some potential measures are increasing the cap on foreign investment, currently at $12.8 billion, and raising the cap for individual investors from $160 million to $800 million. Edelman projects that these reforms are likely to be implemented soon, probably over the next six months.

Additionally, signs point to new policies to encourage foreign investment in renewable energy sources, especially in the construction of new-energy, hydroelectric, and clean-combustion power stations, as long as Chinese joint-venture partners retain control. While foreign firms will be encouraged, there will still be intellectual property and technology transfer risks because the Chinese want to build local capacity. Another opportunity lies in the expansion of biomass power stations, as local governments and the State Grid Corporation of China (SGCC) are providing financing, reduced taxes, cheap land deals, and guaranteed clients via the state grid. Although all of the current vendors are Chinese, opportunities for foreign companies are likely to arise in selling technology to local vendors.

CHINESE BUSINESS CULTURE

To best navigate the China market, SMEs must grasp the cultural complexities of the local stakeholder landscape. While a business trip to Beijing or Shanghai provides anecdotes about the myriad differences between cultures, detailed cultural analysis and other market and stakeholder research, provides a layered, quantitative, and qualitative approach to understand new markets.

Culturally, Chinese partners prefer companies that present a long-term strategy rooted in research and development and a sustained presence in China. The Chinese value cultivating relationships. Depending on the product or service, businesses may need to make early investments in these relationships, far before proceeding with their market entry.

It’s also important to understand and address the critical decisions that stakeholders must make. Complementing cultural insights and open-source research with timely direct intelligence from sector experts, senior counselors, and experienced on-the-ground consultants, can inform SMEs about the issues and decisions most critical to their stakeholders. By understanding the factors that most affect these behaviors (such as buying or investing), SMEs must design comprehensive market entry and communications strategies; hone their focus to specific tactics or stakeholders; and evoke the desired behavior from customers.

INTELLIGENT MARKET ENTRY

It is becoming easier than ever to do business globally, something that is especially true in China. That said, it is important for SMEs to truly understand, and be understood by, the country and market they are entering. For SMEs in particular, comprehensive and targeted research of carefully prioritized markets is imperative. Though the regulatory environment is becoming more relaxed to allow for increased FDI, the Chinese market remains a massive, complex, and constantly evolving amalgam of hyper-localized cultures. China’s fragmented media landscape is a telling example—the nation has more than 3,000 television channels but few have national reach, according to Edelman’s research. Depending on tactics, regional governments and stakeholders can serve as an ally or act as a roadblock. Recognizing and accounting for these differences, and leveraging insights to create strategic and meaningful stakeholder engagement will be key to unlocking China’s potential.

In short, entering a new market without research simply leaves too wide of a margin for error and, ultimately, business failure. To mitigate risk and build a foundation for a successful market entry, it’s important for SMEs to know the total requirements of success: truly understanding the complex cultural, political, and regulatory landscape of the company’s target market; strategically building trust amongst relevant stakeholders; engaging key stakeholders in a credible way to create a smooth landing; and leveraging research, trust, and engagement to position your entry for sustained presence.

Christopher Hayes ([email protected]) is the global lead for Daniel J. Edelman Inc.’s market entry offering, Periscope.