China Market Research
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It is commonplace that most companies get into foreign markets more or less by accident. They place an ad in a trade magazine, get an inquiry from a foreign distributor, and sign him up after a little preliminary checking thinking “why not?”. Or they meet an agent at a trade show, have dinner together, hit it off, and enter into a contract. Or they follow what we call the “Uncle Bill” pattern: Somebody’s Uncle Bill knows somebody who knows somebody who… And so on. Sometimes companies get lucky and get a good result from these approaches. But usually, it is far less productive than it should be.
The whole point of the international market entry process we have developed is to be systematic. It is a process which reduces the probability of error, and therefore increases the probability of success. It's almost like a sporting event. The team that makes the fewest mistakes wins. The same is true in entering foreign markets. The company that makes the fewest mistakes is the most successful.
In this section we present a snapshot of the process. It represents a composite picture based on years of experience with numerous companies in numerous countries. But don’t be daunted by it. Because it is a composite, not all will be relevant to you. Pick and choose what you need. But keep in mind the total process as context. Note that some components, though important, can be very quickly accomplished. If you want to see an example of a successful application of the process, click on Success in China: One Manufacturer’s Story.
If you want to talk about the process and where you fit in, give us a call. We will be happy to help you think through the issues with no obligation whatsoever.
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Phase 1: Analysis
Phase 2: Strategy
- Product & market position
- Technical strengths, edge
- International experience
- Support capability
You need to know who you are before you begin international expansion. What is your corporate vision? Have this vision and its supporting objectives been clearly articulated and are they shared by all key managers? Do you see yourself as a potentially global company? Why or why not? What makes you a potentially global player?
And what is your international experience – with stocking distributors, independent agents, agents employed by you, licensees, contract manufacturers, joint ventures, local customs, and with actual foreign customers? Are you familiar with the strengths and weaknesses of alternative approaches? For example, if you have limited international experience, it may be too aggressive to begin by thinking about some kind of local production. Rather it may make sense to plan a staged international move beginning with exporting, learning how people behave in that market, and developing relationships. Perhaps then it would be appropriate to move slowly toward a joint venture or another type of in-country production arrangement based on solid experience.
It is also critically important to understand exactly how your products are differentiated in your home market. This addresses your product and market position. Generally, a well-differentiated product in your home market (especially in the US, the world leader in technology) will also be a strong candidate for foreign markets. Moreover, you may not have to think about local added value for a time. That is, the more a product is differentiated by unique or proprietary know-how or technology (technical strengths), the more likely it will be a strong export candidate. Conversely, the less differentiated it is, the more it will be driven by price due to competition and the more it will be necessary to consider local added value – assembly, some fabrication, etc. – to bring costs and prices down.
Last, you must know how to support international expansion. This means people and dollars. International sales do not come quickly, and breakeven can often take time to reach. In a typical entry process into a new market, it may take a year or more before revenue really starts flowing. But there is little sense in starting the process unless you can follow it through and be prepared for set- backs. As with everything, “if it were easy, everyone would do it.” Sometimes it is actually not too difficult, but it is rarely “easy,” and you must be prepared to support the effort to success.
Initial Strategy Concept
- Where to go
- How to go
- Initial steps
- Decision points
An initial strategy is not some grand design that takes months and thousands of dollars to put together. It is largely based on common sense and knowledge of your company position. The point is you need a logical starting place.
You read articles that give you a strong sense of a market in a certain country. You talk to a colleague who is doing well in France and you think, “I'm just as competitive in my market as he is in his, I should be there too.” You read about the staggering growth in China, or the enormous emerging middle class in Latin America, and you believe there ought to be a market for you. You go to a trade show and listen to speakers on international business and think, “This is not brain surgery.” And you try to find time to surf the Web and its endless sources of information. And so on. But how do you organize your thinking into a starting place.
It's easy, and somewhat intuitive at this stage. First, as you swim through the above activities, just decide where it seems logical to go. One basic issue to consider in this decision is whether you want to target developed or emerging markets, and then to target specific countries within the category you choose. Sometimes – but not always – developed markets, such as Europe, are so mature and competitive that finding a cost effective entry point is difficult. And sometimes – but not always - emerging markets are difficult, because of cultural and language issues, IP concerns, pricing difficulties, and the like. In any case, pick two or three countries as starting points. And its OK to be a little biased at this stage. What are your personal preferences? It's OK to pick a country simply because you like it. And then gather a little market information on each country you choose (on the Internet) to narrow it down to your primary and secondary targets.
At the same time, think about logical approaches to the chosen markets (How to). This means, first, what kind of detailed market information will you need to know if there is a real market there for you or not? (You don't have to get the information at this point, just decide what it is you need.) Second, it means what kind of partnership, if any, would be appropriate for your company and product line? There are many different kinds, each with pros and cons – various kinds of agents and distributors, producers, contract manufacturers, licensees, assemblers, etc. Third, what are the steps you want to follow to see if this initial strategy concept will work, or how it should be modified. Basically, those steps comprise the rest of the SCI process, starting after Global Scan. And last, think about some possible decision points, perhaps based on market size, or pricing, or growth potential, or the like.
Now you have a starting place, and it didn't take you long to get there.
- Scan regions or world for best target markets
- Set priorities and starting point
In addition to a Global Scan, you can also think about a regional scan, or a selected country scan. For example, if you selected 3 or 4 countries in your initial strategy concept, you may want to scan them for the key market information you need to pupriorities. t them in priority order. In any case, the point of the scan is to set
Such scans are tricky. On one hand, you don't want to spend a lot of time and money on this component – that's why its called a “scan.” But on the other hand, it is sometimes difficult to obtain adequate information from a scan to make an informed decision on priorities. The task is to define what is needed carefully, so it does not lead to the need for more and more follow-up information – at this point. In depth information comes in the next component, when priorities are set.
- Size, trends, niches
- Distribution analysis
- Competition & pricing
- Buyer analysis
- Supply/demand balance
- Legal & social environment
- IP protection
China market research and analysis may be the single most important component of the entire process. Most mistakes result from poor homework - and they are very costly. Put differently, most mistakes result from making decisions based on inadequate information.
When Armstrong first went into Europe, it used the same advertising concepts that had been so successful in the US: floors so squeaky clean you can see your reflection. Nothing sold. When they conducted some research, they learned that Europeans don't like that squeaky clean image, but rather prefer the flat look of a patina which comes with age and is associated with warmth and security. Armstrong changed the advertising, and its product line, and took off.
In Brazil, Lonza supplied a disinfectant which was more effective and less expensive than domestic competitors and had a lovely fragrant smell. It didn't sell. When their buyers finally did their homework, they discovered that Brazilians associated two factors with disinfectants: a pine odor and a “bloom” when it is poured into water. Lonza's formulation was changed to “bloom” and smell like pine tress, and did very well.
GM invested in and built a line of trucks in China to sell to farmers. They didn't sell. When they talked with farmers, they learned that the farmers use these vehicles for everything, including taking the family to town for shopping, etc., and there was not enough space in the trucks for the family. Too late - the investment had been made.
The stories go on and on. These are primarily related to consumer markets, but you can find the same thing in B2B markets.
Our point is that it is difficult to know how to position your product in a market if you don't understand that market as well as you understand your own, or as close as you can get. This means at least understanding the bullet categories above. Some of the most important questions are:
- How does the distribution system work? Each country is somewhat different. How does your kind of product get from the dock into a final buyer's hands? What are the steps, the added value at each one? Find examples to make it concrete in a business sense.
- Who are the key players in the supply chain at each level?
- How is the in-country competition doing? Are there lots of competitors or just a few key ones, and how do they differentiate themselves to buyers? What are the price points?
- How are your own home competitors doing in that market? If they are not in it, why not? If they are in it and successful, why? Not successful, why?
- What drives the buying decision – price, timely supply, quality, brand loyalty, supplier loyalty, other? What will it take for you to get onto the buyer's radar screen?
- How will you protect your IP, including know-how?
- What is the government's stance toward your type of product? Incentives, dis-incentives?
Phase 3: Implementation
| Partner Search
- Representative office: employees
- Contract manufacturing
- Joint ventures
- Special alliances
Based on your knowledge of how the market works and the requirements of your product, you can decide the best kind of partnership for you and begin a partner search. This could include a search for partners in a couple different categories, for example agents, distributors and joint venture partners. Different types of partners could be especially important if your idea is to phase in involvement from exporting through eventual local production.
Key considerations are:
- Service requirements for your product, perceived or real?
- Product tailoring to applications?
- Technical sale?
- Technical support?
- Repeat sales? When, why?
In many cases, companies know very well what they are looking for because they have already decided on a global strategy. Small biotechnology companies, for example, commonly look for single licensing partners to cover major regions of the world (such as Europe, Japan, and the rest of Asia). In other cases, companies know they must set up local production, because their major OEM customers, who are already there, are telling them to. In yet other cases, companies have such highly technical and differentiated products that they only need to secure distribution. And so on.
If you don't know who may be the best kind of partners, an outline of some considerations is presented below.
Sales representatives: Paid employees who sell products on your behalf. Can also work on a partial commission basis.
- Strength: Dedicated to your products; direct knowledge of customers; ability to plan
- Weakness: They assume no risk; hard to monitor from a distance; support expenses.
Agents: Independent commission-based agents.
- Strength: Market and technical knowledge; direct knowledge of customers
- Weakness: Represent other accounts. May be more interested in short-term commission than in long-term growth. Hard to control, monitor.
Distributors: Distributors buy and sell the products on their own account and risk.
- Strength: Consolidated shipments, fewer shipping/logistics expenses; No marketing expenses
- Weakness: No real contact with customers; Carry many other products, hard to focus on yours.
Selecting your representatives
- It's not easy. Ads, shows, trade associations, friends, professional search firms.
- Due diligence
- Visit and interview
- Interview clients, references
- Trial periods
- Sales targets
Supporting your representatives
- Training, here and there
- Sales support: advertising, translated brochures, association memberships, etc.
- Build personal relationship
- Set regular visit schedule
- Learn from your reps and adjust
Why develop a strategic alliance or partnership:
- Long term versus short term interests
- Market share versus quick sales
- Bypass some trade barriers.
- Bring costs down, increase margins
- Pressure from existing customers
- Harmonizing strategic objectives
Contract manufacturing: Brings costs down to compete more effectively. Quality control key
Technology licensing: Production process, patent, trademark, know-how, trade secret. Long term can be a problem.
Joint Venture: Equity corporation with foreign partner. True long term, market share orientation. Issues:
- Technology transfer
- Fee structure
Wholly owned subsidiary: Maximum control and costs. Same issues as JV.
- Market access
- Technical capability
- Share Pision (discuss examples of problem splits: fire pump, leather, etc.)
- Key personnel (importance of CFO)
- Quality control - image in market
- Management (From a distance? Expatriate? Local search?)
Profiling and evaluating potential partners
- Marketing & sales capability
- Technical level
- Service capability
- Workforce conditions and labor relations
- Information and reporting systems
- Quality and turnover of managers
- Financial situation
- Production efficiencies
- Quality control
- Market analysis
- Competitive analysis
- Partner types & candidates
- Costs & barriers
weaved together into a workable plan for your company
Based on the market analysis and on profiles of candidate partners, you can modify and put real meat on the original “Initial Strategy Concept.” In fact, a strategy is often fairly easy to put together with all of the supporting information because you have done your homework. Keep in mind the following distinctions.
|A strategic plan is not:
||A strategic plan is:
|A long, laborious document
||A few pages long, maybe longer if you show a few options
|An academic document
||Subject to change based on experience
|A business plan with detailed financials
||A document that gets everyone looking in the same direction
A strategic plan is a rational statement of where you want to go and how you want to get there based on good information. Putting it together should help you think through what you are doing and it should encourage discussion, enthusiasm and team work.
A common approach which we have used to develop a strategic plan is a straightforward and even simplified “SWOT” analysis (SWOT = strengths, weaknesses, opportunities, threats). We list all the “positives” and “negatives” we have learned about the market, including “gut feelings.” Such a listing task does not need to be systematic. In fact, it should be done as quickly as possible, not worrying about overlap and duplication. The point is to get all key points down. Then organize, consolidate, categorize and analyze. You can also develop a decision matrix, assigning various weights to key points, and so on, but this can get very sophisticated and is beyond our purpose here.
Generally, strategy options become more or less obvious from such an exercise. And it doesn't take long. But there are always ambiguities, and you will find yourself thinking about them as you drive home, wanting to discuss key issues in staff meetings, wanting a little bit more supporting information, and so on. It's OK. In fact, it's a great feeling. You're on the move.
But you're not yet ready to put real numbers on your efforts. There are numbers floating around in your head based on the market potential you have identified, and you may even suspect this could be a key to your future. But you need one more step before you can put numbers on the market with a reasonable level of comfort: FIRST HAND EXPERIENCE. This comes with your first market visit.
- In-country, highly targeted meetings with potential customers, partners, industry experts, etc.
- Partner negotiations begin
Interestingly, until this point, you really don't need to leave your desk. This is important to understand. If you have followed a systematic process and done a little homework, you do not have to be traveling all the time to develop international business. And when finally you do travel, it will be very, very efficient and productive.
But now it is time. You have learned how the market operates, defined the opportunity and how you want to approach it, and you have a list of companies and people in-country who can help you get there. There is nothing like first hand, face to face discussions to make this all real.
All meetings should be arranged in advance, including time for follow-up with the groups you suspect may be the most important for strategic alliances. Such key candidate partners should be told in advance why you are visiting and what you want to achieve. In our experience, you will find that this trip results in important initial negotiations, and sometimes goes a long way toward closure.
You should also meet with potential customers and discuss buying habits with them directly.
| Business Plan
- Market knowledge
- Competitive intelligence
- Partner options
- First hand experience
It is time for an operational business plan.
A well-planned trip will generally run from one week to 10 days. And with a little luck, you will now be in a position to put a working business plan together. You have talked with candidate partners, and undoubtedly those discussions will continue when you return. You will each have a certain “to-do” list to move your relationship forward. Part of this will be estimating sales and costs.
Again, this need not be a long document, but it does need to have numbers attached to it. This is the first time that you are actually projecting in a concrete way what this international market can mean to your company. Of course, from the market research you concluded early that there was good potential. But it is hard to quantify what portion of that potential you can capture until you are in partner negotiations.
In addition to numbers, the business plan should have tasks, personnel assignments and timing (a typical PERT-type chart).
In a sense, implementation began when you got on a plane and began discussions with a potential partner. Reality is rarely as neat as our flow charts, and it is really only a matter of convenience here that we so cleanly separate implementation. The theoretical rational is simply that implementation normally follows a business plan.
It is hard to predict what will be involved in implementation. We list at least 4 activities:
- Investment intelligence (normal due diligence)
- Site location
- Market watch (on-going monitoring of technology, competition, pricing, etc.), and
- Support Services (a catch-all for everything else.)
Regarding investment intelligence, while you have profiled your potential partners and met them personally, you will need to perform normal due diligence on them as your negotiations get serious. You need to confirm that they really are who they say they are, that they are positioned in the market as they say, that they have a good reputation, that management is solid, and the like. Normally, in-country expertise is required to get this done.
Market watch may or may not be important. Often, your partner routinely watches this kind of thing and this is adequate. However, sometimes more sophisticated monitoring is required. For example, Motorola, Nokia and Ericcson monitor cell phone sales throughout China on a weekly basis so they can track market share and adjust quickly to both problems and opportunities.
Support services can be any number of things from negotiation assistance to distributor training to shipping and receiving.
We could add, of course, “follow-through,” as another entire component to the process, but that opens up a whole new realm of discussion, much of which becomes inward looking for a company.
Due diligence on:
- Candidate partners
- Optimize infrastructure & minimize costs
- On-going monitoring of trends in technology, competition
- Early alert to market opportunities
- Ongoing liaison, project monitoring
- Direct representation
- Export management