This revision presentation provides an overview of the key considerations and options facing businesses outside China looking to enter the Chinese market.

1. China – Market Entry Strategies
AQA BUSS4 Research Theme 2014

2. Generic methods of reaching emerging markets
Exporting direct
to customers
The UK business takes orders from international customers and
ships them to the customer destination
Selling via
overseas agents
or distributors
A distribution or agency contract is made with one or more
intermediaries
Distributors & agents may buy stock to service local demand
The customer is owned by the distributor or agent
Opening an
operation
overseas
Involves physically setting up one or more business locations in
the target markets
Initially may just be a sales office – potentially leading onto
production facilities (depends on product)
Joint venture or
The business acquires or invests in an existing business that
buying a business operates in the target market, or sets up a new business in
overseas
partnership with a local business (JV)

3. Key international risk factors
• Cultural differences
– A business needs to understand local cultural influences in order to
sell its products effectively. For example, a product may be viewed as
a basic commodity at home, but not in the target overseas market.
The sales and marketing approach will need to reflect this.
• Language issues
– Although the common business language worldwide is now English,
there could still be language issues. Can the business market its
product effectively in the local language? Will it have access to
professional translators and marketing agencies?
• Legislation
– Legislation varies widely in overseas markets and will affect how to
sell into them. A business must make sure it adheres to local laws. It
will also need to consider how to find and select partners in overseas
countries, as well as how to investigate the freight and
communications options available.

4. Option: Exporting Direct
Advantages
Disadvantages
Uses existing systems – e.g. ecommerce
Online promotion makes this costeffective
Can choose which orders to accept
Direct customer relationship
established
Entire profit margin remains with
the business
Can choose basis of payment – e.g.
terms, currency, delivery options etc
Maybe subject to import duties
(impact on pricing)
Potentially bureaucratic
No direct physical contact with
customer
Increased risk of non-payment
Customer service processes may
need to be extended (e.g. after-sales
care in foreign languages)

5. Option: Sell Via Agents / Distributors
Advantages
Disadvantages
Agent of distributor should have
specialist market knowledge and
existing customers
Lost profit margin
Unlikely to be an exclusive
arrangement – question mark over
Fewer transactions to handle
agent and distributor commitment
Can be cost effective – commission & effort
or distributor margin is a variable Harder to manage quality of
cost, not fixed
customer service
Agent / distributor keeps the
customer relationship

6. Option: Open Overseas Operation
Advantages
Disadvantages
Local contact with customers & Significant cost & investment of
suppliers
management time
Quickly gain detailed insights
into market needs
Need to understand and comply
with local legal and tax issues
Direct control over quality and
customer service
Higher risk
Avoids tariff barriers

7. Option: Joint Venture or Acquisition
Advantages
Disadvantages
Popular way of entering
emerging markets
Joint ventures often go wrong
– difficult to exit too
Reduced risk – shared with
joint venture partner
Risk of buying the wrong
business or paying too much
for the business
Buying into existing expertise
and market presence
Competitor response may be
strong

8. Some specific considerations for market
entry into China
• China is not a “single market” – very province is
different
• A rapidly growing middle class and rising
disposable incomes are spreading wealth across
China
• Rising wages are making China less competitive
as a location for manufacturing
• China’s industries are heavily regulated
• Local partners may be key to success, but a risk of
loss of technology and know-how
• Increasingly strong local competitors

9. A strategic approach to market entry to China
Assess the
market
Assess
competition
Size
Fragmented?
Growth
Consolidated?
Demand drivers How
differentiated?
Geography
Cost
Regulations
advantages?
China Govt
support?
Choose
entry option
Choose
business
model
Implement!
Short / long-term Does product or People with
goals
service need to be the right skills?
localised?
Consolidated?
Where to start
Resource needs (gateway)?
Is a local partner
needed?
Is business model
flexible to handle
Takeover/merger
change?
Joint venture?
Strength of
relationships

10. Doing business in China is getting slightly
easier – but it is still difficult!

11. The first step of any effective China market entry strategy is
to identify the geographical location of the target market(s)

12. Western businesses have typically been drawn to coastal provinces
such as Zhejiang, Guangdong and Shanghai, due to higher
populations and incomes in those areas

13. The “Zhejiang spirit”
“Zhejiang's main manufacturing sectors are electromechanical
industries, textiles, chemical industries, food, and construction materials.
Zhejiang has followed its own development model, dubbed the "Zhejiang
model", which is based on prioritising and encouraging entrepreneurship,
an emphasis on small businesses responsive to the whims of the market,
large public investments into infrastructure, and the production of lowcost goods in bulk for both domestic consumption and export. As a result,
Zhejiang has made itself one of the richest provinces, and the "Zhejiang
spirit" has become something of a legend within China.”
Source: Wikipedia

14. Guangdong – the “Factory of the World”

15. China has created a series of industrial “hubs”
which have helped attract investment

16. However, there is increasing evidence that China’s traditional
manufacturing locations are becoming less competitive

17. Many different methods of market entry

18. It is important that the method of market entry
is aligned with the objectives of the investment
Source: PWC China

19. Wholly foreign-owned enterprises
(known as WFOEs or WOFEs)
• The preferred method for businesses with an established
product or service that can be relatively easily imported and
sold in China
• Attractive because they give investors 100% equity and
control
• WFOE has complete control over strategy, decision-making,
operations, human resources and corporate culture
• Lowers the risks of working with a local partner
• Are allowed to convert Renminbi (RMB) into other currencies
(therefore can remit profits to the parent company)
• But not all industries in China allow WFOE / WOFEs

20. Licensing to distributors / franchising
• Find a local distributor to manage products
in China
• Relatively simple and quick with minimal
resource commitment
• Main downside: a loss of managerial
control over how the product is marketed &
handled
• One way to reduce risk - appoint different
distributors in each target province

21. Case Study: KFC in China
• Fast-food is traditionally
a franchise model in
developed economies
• KFC (owned by Yum
Brands) opted to expand
by setting up whollyowned outlets
• Wanted to keep control
over it operations and
brand in China

22. China: The Foreign Investment Catalogue
It is a central policy of the
Chinese government that
foreign investment must be
made in a manner that is
consistent with Chinese
policy and in a way that will
promote China’s
development. China
therefore follows a policy of
guided investment, and the
Foreign Investment
Catalogue is the guide

23. What kind of outside investment is
permitted in China?
• Encouraged: investment in activities in this category is
subject to less strict administrative requirements and may
enjoy certain tax and other benefits;
• Permitted: the standard category, with no particular
restrictive or favourable treatment;
• Restricted: investment in activities in this category is
subject to higher levels of scrutiny and stricter
administrative requirements, and may be denied at the
discretion of the approval authorities;
• Prohibited: foreign investment not permitted

24. Encouraged industries in China
Priority industries that are
"encouraged" include high
tech, environmental protection
and new energy. China offers
preferential tax treatment and
other incentives to foreign
investors in this industries,
with the aim of attracting new
advanced technologies,
management and (most
importantly) know-how to
China!

25. China’s 7 “strategic industries”
• Energy saving and environmental protection (clean
energy technology)
• Next generation IT (modernization of the country's
telecommunications infrastructure)
• Bio-technology (pharma and vaccine manufacturers)
• High end equipment (airplanes, satellites,
manufacturing technology)
• New energy (nuclear, wind, solar)
• New materials (rare earths)
• New energy cars (electric and hybrid cars, batteries)
Source: http://www.businessinsider.com/the-7-strategic-industries-the-chinesegovernment-loves-2011-2

26. Restricted industries in China
Restricted industries have policies
imposed on them to restrict
foreign investment that will
"impair China's sustainable
development".
For example, commercial banks in
China cannot be more than 25%
foreign-owned. In entering some
of these restricted industries,
multinationals may be required to
enter into a joint venture or other
local partnership.

27. Examples of restricted industries
Certain agricultural, forestry, animal husbandry and fisheries
Mining of precious metal and certain ores
Certain manufacturing (tobacco, certain textiles)
Electricity (adoption of low capacity generator)
Certain telecommunications
Certain wholesale and retail trade
Electricity, gas, and water production
Wholesale and retail of certain products
Banking and insurance industries
Real estate in high end property
Public utilities
Medical institutions
Golf courses
Production and distribution of radio and TV programming
Land surveying
Asset certification and appraisal
Other industries restricted by the Chinese government
Source: LehmanBrown

28. A good summary from The Economist
“China classifies foreign
investment as encouraged,
restricted or prohibited,
depending on the sector. In the
past five years the list of
prohibited and restricted
sectors has changed but not
shrunk much. Many of the
fastest-growing technology
sectors, such as internet
businesses and cloudcomputing services, are on the
restricted list, requiring joint
ventures.”
http://www.economist.com/news/special-report/21587744-companies-doingbusiness-across-borders-politics-globalisation-can-be

29. Examples of prohibited industries
Breeding and growing of precious, high quality breeds of
animals
Development of certain types of plant seeds
Mining of radioactive materials
Arms and ammunition manufacturing
Construction and operation of power grids
Air traffic control
Postal Services
Futures trading
Social research
Gambling
Pornography
Publication of books, magazines, and newspaper
Source: LehmanBrown

30. Prohibited investments in China
Investment in “prohibited” industries is completely off
limits to foreign investment. Typically, investment in these
industries is prohibited for project that would:
Endanger state security or harm the public
Pollute the environment or endanger human health
Occupy a large amount of current farmland
Endanger the use of military resources
Use manufacturing techniques that are unique to China

31. Joint ventures
A joint venture (JV) is a business
agreement in which the parties agree to
develop, for a finite time, a new entity
and new assets by contributing equity.
They parties to the JV exercise control
over the enterprise and consequently
share revenues, expenses and assets.

32. Joint ventures are high risk!
“Because there are so many risks, joint
ventures should only be entered into if truly
necessary. Potential investors should actively
explore any reasonable alternatives, such as
creating a WFOE, early in the planning stage.”
http://www.out-law.com/en/topics/projects-construction/projects-and-procurement/successful-jointventures-in-china/

33. More on Joint Ventures in China
• Another popular method, but less common now
• Takes many months at least to negotiate and set up
• JV partners share profits and losses depending on
their equity stakes
• Multinationals need to consider how they will exit the
JV before it is set up
• JV partners in China are potential competitors!
• Chinese partner motives are usually strategic - to gain
know-how, technology: i.e. more competitive than
collaborative

34. Examples of JVs in China (1)

35. Examples of JVs in China (2)

36. Examples of JVs in China (3)

37. The perils of joint ventures in China…
Why they initially proved attractive
• Helped make sense of complex market
• Combined foreign capital/know-how/brands with local
capacity
• Perceived as reducing risk
• Often required by Chinese government in some industries
Why most firms now avoid them
• China has changed: lots of capital and rapidly growing
domestic competitors
• Track record of technology transfer and corrupt practices
• If you’re serious about investing in China, keep control

38. What is a takeover?
Where one business
acquires a controlling
interest in another
business

39. Takeovers and Mergers in China
Multinational companies are today turning
increasingly to M&A as means to pursue their
expansion plans for China.
But finding a suitable candidate to acquire can be
fraught with difficulty, and foreign managers are
often tripped up by their unfamiliarity with China’s
often unique business, cultural, and regulatory
environments
Source: Booz & Co

40. Why go for a takeover?
• An exit for a joint venture that has
run its course
• Take control of strategic assets in
China
• Take stakes in successful Chinese
businesses

41. Advantages of acquisitions
• Quick access to resources & skills the
business needs
• Overcomes barriers to entry
• Helps spread risk (wider range of products
and greater geographical spread)
• Revenue growth opportunities (synergy)
• Cost saving opportunities (synergy)
• Reduces competition
• May enable economies of scale

42. Drawbacks of acquisitions
•
•
•
•
•
High cost involved
Problems of valuation
Clash of cultures
Upset customers
Problems of
integration (change
management)
• Resistance from
employees
• Non-existent synergy
• Incompatibility of
management styles,
structures and culture
• Questionable motives
• High failure rate
• Diseconomies of scale

43. Heinz into Brazil and China
HEINZ
2010: Heinz expanded in China by
acquiring Foodstar, a leading maker of
sauce for $100m
2011: Heinz bought an 80% stake in
Quero, a leading sauces brand in
Brazil.
“The acquisitions in Brazil and China
put Emerging Markets on track to
generate more than 20% of our
Company's total sales in 2012, up
from 16% in 2011.
The acquisitions are the latest
examples of our successful "buy and
build" strategy in Emerging Markets,
where we have acquired and grown
strong local brands and businesses in
the key markets of China, India,
Indonesia, Russia, Poland and now
Brazil.”

44. Diageo’s Chinese Takeover
Diageo
2012: Diageo expands its
footprint in emerging markets
with £600m takeover
Global drinks giant Diageo is
finalising a deal to buy the
Chinese baijiu brand Shui Jing
Fang, as it seeks to expand its
footprint in China.
It's reported that Diageo has
offered $950m (£600m) for the
company, which it would use to
develop the market for Chinese
white spirits elsewhere in the
world.