DiligenceChina

SMEs (Small & Medium Enterprises) entering the China market should not make any major moves until they have conducted a comprehensive ‘feasibility study’ to determine whether or not their product or service has a fighting chance in the Chinese markets. Long, long ago in Ancient China (pre-2001), buyers were fairly unsophisticated about international brands and were very curious about new products and services. Nowadays, Chinese people with money to spend like to spend the money – and they are not short of opinions about what they like and what they don’t like. The only ones in China without strongly established brand preferences and firm attitudes towards products and services tend to be those that don’t have much spending power and are difficult to reach. SMEs entering the China market are probably looking for distinct market niches in or near the major business centers of Coastal China.

Starbucks had the deep pockets to buy a wide-ranging network of convenient, highly visible locations throughout major Chinese cities. Coke had the brand name and established image. KFC had deep pockets for big advertising spends. For most small and medium sized businesses, however, the ability to change people perceptions, alter buying behavior or even educate markets is going to be very limited in China. Operating in China is increasingly expensive – particularly for high-profile retail rentals, advertising and marketing.

Many owners and senior managers at mid-sized companies are used to following their instincts and experience when it comes to business decision-making. They tend to be dismissive of MBAs, management consultants and the latest high-concept business trends. On their home turf, this hard-boiled cynicism is understandable. In China, however, it can lead to disaster. Many senior decision-makers spend so much time analyzing what the China market can do for them that they never stop to consider what they and their company can bring to the China market. Once they decide that the time is right to make their China move, their first call is to an international lawyer to start business formation procedures. By the time they’ve learned the hard lessons about Chinese buying behavior or business procedures, they’ve already blown their entire operating budget and a year of effort.

You China business entry process should start with a feasibility study. If you have the ability to perform the research and analysis in-house, then go for it. Most companies will find it is worth investing in a competent China-based consulting firm or market research firm to perform a customized analysis, or at least provide some off-the-shelf industry reports that will enable you do plot out a logical course of action.

A reasonable feasibility study should include the following sections:

1) Regulatory / Legal
Is your product or service legal in China? Is it legal for you to provide it? How and where can you get paid? How will you protect your intellectual property? Do you need local Chinese partners? The list of questions varies for each industry. The only universal truth is that you will not be able to evade the Chinese bureaucracy forever – though you may be able to spend lots of money before you discover that you are in violation of the rules.

2) Does a market exist?
Market need and market demand are two different things – particularly in China. You won’t find many car-washes in China, and that might lead you to think that you’ve spotted a tremendous market opportunity in a country buying millions of cars per year. But it may turn out that car owners would rather have a small army of migrant workers come to their parking lot and hand-wash the car – in front of all their neighbors. Shanghai and Shenzhen can look very familiar from the back of a taxi, but there are plenty of subtle – and not-so-subtle – differences in buying behavior.

3) Is your target market already being served?
You may find that you’re facing the opposite challenge – your product or service is already facing too much competition! In Shanghai, there seems to be a Yoga studio, wine bar and high-priced cafe on every corner. Remember – you are competing with local entrepreneurs, long-term expatrepreneurs and relatively new MNCs. Assume nothing.

4) Will you have to localize or alter your product?
Chinese consumers have proven to be extremely flexible and open-minded – sometimes. In some ways. The problem is that you can never be sure when Chen Q. Public will be adventurous and when he will be traditional. A feasibility study will help you understand how the market will react to your product or service. It will address your price, functions, size, quality, name, and packaging.

5) Will it be profitable?
Many shops, products and services have found that while market demand was strong, they still couldn’t make the numbers work. Ultimately, your business has to be profitable. If you can’t charge enough – or if you costs and expenses are too high – then you are going to drown in red ink sooner or later. This is particularly true of businesses that have to import products or raw materials, rent high-profile space or compete with local service-providers.

A feasibility study is more than a competitive analysis or a market survey. A basic feasibility study will tell you if your product or service stands a fighting chance of succeeding in the marketplace. A more detailed analysis will tell you what challenges you’ll have to overcome in order to be profitable – including localization, pricing and marketing issues. Many new entrants to China have found that they conducted accidental feasibility studies – with their first year of operations. There are cheaper and better ways.