Or $100 Million? Or $100,000?
Most who deal with China strategically have long ago moved past the mindset of “if I could only sell a product to every Chinese person, then I’d have it made…,” realizing that penetrating this market and making sales is not so simple. Unfortunately some still look at China from afar and see a much rosier picture than exists here on the ground- a big market, fast growth rates, low hanging fruit, and with these come expectations that are just as high. Such as for one’s company:
- To triple sales in China within 5 years
- To gain 20% market share within 3 years
- To do $1 billion or $100 min in China within 3-5 years
In some cases these are possible, though in many cases not, especially with a slower market at present. So if your company can’t meet these goals, what’s the problem? We outline here the top factors that will limit growth of your company in China:
1.Access is Limited
Yes, in some cases your access in China will be limited, depending on the sector and market. China’s market is generally open though in some cases there are real restrictions. There are sectors that are clearly closed or very limited like media or Telecom operations, and then areas where limited participation is allowed. At a structural level auto OEMs must still operate through JVs, though through these JVs have few operating restrictions. In these industries legal structural limitations are clearly labeled.
However there are other barriers to access other than structural. The most notable example here is in industries where governmental companies (SOEs) are customers or major influencers. Some sectors in China are deemed to be strategic and are dominated by a handful of large SOEs, including power, oil & gas, aerospace, banking & insurance, and to a lesser degree automotive. In these industries companies may be directed to purchase from certain domestic firms, and/or not to purchase from foreign suppliers. Or they may come to this on their own, or have existing relationships with sister companies. In the figure below, we label this as operating barriers.
A good example is oil & gas- a very state controlled and strategic industry, dominated by three large SOEs and their subsidiaries. Each group company such as CNPC includes operating, design, engineering, and service subsidiaries. Western oil firms have some chance to participate in China, but only where the domestic industry feels it does not have expertise, and only with a partner. For example Chevron has contracts with CNPC for gas exploration in the Qiannan Basin, as well as in Sichuan. For operating barriers, take power. There are no rules against foreign wind power OEMs selling in China, though wind power operators now as a rule use foreign OEMs for off-shore projects only. Domestic wind turbine companies such as Sinovel and Goldwin are considered up to the task for any land-based projects.
This figure shows where the government in China has more or less control over an industry, and whether the primary barriers are more structural or more operational. If the structural barriers are highly restrictive, then the operating barriers may be moot.
Figure 1: Assessment of Government Control on Select Industries in China
So if your company is one of these industries noted above that are highly restricted, then yes the main problem may be access. However, this is something that one should be aware of before targeting this market. There should be no surprises here. With a couple exceptions (auto), it is in the Market Based sectors where western suppliers have more opportunity and perform best. ?
Just having access, though, will not make your market. The biggest factor may be the market itself, and finding customers that will pay a premium.
2. Market Requires Product that is just “Good Enough”
Even accounting for access issues, this is the single most important limiting factor to western businesses in China, and is near totally market driven. Simply stated, Chinese products are cheaper than western ones, whether made in China or not, and if the customer base requires a product that is just “good enough” they will buy the local product. And “good enough” is the purchase criteria in most markets and for most customers, but not all. In any market where the main criteria is “good enough,” opportunities for western firms will run from limited to none. ?
How can you best judge whether one’s target market wants to buy “good enough,” or whether customers are willing to pay a premium? You can ask customers how much they value quality, how important performance is to them, etc, but this is of limited value. Many customers GCiS has interviewed claim they only want the best technology available and then purchase the cheapest product on the market.
The best indication is whether a customer has purchased a quality product (foreign or domestic) at a premium, or have the intent of doing this. This chart provides examples of to what extent customers are willing to purchase foreign products, based on original GCiS research. This shows that LI-ON batteries, for example, are mainly purchase from domestic firms, and at the other end 80% of LEDs revenues are to foreign suppliers. Other factors such as the size of the market and the trend need to be considered, but this is the most pertinent single indication. If there are few quality products sold in the market then think twice before pursuing this market.
Figure 2: Market Sales % to Foreign and Domestic Suppliers by Revenues(Diverse Markets)
This chart cannot represent a “typical market in China” (there isn’t one), as the products in these markets are above average in technology, so foreign suppliers have a greater advantage. If the technology is more common, such as: a table fan, rebar, a coffee pot, or name a product, then these will nearly always be purchased based on price. It is important to discern the purchase dynamic in your market.
And this “good enough” factor is not static. In some markets customers want to improve their quality so are looking for components that will help them do this. For example, Chinese auto makers such as Geely and Chery use a lot of systems and components from the likes of Bosch, Delphi, and Visteon. In this case they will look to purchase higher-end products at a premium. Domestic HVAC manufacturers such as Midea do the same for key components, such as compressors from Emerson, as do the Chinese wind turbine OEMs.
However, while some customer groups will want to move the value chain, your domestic competitors may also be doing the same, offering stiffer competition?
3. Domestic Competition is Getting Better
There are generally two types of Chinese suppliers: those that sell primarily based on price, and also including local relationships, and those that can provide some value added and can sell for a premium. Typically the latter group is smaller in number, consisting of larger companies with a nationwide reach. And they may have significant exports. It is these companies that may move up and provide a direct threat to your sales, and we list a couple examples of this:
- Foshan NationStar Optoelectronics (佛山市国星光电股份有限公司) was originally focused on LED chips seal assembly. They began to expand both up and down the value chain and are now producing epiitaxial chips and LED application products.
- APT Electronics (晶科电子有限公司) in 2010 only manufactured LED chips, but in the past 3 years have moved down the value chain to LED devices (seal applications).
- Hengdian Group DMEGC (横店东磁) is focused on photovoltaic cells and PV Modules. In order to reduce material costs, they have expanded up the value chain and invested in a poly-silicon production line.
Moving up in quality may also come through acquisition, such as the recent purchase of Europe’s leading cement pump manufacturers by SANY and Zoomlion. This does mean that their quality will be similar to that of Western suppliers, but to win a good cache of new customers it does not have to be. The “good enough” criteria are on a scale, and seldom do Chinese customers require the very top quality. If the demand for quality in a market is especially high, then the greatest barrier to your company’s sales may be companies you are very familiar with- leading foreign competitors.
4. Cannot Compete with the Foreign Competition
One characteristic of China is that, being such a big draw everyone is here- the Germans, Koreans, Americans, etc. Whereas in the US market your company may compete against a small handful of nationwide competitors, in China it may be more than ten. Local customer relationships from Germany or the US do not transfer to China, making this market several degrees more competitive. ?
Take a couple examples. In industrial controls, including DCS, PLC and SCADA, the domestic suppliers such as Hollysis and Supcon have not been able to close the gap with the leading foreign suppliers. However, there are over 10 leading foreign suppliers here, including giants like Siemens, ABB, Emerson, Schneider, Honeywell, as well as several Japanese companies. These companies need to be very selective about which projects they bid on.
Or, want to sell interior architectural coatings in China- eg, house paint? Two brands, Nippon and Dulux (ICI/Akzo Nobel), managed to gain the top two positions in this market, and have defended these successfully for over 10 years- in good part due to brand building using massive TV advertising. American coatings companies, with the possible exception of PPG, have had a difficult time in this market, against brands they do not see much in the home market. Channels may be a factor here, though the biggest issue is brand recognition. But to make gains against Dulux or Nippon, a coatings company would also have to commit to a very expensive marketing campaign over multiple years. China’s market may be good hunting grounds, but other hunters have also got the message.
5. Your Offering Does not Match this Market
This is not an issue of performance. In some cases the offering does not match what is currently used in the similar space in China. This often applies to systems, solutions, or services. Services in China, for example, are often free or ad hoc, not sold as a packaged warrantee. For example, a European Telecoms supplier once wanted to bring a service package to come with the PBX equipment they sold. So the offering would be the equipment plus the service, plus operational support, in a single package for businesses.
When it came time to test the package among prospective customers, though, customers could not fit this into their procurement plans because it did not match their operating parameters. Some showed interest, but were not sure how they could apply this solution, and would not accept in its current form.
A product may be too functional to be useful in this market. When a company introduces a BRIC product or China product it is often stripped of much of its “superfluous” functions and made easier to use, and of course cheaper. The original product in the West is in some cases less appropriate for this market.
6. Cannot Reach the Customer
Even if all other factors align positive, channels are often a last big hurdle, both in B to B and B to C markets. You may have a great offering but unless you can reach the customer it will be hard to sell any. And customers can be hard to reach. Many prospective industrial customers will not read the latest technical journals with articles on your latest products, or attend trade shows. And given the breadth and staggering demographics of this market, direct sales in many cases will be too expensive, or gray market issues may intrude. For example if you are selling an industrial solution for use in factories there are thousands of potential customers. Outside the obvious ones, who are your prospective customers and how do you prospect them?
Selling mainly through distributors and agents comes with its own set of challenges. Distributors may represent a range of suppliers and not be very pro-active about pushing your products, or may even mis-represent your company to customers. On the flip side, distributors may move outside their prescribed regions to poach sales from other distributors. And, just as important, they may demand an especially high discount rate, which can either seriously crimp profits, or make the final price excessive, or both. For example, in the professional tools market, which relies on sales through one or more levels of distributors, aggregate discount rates of 40-50% are common. But the customer base in this market is so diverse, and local relationships so important that distributors have substantial leverage with suppliers.
Apple may be able to draw customers in China to its stores with minimal marketing, but for almost everyone else this is not going to happen.
The purpose here is not to discuss the many ways your company may fail in China, but to understand what the limiting factors may be, so that your company can see your markets realistically and plan accordingly. In some cases the limits may be real and insurmountable. Want to buy a million acres of land and start a big soybean farm? Or open a news magazine? Or start retail banking in Shandong? Not much chance of these happening. Want to sell standard table fans? You may be able to sell a few, but when the competing products, which work nearly as well, are a third of the cost, then probably not more than a few.
But we shouldn’t just dwell on the negative- the limiting factors in the China market. As noted in the first article in this series, many Western firms have greatly increased their sales in this market in the past five years, and their success factors should be instructive. We explore some of these in the next article.