How to Break into the China Market if Your Startup is not From China, Pt. I
In this article, I analyze and evaluate some of the strategies as well as the do’s and don’ts of breaking into the China market. Much of this below is again based on my academic research and the time I have spent conducting research and working between the states and China since 2015. In this period of time I have played various roles and put on different hats—as researcher and social scientist, other times as management and strategy consultant to startup founders and CEOs from both the states and China, and more recently, working and consulting in the crossborder investment sector.
Side note: at the time of writing, the US and China is still engaged in a trade war, and Cold War era style race for arms has been replaced by the race for tech. From my perspective, both sides will need to compromise. China has been taking advantage of the U.S. in recent years, but the U.S. would be foolish to alienate China. As former Treasury secretary Hank Paulson cautions in a recent speech, the U.S. may find themselves to be the one in isolation if they force their partners and allies to choose. I mention the above because in spite of mounting tensions, I believe both sides are aware of their instrumental need for the other.
One glance at recent articles from the Wall Street Journal, the New York Times, the Economist, the New Yorker, the Atlantic, and various other sources will tell you how difficult and challenging it can be to break into the China market. See this recent feature article a friend sent me from the WSJ for reference: https://www.wsj.com/articles/american-entrepreneurs-who-flocked-to-china-are-heading-home-disillusioned-1544197068
Unfortunately, these kinds of stories are not new or unusual. I’ve interviewed and talked to foreign entrepreneurs in China who have been scammed, discouraged, and disillusioned by their experiences or the experiences of their friends and acquaintances. In spite of the above, I have also met and interviewed a number of foreign entrepreneurs and investors who are making headway in the China market.
So why are some succeeding, and others are not? Of course each situation is unique, and there are a number of factors contributing to a situation at any given time, but below are some questions and recommendations to consider.
- How mature are you as a company?
IP protection is still a concern for foreigners and foreign companies in China and for good reason—what China mainly needs right now from the U.S. is technology and talent. They don’t lack capital, but they lack top talent and technology.
If you are a technology company, it would be wise to develop your technology outside of China first for some time before breaking into the China market. In contrast to some struggling foreign entrepreneurs who began their companies in China and have run into obstacles along the way, more than one foreign entrepreneur I know have taken this strategy, though one local marketing expert I have talked to at length also mentioned that foreign companies need to be ok with and even expect that local companies will begin copying what they are doing, almost immediately. And so to enter this market strategically, consider, what do you have that they cannot copy immediately, or in a short period of time? Are you just accruing market users at this point in time?
2. Do you understand the China market or work with someone who does?
Local companies will be even savvier about knowing what business model works for the China market and doesn’t work. Many successful Chinese companies have adopted and adapted Western company models to local needs or built their own model on top of the Western model. It’s similarly important to learn about and understand the China market before entering, or engaging and partnering with experts who understand the market.
3. Do you trust local partners and more importantly, do they trust YOU?
One of the toughest things you’ll need to do is to find and build the right local partnerships, networks, and channels. Either you will need to invest time in building those relationships and networks yourself, or find someone to partner with and you trust who already has done the hard work of building those local networks and connections.
Some of the foreign entrepreneurs I interviewed spent a significant amount of time in Asia and China; some even married local partners. In a couple of cases, the spouse or partner was the company cofounder. (This is helpful especially if you look very foreign.) But even this scenario comes with its own set of pros and cons. For some this might work well; for others it does not. The analogous debate for entrepreneurs would be to work with friends or not work with friends.
Trust has been harder to come by in the U.S. in recent years, but it can be even harder in China. Some foreign entrepreneurs come in with either an entitled mindset or an overly suspicious mindset. Either extreme is not going to help in building relationships. To the entitled: do not come in thinking this is your chance to screw locals; locals will screw you. To the overly suspicious: not every local is out to get you; believe it or not, there are actually many incredibly kind, honest, diligent, and intelligent people in China. I can say this because I personally know and am friends with many amazing individuals here.
The TLDR two-cents: be kind and be wise.