Trade Routes to China
Who wouldn't want to reach this market: 1.3 billion people, growing household income and only slim market penetration by consumer-product firms. The market, of course, is China -- the most lucrative spot on the planet in the coming years.
The potential is incredible. Although most Chinese still opt for the security of government jobs, about 25% are looking to start their own business -- and the percentage is growing all the time. Just think, for example, of the boom in the Chinese telecom industry once the Internet really catches on. Right now, only seven million out of 1.3 billion Chinese are Internet users, but that number is expected to jump to 20 million by 2003.
And with legislation to permanently normalize trade relations with China headed toward final passage in Congress, and China's expected entry into the World Trade Organization later this year, the opportunities will be greater than ever.
But you'd better put on your boxing gloves, for China can seem more like a sparring partner than a trading partner.
How best to tackle exporting to China? Of course, you'll need to understand your customers and what they want. You must also expect to invest a significant amount of time to build and monitor sales, marketing and distribution. Besides the Chinese government itself, your greatest competition will come from other Asian countries, such as Hong Kong and Taiwan, not necessarily from local private-sector companies.
The market for export to China is so huge that for simplicity sake I'll focus on one industry -- food products -- since the average Chinese household spends about a third of its income on food. But much of the advice can be translated to other consumer goods.
Here's a look at how to get started.
Do the Math: Annual income per capita for residents of China's 10 major cities was equal to $2,670 in 1999, up from $2,490 in 1997. With disposable income so low, savvy marketing in China must include constant consumer testing and experimentation to ensure that tight-budgeted consumers will choose your product.
The typical customer of a Chinese supermarket or hypermarket is younger and usually female, has higher-than-average income, and appreciates convenience products. Keep in mind that with China's one-child-per-family policy, the "little emperor" is particularly precious. For this reason, parents are willing to spend much of their disposable income on their children.
How and Where to Enter: The best entry strategy for food products -- the biggest single expense for the Chinese household -- is to focus on the "Big Three" of Shanghai (eastern seaboard), Beijing (in the north) and Guangzhou (in the south). There are some 640 other important cities, but you must establish yourself in the Big Three before taking on the less-developed areas.
Exports to China typically travel in this sequence: U.S. exporter to Hong Kong or Chinese importer/distributor to local distributor to local retailer.
Navigating this system without a Chinese distributor who knows the complex, unorthodox system is almost impossible. To find one, I'd suggest asking companies who are marketing similar but noncompetitive products in China. You might even consider making a "piggybacking" arrangement with established multinationals that handle noncompeting products. Distributors prefer to work with companies that visit frequently and have an understanding of the market.
Next, exhibit in a trade show, easily found through the U.S. Agriculture Department at www.fas.usda.gov (click on "Market Reports" and then "Attache Reports"). The U.S. Commerce Department, U.S. Commercial Service or the American Consulate General (in certain major cities, such as Shanghai and Beijing) can also help.
Then, promote, promote, promote. Investment in local marketing is crucial. Point-of-purchase merchandisers and sampling are the most effective ways to develop sales. For specialty and snack foods, you should consider promoting heavily during the Chinese "Golden Period," which lasts from fall to spring and includes National Day, New Year's Day and Spring Festival. Gift-giving is customary during this time, and luxury-food sales are brisk. Shoppers also like innovative products for gifts, and as treats for their pampered children.
Think you're going to short-circuit the process? Remember that most supermarkets are not allowed to import foodstuffs directly, but must go through an approved importer. And even that can be tough, since imported food generally has a less than 5% of the retail shelf space in Chinese stores, which typically only stock about 3,000 to 5,000 different products compared with 20,000 in the average U.S. supermarket.
Stay Flexible: You will need to modify your products to suit the Chinese palate and also to appeal to the eye. Even Wal-Mart tailored its product line to fit local tastes by offering live snakes and barbecued pigeons. Expect a trial-and-error period; it is not uncommon for a packaged-food manufacturer to spend up to two years developing a product for the Chinese market.
The Chinese tend to like their foods less sweet, disliking anything with a "honey" scent or taste. Northern Chinese prefer salty snack products, while Southerners like creamy-sweet flavors. In general, the Chinese enjoy strong flavors.
And of course price matters. Although the Chinese prefer the superior packaging of Western products, which give the impression of top quality, they still demand bargain prices. The market with the biggest potential is for products that retail for less than $3.50. Consider cookies and bakery items, candy, fresh fruit, snack foods, corn (frozen or canned), frozen french fries, nonalcoholic beverages and milk powder.
The Payment Problem: The best way to secure payment from any overseas customer is to ask for funds in advance. Having your customer open an irrevocable letter of credit, preferably confirmed, is another excellent way to guarantee payment.
Unfortunately, both of these widely used methods of payment on international transactions create problems for companies doing business in China. Cultural factors, the legal framework and the bureaucracy make it a complicated matter.
So, you must work through authorized agents who are appointed by the government and who work within a relationship known as guanxi, which can be shady. Can you avoid getting taken? Sorry, but there's no foolproof approach.
But you can improve your chances by communicating clearly with your customer and your bank on matters of payment. It is ideal if your bank has branch offices in China so they can provide on-the-spot assistance. Ask your U.S. bank if they have experience with the Chinese bank that will handle the prospective transaction, and if they can vouch for that bank's reputation and professionalism, especially in their dealings with U.S. companies.
Even in the best-case scenario, expect to wait for payment: Chinese supermarkets require 60-to-90-days' credit on most purchases, and some chains will delay payment even longer.
-- Laurel Delaney runs Global TradeSource Ltd., a Chicago-based global marketing, consulting and web content providing firm. She teaches at Loyola University in Chicago.
