The Challenges of Exporting to China

The Chinese economy has stood apart from the rest of the world since it opened up in 1978. Most citizens owned few personal assets of any kind for years afterward. The hukou system is still enforced, and the one-child policy has left a mark. But as incomes rise, education opportunities improve, and people move to cities, Chinese consumers have begun to resemble their counterparts in the rich world. They already import more goods than anyone in the world outside of America. Their collective share of the global economy means that their tastes and predilections now set business trends all over the world and command enormous attention. Foreign companies watch the growth of China’s middle class with a mixture of serenity and delight.

China’s absolute level of wealth per capita remains low by rich world standards. But the total number of middle-class consumers is the largest in the world. According to a 2013 report from McKinsey & Company, nearly 76 percent of China’s urban population will have joined the middle class by 2022. This represents a total of more than 500 million people with enough disposable income to afford family cars and small luxury items. Approximately 50 percent of the urban population will be part of the upper middle class, with enough income to afford luxury goods. As more affluent Chinese consumers increasingly aspire “to improve themselves, the way they live, and their perceived social standing,” they will increasingly “trade up” and spend their disposable income on pricier versions of goods they already own. This is reflected in the vertiginous growth of sales in premium goods and premium brands, which has already begun to outpace the growth of sales for conventional products.

If consumers cannot obtain these goods from home, then they will try to acquire them from abroad. The most commonly imported products are computers, electronic equipment, premium apparel, and furniture. For many Chinese consumers, these foreign brands are associated with quality and safety. The enormous size of China’s consumer base obviously makes it the world’s foremost destination for foreign goods. But even beyond its size, China has created numerous built-in advantages. It has the world’s largest mobile user base, a collection of world-class vertically integrated platforms and firms, modern infrastructure that is the envy of anyone in the world, and a relative paucity of physical stores (which drives consumers to shop online). China’s rise represents the greatest business opportunity in the last century. This would seem to suggest that every medium or large company needs a strategy to deal with the Chinese market.

Nevertheless, the zeal to enter the Chinese market does not always translate into success. Companies are often thwarted by the hard realities of China’s opaque economy, including the high barriers to entry, the concerns about corruption, and the intrusive and stifling hand of the state. Not everyone will make it or should even attempt to try. The World Bank’s 2018 Ease of Doing Business report ranks China 97th in the world for trading across borders. The greatest burden to cross-border trade is the customs process, which includes port and border handling, clearance, inspection procedures, and the time it takes to prepare and submit documents such as a certificate of origin or a packaging list.

According to a report from the University of Southern California and APEC (the Asia-Pacific Economic Cooperation Forum), the quality of China’s border administration ranks relatively low. Even once you take into account the relative openness of the customs management system in its various pilot cities and free trade zones, the country routinely suffers from “high complexity of customs requirements and procedures,” a lack of transparency, and low efficiency and speed of clearance. Even small errors in documentation can run the risk of significant delays or the seizure of goods. However, the poor quality of China’s national system obscures an enormous amount of variation between different regions. The World Bank estimates that it takes an average of 72 hours to complete the customs process in the free trade area of Shanghai – still high by rich-world standards but lower than the 118 hours it would take to complete the process in Beijing.

Another potential source of trouble for cross-border trade is both tariff and non-tariff barriers such as regulations and local registration requirements. These regulations, which are complex and constantly changing, stem partly from the government’s desire to pursue industrial policies that attempt to limit market access for foreign companies while simultaneously promoting products from home-grown businesses and well-resourced state-owned enterprises. Even private startups often receive lavish support from the state. Although the common image of a stodgy close-minded China is long out of date, some segments of the economy are still closed to foreign competition or at least subject to meddling. China ranks highly in the tendency to enforce contracts between different parties, but the inconsistency of its regulatory regime can appear mercurial and arbitrary from the outside, reflecting the whims of the state. Some companies, struggling to make headway in the Byzantine world of China’s one-party bureaucracy, have quit the market altogether. The remaining companies must spend extra effort navigating through this exhausting and burdensome regulatory minefield of rules and procedures.

The third barrier to entry is simply the challenge of finding the right audience. China is not a single market but a collection of different regional markets and hubs, each with its own distinct rules and trends. A product may sell in one region but fail in another. Moreover, China’s e-commerce marketplace and social media platforms represent a distinct ecosystem itself (Baidu, Weibo, and Tencent’s WeChat are prominent examples of this trend). Companies that understand this ecosystem and adopt an integrated strategy between the various online platforms will tend to thrive in this space. They can improve their chances of success in China by forging partnerships with local firms and distributors who understand the market, but it takes time to establish relationships, create the right networks, and build trust. More cross-border cooperation between various stakeholders to decrease complexity and friction in the logistics, shopping, and payment process would ameliorate some of these problems.

Altogether, foreign companies cannot expect to succeed in China without a distinct strategy.  Entry into the Chinese market must make sense for the company and benefit the consumer as well. Only the most determined and disciplined will succeed.