China markers are closed for the Golden Week holiday, so there is no update to Shanghai Index notes. This provides an opportunity to more broadly what underpins foreign business success in China.
This is particularly important for SMEs looking to expand their footprint or start a new business focusing on China. Although many business success factors remain the same, there are some changes in emphasis following Covid-19 and in response to the ramp-up of adverse US trade policies.
When considering business, remember that the Chinese customer counts. They will not gratefully accept your product or service because it has a foreign premium. The product or service must be good for its purpose and be packaged and presented appropriately for the customer base.
Expectations
Although it is often considered necessary to have a formal China strategy, many companies embark on China ventures with very little insight, great hopes and low chances of success. Companies using the wrong strategy wreak destruction on their share price and your investment in them.
There are three essential features for foreign company success in China. First are businesses offering status and value on products or services. It is very difficult to compete on price in China, so the field of competition must be different. This is a strategy of “luring the tiger from the mountains.” The tiger has an advantage in the dense forests in the mountains, but he is vulnerable on the open plains.
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It is difficult to compete on price in the jungle of the Chinese marketplace, so it makes sense to compete in a different area where you have a natural advantage. This includes status and service quality, although the Chinese standards in both areas are much better than five years ago.
Chinese consumers remain extremely value-conscious, so it isn’t easy to win on price. More importantly, Chinese consumers are very status-conscious, but the nature of status is changing. There is a patriotic status in buying Chinese rather than foreign. This has become a new barrier to foreign business growth.
Many Chinese are willing to pay more for goods or experiences that give a face and enhance their social status because this delivers social value beyond the price paid.
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Middle-class consumers shop at supermarkets and department stores for everyday basics, then go to high-end stores to buy high-status face items. The foreign brand names face increasing competition from domestic Chinese brands, which were more readily available during the Covid-19 lockdowns. The duty-free stores will still make a good trade for international travellers, but the purchases are less likely to be in addition to regular consumers buying at home.
Second and increasingly important are brands the Chinese trust. This is particularly true in the food sector, where safety is always important. Will this food harm my health? This is an important question that requires a definitive answer.
This is an area of significant change with the use of blockchain-enabled QR codes. These provide incontrovertible proof of provenance. It proves the product is not a substitute and has not been tampered with.
This digital advance means that meat from Inner Mongolia can be sold at the same price as premium beef from Australia. It is estimated that up to 40% of meat sold as Australian beef in China is a low-quality substitute. QR blockchain certification eliminates this problem.
QR blockchain certification means the health supplement contents in the plastic bottle have not been tampered with nor substituted. Foreign suppliers need to adopt these standards.
Chinese have a sophisticated taste for food, but US fast food chains like McDonald’s and KFC have done well in China because they are consistent in quality and perceived as offering safe food. Homegrown chains like the hot pot restaurant Haidilao and the meat-heavy XiBei restaurants have expanded because they offer the same consistent quality and safe food. Meanwhile, Luckin Coffee challenges Starbucks and brings innovation with its Moutai-laced coffee product. High-end, trustworthy international brands have a premium, but establishing a presence in China is no longer as easy.
Understand the locals
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The third element of success is foreign businesses that understand their local market — not just China, as it is a mistake to treat the country as a single consumer entity. Tastes in Shanghai are very different to tastes in Beijing or Xi’an. Many Chinese cities are the population size of small countries and viable markets just by themselves.
China is a collection of different regional markets. Each has its consumer habits and preferences. The malls may look similar, but the retail and consumer patterns differ. Our focus on Beijing and Shanghai is understandable, but remembering the so-called second-tier cities, like Dalian, Nanjing, Changsha and others have populations of around five to six million, is also important.
China is a hyper-competitive market — companies that choose to play only based on price will fail. Foreign companies’ narrowing advantage is status, branding and trustworthiness. Future success depends on adopting a diversity of regional strategies.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia-China Business Council. The writer owns China stock and index ETFs
