American firms today cannot afford to ignore China. You know this and so does everybody else. So take the first step towards doing business in China and start planning. The question is how your company can do business in China and be successful. Most US companies are turning a profit with their China operations. You will need to do your China homework and plan carefully to join this group.
US companies have long looked at China as a low cost manufacturing platform or place to source goods. But increasingly China’s opportunity-rich domestic market is the focus of attention. This lesson will discuss planning for companies that want to sell in China.
Whatever your focus, base your planning on realistic assumptions. Don’t, for instance, get carried away with the overall size of the Chinese market when estimating sales potential in China. Consider instead how many of China’s 1.3 billion are realistically likely to buy your product or service.
The more you know about the market and your potential customers, the more likely you will be to make realistic assumptions about prices, sales potential, and operating costs. Determine how your customers break down in terms of age, income, and location. Are you targeting people concentrated in top tier cities like Beijing and Shanghai or are they more dispersed? Marketing strategies and selling costs can vary enormously depending on who and where your customers are.
You are likely to be competing against both foreign and domestic companies. In many sectors some of the toughest competitors are very savvy, very nimble Chinese companies that most Westerners have never heard of. Make sure the domestic competition in your industry is on your radar before you get your China start up underway.
The best way to determine your prospects in China is to base your planning assumptions on worst case scenarios. Take sales targets and pricing. To begin with forget about your US pricing scheme. While affluent consumers are increasingly attracted to value propositions, millions of Chinese still base purchasing decisions on price alone. You need to be prepared to compete on price.
Set target prices based on what you’ve learned about China’s domestic market. Use the demographics you gathered on your target customers and your experience from the US and elsewhere to estimate sales revenue and the costs of sales and distribution. Then add in “the China factor”. Knock ten points off the revenue projections and add ten to the cost estimates. Run the numbers again and see where you stand. Knock twenty point off and run the numbers again. In addition to knowing what it takes to succeed in China, you need to know the absolute minimum required to survive there.
China will throw unexpected changes your way. Yes, there are tremendous opportunities and many foreign companies do very well in China. But business in China can be very unforgiving to companies that are not well prepared. You need to plan for success, but also have a clear understanding of your China pain threshold. Instead of getting caught off balance, worst case projections based on realistic expectations will help you roll with realities on the ground.
It seems everybody has something to say about China these days. How do you filter out the noise and get to the reliable, targeted information you need to plan? Our next post offers some thoughts on doing your homework for China.