China Market Entry

Abstract

As China’s 14th Five-Year Plan (2021-2025) proceeds ahead with gradual liberalization of the business environment and accelerates its inward and outward business expansion landscape, the Chinese Government works to attract investors by addressing market access restrictions, and the business and regulatory environment.

Setting up a business entity to capitalize on these growth and market share opportunities requires the investigation of different modes of China market entry. The purpose of this chapter is to discuss the spectrum of business initiation activities ranging from the organizational structure, location and internationalization strategies, government regulations, and the China party (CCP) role, as well as other marketing, logistical, and distribution considerations.

Finally, the chapter will discuss the ease of doing business in China. A review of business failures in China Market Entry must be studied to understand the barriers to success and avoid wasted investments.

Fig. 1

China Renminbi “Yuan” 人民币

After review of China’s market potential, resulting in your decision to enter the China market, your mode of entry becomes the focus. The decision factors in market entry choices are discussed in this chapter. It is paramount that you consider the pros and cons of the modes of entry and potential strategic alliances available to you, as they crossover and/or interdependence in many areas and channels of the overall marketing mix, business structure, and management approaches your business may assimilate in the China market.

It is also important to note and appreciate that you’re understanding and investigation into the most advantageous entry mode for your business, affects many of your decisions, and subsequently your negotiations. There are many diverse and creative elements in your entry mode selection, necessitating negotiations based on situational contingencies including risk, return, control, integration, and commitment, flexibility at the country, industry, firm, and even individual projects level. Many of these will become tradeoffs between risks and rewards, addressed in your negotiations. This chapter is devoted mostly to your China ownership options and market entry modes based on resource investment and management control. It should be noted that cultural diversity between Chinese and American management strategies and tactics, as some refer to as “cultural distance” are important elements of your overall market mode strategy in China. We will take a closer look at cultural management comparisons and strategies in three Chapters: China Culture (5.0), China Strategic Alliances (4.18), China Strategic Negotiations (1), and China Strategic Marketing (9) (Fig. 1).

1 Approach to China Market Entry Strategy.

Your China entry mode selection commences with the foundation that your efforts of finding the best fit for your business while also making the best use of your resources. As mentioned previously, your evaluation and decisions are not done in isolation, but instead, in a crossover between all the cohesive and integral elements of the entry mode selection. Charles Hill, Peter Hwang, and Chan Kim (1990) suggested a unified framework of three essential constructs:

• 1. Strategic Variables

Strategic variables shape your China entry mode through your firm’s control of the requirements including your ability, preparedness, and commitment to influence decisions, systems, and strategies for the China market. Different strategies require distinctive degrees of control over the operating of Chinese affiliates and alliances and consequently can result in unique and even simultaneous entry modes. China’s exceptional culture adds valuable

• 2. Environmental Variables

Strategic variables affect your China entry mode and contingency theory through your appropriate level of resources commitment. Resource commitments are pledged assets that cannot be employed for other uses without experiencing added expenses. Assets may be intangible, such as managerial skills, patents, trademarks, franchises, goodwill, and copyrights. Additionally, they may include internet sites, service contracts, computer software, manuscripts, and trade secrets. Assets may be tangible, such as land, inventory, stocks, bond, and cash.

• 3. Transaction Variables

Transaction variables affect your China entry mode through the allocation and distribution of risks, and assorted levels of control. Risk comes from the chance that a firm's applied knowledge (tangible and/or intangible) can be unintentionally transferred to a local firm creating a new competitor (Fig. 2).

Fig. 2

China entry mode selection model

Different MNE entry modes involve different levels of control, resource commitment, resulting in various levels of bargaining power. Players may include China’s governance and political structures, regulatory bureaucracies, negotiations of legal contracts, and business setup requirements. Negotiations will also play a role in information exchange, technology, and other elements of collaboration that are contingent on various entry mode characteristics. Clearly, culture and time in China influence the evolution and progress in modes of entry and negotiations, which are also considerations affecting your choices.

The relevant knowledge and your firms growing experience in your research activities and strategic development may include seeking advice, consultants, or other China domestic resources to function as a counterbalance offsetting your newness to the China market. Inadequate information and cognizance of practical problems during your decision process in market entry mode will certainly lead to negotiations and strategic implementation into the China market resulting in increased risks. For additional reference information, access https://www.trade.gov/knowledge-product/exporting-china-market-overview?navcard=3169 where market assessment, competitor assessment, entry options, business model, and implementation are discussed on the US Department of Commerce, International Trade Administration website.

The following are key strategic elements of the China modes of entry factors facing you in your decision process. It takes a detailed look at the numerous specific types of alliances, along with the advantages and disadvantages of each.

The significance and value of different market entry factors depend on your industry, the nature of your product or services, the market potential, and circumstances your firm has relative to investment funds and overall objectives. As I have mentioned many times before and will continue going forward, “there is no one right way” to make your decisions, and/or to ultimately implement your activities in the China market.

Further, as you evaluate your strategies for China market entry, I would suggest an attitude that gives you the ability and flexibility to work in a fashion that provides for your “switches in methods” depending on changing conditions and growth of both the China market and your individual market mode as a “sequential strategy.”

2 China Mode of Entry Options

An important decision for consideration in your review of your China competitive strategy should include the elements of the China market mode of entry options, shown in Fig. 3. One should also be aware of the China Foreign Investment Law (FIL) passed on March 15, 2019, on choosing investment structure. The law is to help improve the business environment and enable equal market competition for foreign investors. The law went into effect on January 1, 2020. It is important to further study this law to understand better the available investment structures outlined in this new law. The publication by Dezan Shira and Associates in 2019 titled “The New Foreign Investment Law in China” through their China Briefing Magazine provides detailed insight into this law. www.dezshira.com (Fig. 4).

Fig. 3

China decision factors

Fig. 4

China modes of entry

2.1 China Mode of Entry

But first to get started, your company must have a business license. A business license in China is an official license that all entities (including Chinese-owned companies) operating in China, are required to have. In the below article, we introduce the elements present in a Chinese business license and hints and tips when applying for a Chinese business license.

https://www.fdichina.com/blog/business-license-in-china/.

3 Ownership

Your company’s selection of China entry mode is affected by your conceivable ownership posture. You will be competing with China firms who know and own their market. This serves as an alert, that your company’s tangible and intangible assets require a notable level of strategic and tactical skills, some call asset power, to create a competitive advantage that offsets the higher overall costs you face in servicing the China customers based on value and differentiated products and/or services.

A strong ownership position provides advantages based on product knowledge, technology, production skills, experience, intellectual property, negotiation posturing and provides a foundation for reducing foreigner’s liability issues such as political, governmental, and cultural disadvantages.

The three major forms of ownership in the PRC are Representative Offices (RO), Wholly Owned Foreign Enterprises (WOFE), and Joint Ventures (JV). The Representative Office is the easiest investment structure to set up. A RO is an extension of the foreign home country Company and is not able to engage in any profit-making ventures. Activities like liaison assistance, market research, marketing of products or services are the main activities allowed under a RO. There are also employee hiring restrictions, as a RO must hire local staff through registered labor agencies. (There are several Human Resource Guides from Dezan Shira and Associates (www.dezshira.com), i.e., “A Guide to Minimum Wages in China in 2022,” “China Income Tax Policy and Tax Incentives in China,” “Human Resources and Payroll in China 2021–2022,” “Preparing for the Coming E-Piao,” “Annual Audit and Compliance in China,” and “An Introduction to Doing Business in China.”

The Wholly Owned Foreign Enterprises (WOFE) is a limited liability company fully owned by the foreign investor. There are three types of WOFE: consulting services WOFE, Manufacturing WOFE (for manufacturing), and Trading WFOE or a Foreign-Invested Commercial Enterprise (FICE) for trading, wholesale, retail, and franchise reasons. A WOFE must perform business functions only pertaining to its business scope.

A Joint Venture (JV) is considered a foreign-invested enterprise (FIE) where there are foreign and Chinese investors. The local business partner can assist with government relations, distribution, and local market knowledge to further the business operations.

There are also new China Government Ministry of Commerce (MOFCOM) foreign investment reporting requirements under the FIL as of January 1, 2020, through the Enterprise Foreign Investment Information Reporting System. There are penalties for incompliance (Zhang, 2022).

The government is constantly changing and updating rules and regulations regarding types of ownership, but they are not often straightforward, when it comes to “mixed” ownership where the state and private investors jointly own companies. You should pay particular attention to the changes in state ownership enterprise regulations and the trend in many industries to reduce state-owned companies through liberalized enterprise privatization.

As an example of recent liberalized regulatory ownership/investment for JV’s.

China is opening its E-Commerce market to full foreign ownership, removing restrictions that limited joint venture investors to no more than 50 percent. The new regulation means that foreign investors can take 100 percent ownership of an e-commerce operation in the country The Ministry of Industry and Information Technology announced the change on Friday (July 2015); months after authorities introduced it on a smaller scale for a newly established free-trade zone in Shanghai. The moves come as Beijing seeks to transition China's economy from its old model of investment-fueled growth that resulted in years of double-digit GDP expansion, which is now seen as unsustainable. For more information on the expanding China E-Commerce business, the book, “The Smart Business Guide to China E-Commerce” by Frank Lavin, 2021, can be an additional resource (Table 1).

Table 1 Comparison of different investment options

4 Location Advantages

Does China offer your firm an attractive market based on market potential and investment risk? China may offer location advantages for your “make or buy decision,” based on market potential, size and growth, that may include, production advantages, based on local wage rates, cost of land, existing factories, surplus production availability, R & D capabilities, and logistics benefits. Your company may benefit from China’s economic system, policies, and culture-bound compensations that can enable your firm to exploit these elements profitably. Government policies regarding trade, such as high tariffs, discouraging imports, may encourage your production decisions. Part of your decision should include China’s corporate tax levels, (PRC corporate rate is 25%) prohibitions against repatriation of profits, and/or restrictions on Foreign Direct Investments (FDI). Location advantages may be offset if government policies impede your success based on changes in investment and/or ownership, leading you to other forms of market entry. The use of a weighted average balancing of elements may help you amalgamate location advantages and negative aspects. Another consideration includes a combination of location and internalization features.

5 Internalization Advantages

Your understanding of the boundaries of interface between the China external environment and your internal organizational strategies is of the utmost importance. The issues you face as to the production of your products or services internally, or in China by way of contracting, comprise elements of costs of negotiations, monitoring the manufacturing and quality control process, and other contract enforcement. When these costs are higher than you feel work for your market positioning, you may consider a JV or foreign direct investment (FDI) entry mode. Additionally, if these costs are low, you might consider franchising, or licensing. As we discussed early, these issues then also have an impact on your ownership position strategies. Does your firm have the talent, skills, expertise, and culturally capable executives to work closely and harmoniously with your Chinese strategic alliance, or partner? What level of controls do you need to be comfortable with your entry mode? Finally, consideration should be given to alterations or shifting your market mode, as your experience, changing circumstances and your China market knowledge expands.

6 Direct Exports to China

Direct exporting includes your firm’s direct sales to China customers, distributors, or other end-users. The decision to export your product requires you to focus on your specific product/service performance specifications, focuses on the channel that closest meet your needs, and as your intermediary (agent, distributor, or subsidiary) understands, has experience, and has the capability to meet your China needs.

Depending on your company’s current position in exporting, you may have in place your own export department, equipped to handle all your export needs; or you may use an Export Management Company (EMC), trading company, and possibly a combination. Typically, EMCs are specialists in China exporting and rely on foreign agents and other alliances rather than their own China offices.

As your company gains experience and knowledge in the China market, direct exporting advantages emerge including:

• 1. Enhanced level of control over your China marketing mix strategy (pricing, promotion, place (distribution) and related product services)

• 2. Immediate reaction and responses to market conditions, sales performance, and influences of competitive strategies

• 3. High level of attention to, and defense of intellectual property issues, including trademarks, patents, brand image, and other intangible properties

• 4. Advancing skill levels and cultivating market knowledge steering to potential market expansion and market share through additional market mode entry opportunities and strategic alliance development

Notes:

All routes lead through US Customs/Export and into China Import/Customs.

Direct sales from a US brand to China retailers are very difficult and rare, without a China presence in either a US foreign office, or a foreign agent/distributor or subsidiary.

China retail department stores and even most local retailers work under a different model than the USA. In the USA, retailers work on retail markup and take ownership of the merchandise upon receipt, added to their inventory at retail value. In China, retail is predominantly a “consignment” model. The retailer never takes ownership of the merchandise but instead, the manufacturer/brand retains ownership and pays a percentage of retail sales (commission) to the retailer

Ad Additionally, the brand pays for the retail store presentation and staffing. This means a US brand wishing to enter the China retail market must be both a wholesaler and brand manager, but also a retailer, and all that this entails in the China market environment

7 Indirect Exports

Indirect exports are when your firm sells your product or services to a US export management company (EMC), buying agent, broker, trading company, or piggyback. This approach also allows for China market testing, gradual entry, a minimum of risk and resources. Whichever intermediary you choose, you have experience, an outstanding China reputation, and an effective network. This approach removes a significant amount of any control over your brand in China, reduced margins instead paid to the intermediary, and a loss of ability to gain meaningful market knowledge for future expansion.

7.1 Intercorporate Transfers

Intracorporate transfers are the sale of your semi-finished or finished goods by your US firm to your China subsidiary.

7.1.1 Intermediaries

Let’s take a look at the definition of intermediaries based on the www.china.org website: “Intermediary organizations herein refer to the institutions or organizations linking the government and enterprises, producers and distributors, or individuals and organizations that provide market entities of any kinds with services of information consultation, training, brokerage, law, etc., for the purpose of coordination, evaluation, assessment, inspection, arbitration, and other activities.” In the early 80 s and 90 s, there were many Hong Kong-based or Taiwan-based intermediaries that were the prominent intermediaries in China. But as business functions have grown in China, numerous intermediaries can be found. The top three examples of these are:

• a. Industrial Organizations—such as chamber of commerce in large cities based on nationality, i.e., the American Chamber of Commerce or British Chamber of Commerce, industrial sector organizations, and industry conference companies

• b. Financial and Legal Services Organizations—such as law firms, certified public accountants, audit certification companies, and other arbitration companies.

• c. Information and Consulting Services Organizations—such as market research firms and other consulting firms

To better understand the intermediary’s role In China, the intermediary—not the negotiator—first brings up the business issue to be discussed. And the intermediary often settles differences.

A talented Chinese go-between is indispensable even after the initial meeting takes place. Consider what happens during a typical Sino-Western negotiation session. Rather than just saying “no” outright, Chinese businesspeople are more likely to change the subject, turn silent, ask another question, or respond by using ambiguous and vaguely positive expressions with subtle negative implications, such as hai bu cuo (“seems not wrong”), hai hao (“seems fairly all right”), and hai xing or hai ke yi (“appears fairly passable”). (Graham & Lam, 2003).

8 Additional Considerations

As you review your exporting options, additional factors for your consideration include: (1) government regulations and policies, (2) marketing, (3) logistical, and (4) distribution.

9 Government Regulations and Policies Considerations

China’s import and export regulations are complex and change rapidly. Investigation into what options and requirements are applicable to your exports into China will save you time and money if done correctly in the beginning. While you will likely have help from your entry mode alliances, you should have familiarity with these regulations, policies, and requirements as part of your marketing mix considerations, as well as your business scope, labor requirements, and reporting requirements.

• Special Economic Zones (SEZs)—Chinese Special Economic Zones fluctuate in scope and purpose. China has designated six geographical areas where distinctive policies and measures support specific economic utilities. They include free-trade areas, industry parks, technical innovation parks and bonded zones that facilitate experimentation and innovation over a wide range of industries. Types of SEZs include (1) administrative areas, (2) geographical areas, (3) international cooperation, (4) local industrial parks, (5) industry clusters, and (6) corporate SEZs. Based on your specific industry and your firm’s market approach, investigation into these zones may be valuable in your China success and can start with Understand China. https://globalconnectadmin.com/special-economic-zones-sezs-in-china-how-can-they-benefit-your-company/.

• In addition to special economic zones, industrial clusters emerged in certain provinces and defined as “a geographic concentration of interconnected firms in a particular field with links to related institutions” (Zeng, 2012). For instance, Datang Town in Zhuji City, Zhejiang Province of eastern China is known as the sock capital of the world. In 2020, socks production exceeded 22 billion pairs, which is 70% of China’s and 35% of the world’s total socks output. An industrial cluster indicates that the entire industrial supply chain from raw materials, manufacturing, design, raw materials, hosiery dyeing, finishing, shaping, packaging, and logistics is all concentrated here.

• Finally, the special economic zones (especially the first several) successfully tested the market economy and new institutions and became role models for the rest of the country to follow. Together with the numerous industrial clusters, the special economic zones have contributed significantly to gross domestic product, employment, exports, and attraction of foreign investment.

• Import Licenses = There are numerous places to obtain import licenses, one suggested site is https://www.export2asia.com/blog/import-license-china/#:~:text=You%20should%20apply%20for%20your,to%20receive%20an%20import%20license.

• Tariff Rate Quotas (TRQs)—The following sites will help you find Harmonization Codes, tariffs, duties, and costs: https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm

• Also, http://www.transcustoms.com/TARIFF/#:~:text=All%20goods%20imported%20into%20China,subject%20to%20the%20VAT%20tax.

• Import Inspection/Certification—http://www.china-certification.com/en/what-is-ccc.

10 China Party Role

As with doing business in any country, one must understand the role the government plays in business. To help understand the structure of the Communist Party of China, we look at the organization. The Chinese Communist Party (CCP) is the founding and ruling political Party of modern China, officially known as the People’s Republic of China. The CCP has had a political monopoly since its founding a century ago and rise to power in 1947, overseeing the country’s rapid economic growth and growth to be a global power. The Party marks its one-hundredth anniversary in 2021 (Figs. 5, 6, and 7).

Fig. 5

(Source CPC central committee)

CPC

Fig. 6

(Source https://www.cfr.org/backgrounder/chinese-communist-party)

CCP and China government

Fig. 7

(Source https://www.visualcapitalist.com/china-economic-growth-history/)

70 years of economic development

In the past several years, there have been key regulations enacted that are important for the role that the Chinese Government plays in business. Businesses need to pay close attention to legislative and regulatory updates from the CCP. Professional advice should be sought to help navigate the best implementation path for your company. Some examples:

• 2019—The New Foreign Investment Law

On March 15, 2019, China enacted a new Foreign Investment Law (FIL) to enhance the business environment for foreign investment and ensure that foreign-invested businesses take part in market competition on an equal basis with domestic companies. FIL started on January 1, 2020, and has become the key guide to govern foreign investment in China.

https://www.asiabriefing.com/store/book/introduction-doing-business-china-2022.html.

• 2020—Increase of CCP Ideological Influence Within the SOEs and Private Sector

The General Office of the Central Committee of the Chinese Communist Party (CCP) published the “Opinion on Strengthening the United Front Work Department of the Private Economy in the New Era.” The opinion requests the UFWD to “guide” private enterprises to “improve their corporate governance structure and explore the establishment of a modern enterprise system with Chinese Characteristics.” Therefore, this signals an increased Party role in state-owned enterprises (SOEs). President Xi explains that “Chinese Characteristics” means that the Party’s leadership will be integrated into all aspects of corporate governance. Under the January 2020 CCP regulation, all SOEs had to amend their corporate charters to integrate the role of the Party in corporate governance.

In a speech in September 2020, Ye Qing, Vice Chairman of the All-China Federation of Industry and Commerce, spoke about building a “modern private enterprise system with Chinse Characteristics.” This could encompass the Company giving control to the Party’s internal group over hiring and human resource decisions, conducting audits, and monitoring internal behavior. With the announcement, the Party aims to have a role in private companies’ corporate governance structure to ensure all are working toward the national strategic objectives. The below link gives more information on this new opinion.

https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/201008_Livingston_CCP%20Targets%20Private%20Sector_WEB%20FINAL.pdf.

• 2022—Artificial Intelligence legislation lacking around the world…. China takes first stand to develop regulations.

As China continues to follow its current 5-year plan, artificial intelligence was one of the key themes in which to dominate the world. China has the world watching as it sets regulations on artificial intelligence and the impact on business and society that it will have. The article from WIRED magazine on February 22, 2022, discusses how the Chinese Government views regulating AI for the first on the world stage. The rules will cover price-setting algorithms, search results will be controlled, how to recommend videos and filter content. These comprehensive rules will impose new restrictions on ride-hailing applications, the streaming of e-commerce, and social media companies. The regulations, known as the Internet Information Service Algorithmic Recommendation Management Provisions, were drafted by the Cyberspace Administration of China, a powerful body that enforces cybersecurity, Internet censorship, and e-commerce rules.

https://www.wired.com/story/china-regulate-ai-world-watching/.

11 Marketing Considerations

As you enter the China market, obvious concerns must include your brand image, in addition to all your marketing mix elements. Additionally, if you decide to produce your goods/services in China, special attention is required as to quality control and/or exact duplication of your existing products, or your careful and successful customization of these products or services as your resolve for the China market. Depending on your product or service, production in China may keep you closer to the customer, more so, than the framework of importing. China marketing considerations also include your entry mode and period, as to testing, and/or gradual market growth and expansion. The China market is heterogeneous, provincially/regionally divided, and extremely diverse in demographic factors, in particular income levels, fashion perception and sensitivities, and sophistication. Additionally, the Chinese culture, customs, traditions, and government regulations add to the marketing complexity as you develop your strategies.

Marketing in China can vary depending on the product or service as well as the location and consumer that you are targeting. Below are some of the best sources and strategies from “Marketing to China.com” to use to attract the Chinese customer to your product or service:

• 1. Engaging Content video—has an engagement strategy—customized messaging and personalized communication.

• 2. Content Marketing sites:

  • a. Weitao is the built-in social feed from Alibaba for Tmall and Taobao. KOLs can post product and other lifestyle information to build market share with consumers.

  • b. Taobao Livestream is an in-platform product that can help stores engage directly with KOLs for introducing products and services to a new consumer. There is also Taobao Livestream, an in-platform system that enables KOLs to interface with brands for product introduction to consumers.

  • c. Alibaba’s group-buying platform is Juhuasuan (JHS). Consumers can link through this to Tmall and Taobao.

  • d. JD.com has in country and cross-border channels, i.e., JD.com and JD Worldwide.

  • e. Baidu Mobile SEO—largest search engine in China.

  • f. WeChat Marketing—used for messaging, social media, games, and purchase.

  • g. Douyin Affiliate-KOL—known as TikTok internationally—has a hyper-speed platform but can perform a step-by-step product knowledge and contains short videos.

  • h. Xiaohong Shu KOL—translated “little red book,” a social media and e-commerce platform like Instagram; product reviews, view outfits, learn fashion tips. Reference a complete Guide to Marketing on Xiaohong Shu— www.walkthechat.com.

  • i. Weibo Native Ads—open platform and a content-sharing social media site.

  • j. . Pinduoduo—is like Groupon with games and social networking and also has a cross-border e-commerce platform called Duoduo International.

• 3. Platform Popularity—ease of Use, Item and Price Comparison, Discover New Products and Experiences, Entertainment, KOLs.

As many brands, large and small, target China, there are some key marketing strategies (2021) that are shared from https://marketingtochina.com/key-marketing-strategies-for-china-market/.

12 Top Marketing Strategies for China (2021)

• 1. Branding is everything in China

• 2. Build your Reputation First

• 3. Social Media as a Brand awareness Tool

• 4. Engagement will make the difference

• 5. KOL as sale channels

• 6. e-Commerce is more powerful than retail

• 7. Explore niche Market

• 8. China market is a long run.

Another resource for “Introduction of Marketing Strategies in China.”

https://www.beyondsummits.com/blog/introduction-marketing-strategies-china.

13 Logistical Considerations

Logistical considerations start with the vast supply lines and communications complications in China. Further, deliberations relate to physical distribution costs including warehousing, packaging, transportation, inventory, and customer services expenses. Importing costs tend to be higher than locally manufactured products, which require a weighted analysis of all elements of the marketing mix blended with logistical issues.

Overall, transportation within China has vastly improved over the past 10 years. An amazing high-speed train network links many Tiers 1, Tier 2, and Tier 3 cities which makes travel within China very efficient and timely. It is now the “go-to” mode vs traveling by air. Train station facilities are very modern and are extremely large which helps to manage the large migration of population at Chinese New Year holiday. Tickets can be bought via applications and are paperless.

The Chinese Government has also built many new airports across the country. The new Beijing Daxing International Airport opened in September 2019 and is Beijing’s second international airport, after Beijing Capital International Airport. More information on this world-class airport is available at: www.daxing-pkx-airport.com New Airport construction or additional phases at other airports shows a strong investment in infrastructure, not only to move passengers but also to improve the air freight capacity and operations throughout the country. Within the 14^th Five-Year Plan (2021–2025), the Chinese Government will add 30 civil aviation airport facilities resulting in the ability to add 2 million passenger capacity to accommodate the 130 million passengers projected as the annual passenger throughput by 2030. These new facilities will be built or expanded in the major aviation markets: Shanghai and Xiamen of East China, Guangzhou and Shenzhen of South China, Xi’an and Urumqi in Northwest China, Chongqing of Southwest China, Central China’s Changsha and North China’s Hohhot. See more information at: https://www.globaltimes.cn/page/202201/1245192.shtml.

It is best to gain insight into what is happening and what is projected to happen concerning transportation and logistics. PWC has done an extensive study on Transportation and Logistics, 2030—5 series volume. This projection of the transportation and logistics world out to the year 2030 is helpful to follow a framework, look at wildcards, and give insight into the opportunities soon. Volume 1 is titled “how will supply chains evolve in an energy-constrained, low carbon world? Volume 2 is transport infrastructure engine or hand brake for global supply chains? Volume 3 is emerging markets—new hurdles, now spokes, now industry leaders? Volume 4 is securing the supply chain, and Volume 5 is winning the talent race”. https://www.pwc.com/gx/en/industries/transportation-logistics/publications/tl2030.html.

For specific China transportation infrastructure, the Statista Dossier on transport infrastructure in China is outstanding. This dossier contains statistics and facts about the transport infrastructure in China, which includes the road network, railways, waterways, civil aviation, and urban public transportation.

https://www.statista.com/study/15178/transport-infrastructure-in-china-i-statista-dossier/.

14 Distribution Considerations

One of the significant and final elements of your China distribution considerations includes the foundations for your local distribution and sales channels. Whether you choose local distributors or set up your own distribution network, it is an advantage if your firm has experience in the foreign markets and exporting. Without experience, in a complicated market like China, the normal benefits derived from establishing your own distribution network can be offset by the deterioration of financial savings and a loss of control over your network. Company structure for distribution can work with:

• Trading companies—function as intermediaries buying goods in large quantities to resell to

• retailers.

• Distributors: take ownership of the goods, then market and service the products.

• Sales agents: earn a commission for selling US products.

  e-commerce: conduct commercial transactions online.

Distributors and agents could operate in specific provinces or across the whole country. They might have exclusive rights to sell products within a particular region. Exporters could have multiple sales channels that vary by industry, region, and county.

15 Ease of Doing Business in China

As you evaluate your market entry modes into China, many questions come up, as to what do I have to do to get my business up and running? A terrific place to start this process is provided to us by The World Bank Group, in their annual reports “Doing Business in China.” Each year they review and report 189 economies around the world, including “Ease of Doing Business,” “Distance to Frontier (DTF) by topic, utilizing, and summarizing key indicators benchmarked against regional averages”. You can start your research at https://www.worldbank.org/en/programs/business-enabling-environment/doing-business-legacy.

By Oct 2019, China joined the ranks of the world’s top ten most improved economies for ease of doing business for the second year in a row thanks to a robust reform agenda, the World Bank Group’s Doing Business 2020 study says.

China completed a record eight business reforms during the 12 months to May 1 and ranks 31st globally on the ease of doing business rankings with a score of 77.9 out of 100. In 2015, China was 91st.

https://www.worldbank.org/en/news/press-release/2019/10/24/doing-business-2020-chinas-strong-reform-agenda-places-it-in-the-top-10-improver-list-for-the-second-consecutive-year.

At this website, you can then click on the “topics” and review China and the major cities for all of these elements, which are defined as to methodology for your review at https://www.asiabriefing.com/store/book/introduction-doing-business-china-2022.html. Two examples of reforms or progress, in Doing Business (DB) 2022 for China:

• Starting a Business: The China government made starting a business easier by eliminating both the minimum capital requirement and the requirement to obtain a capital verification report from an auditing firm

• Paying Taxes: The China government makes paying taxes easier for companies by enhancing the electronic system for filing and paying taxes and adopting new communication channels within its taxpayer services. In addition, China made paying taxes less costly for companies in Shanghai by reducing the social security contribution rate.

Other examples of information that will be helpful are these two publications from Dezan Shira and Associates:

• Human Resources and Payroll in China 2021–2022

https://www.asiabriefing.com/store/book/human-resources-payroll-china-2021-2022.html.

• Tax, Accounting, and Audit in China 2020 (11th edition)

https://www.asiabriefing.com/store/book/tax-accounting-audit-china-2019.html.

Following are additional graphs reflecting additional elements of doing business in China for your review, provided by https://knoema.com/atlas/China (Fig. 8)

Fig. 8

(Source https://knoema.com/atlas/China/Ease-of-doing-business-index)

China—ease of doing business

What is ease of doing business index? The highest = the best (Fig. 9).

Fig. 9

(Source Corruption Perceptions Index 2021)

China—corruption perceptions rank

Transparency International (TI) defines corruption as the abuse of entrusted power for private gain. This definition encompasses corrupt practices in both the public and private sectors. The Corruption Perceptions Index (CPI) ranks countries according to the perception of corruption in the public sector. The CPI is an aggregate indicator that combines different sources of information about corruption, making it possible to compare countries. The CPI ranks almost 200 countries by their perceived levels of corruption, as determined by expert assessments and opinion survey (Fig. 10).

Fig. 10

(https://public.knoema.com/tfdacoc/global-competitiveness-report?viewState=188302b9a06573784aca69424b90921eeced121c65f53c4138ad17a553ccd1b3)

China—global competitiveness rank

The World Economic Forum’s Centre for Global Competitiveness and Performance through its Global Competitiveness Report and report series aims to mirror the business operating environment and competitiveness of over 140 economies worldwide. The report series identify advantages as well as impediments to national growth, thereby offering a unique benchmarking tool to the public and private sectors as well as academia and civil society. The Centre works with a network of Partner Institutes as well as leading academics worldwide to ensure the latest thinking and research on global competitiveness are incorporated into its reports (Figs. 11 and 12).

https://www.weforum.org/reports/the-global-competitiveness-report-2020.

Fig. 11

(Source Index of Economic Freedom, 2021)

China index of economic freedom 2020

Fig. 12

(Source https://knoema.com/atlas/China/Prosperity-index, 2021)

Index of prosperity index

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital, and goods to move freely and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

The Prosperity Index is the only global measurement of national success based on both income and well-being. Our econometric analysis has identified 89 variables, which are spread across eight subindices. By measuring prosperity holistically, we can identify and analyzes the specific factors that contribute to the success of a country.

16 China Licensing

China licensing is a form of market entry whereby your firm, the licensor, will lease the rights to use your intellectual property to the China licensee, and is subject to China laws and regulations. These properties can include your technology, work methods patents, trademarks, copyrights, and your brand name, for some form of payment or fee. The fundamental elements of the licensing process are the setting of agreement boundaries, compensation format/rates, contract agreement of specific rights, privileges, and constraints, and the unambiguous duration of the agreement. Different elements of a licensing agreement rest with the specific type of products/services being leased, and the source of production. You decide to license your business in China, production, quality control, marketing, all elements of your domestic marketing mix, must be addressed for China as to who and how they are supplied, and what responsibilities to each, your firm, or your licensee has.

With your careful investigation of the China market, you may find licensing relatively low financial and legal risks, and limited managerial resources; you may find opportunities for your firm. Licensing agreements in China carry an additional risk of legal and other communications misunderstandings. There are no specific licensing laws in China; however, many other PRC laws may apply, regarding such things as, contract law, tax laws, foreign exchange provisions, and accounting procedures and regulations. Specifically, trade secrets are protected under the Laws against Unfair Competition. For licensing and other legal contract issues, you will find that China does allow for arbitration of disputes in other jurisdictions outside of China, when agreed to by the parties. I have found this to be a very important element of any contracts, but particularly your licensing contracts.

Further concerns for China licensing should include a practical and careful look at intellectual property rights laws, and the implications over the long-term for the prospect of sharing your technology and/or property knowledge, skills, and applications with a potential future competitor.

17 China Franchising

China franchising is a form of strategic alliance that allows the China investor-entrepreneur the chance to operate a business through a joint venture in a system to utilize your brand name, operating systems, and ongoing support. China franchising is highly regulated, starting with requirements of investment, to set up, accounting, and contract law. A great reference article, written by Z.Y. Zhang, A Guide to Franchising in China from the China Briefing from Dezan Shira and Associates. https://www.china-briefing.com/news/franchise-chinaguide/#:~:text=China%20adopted%20its%20first%20franchise,revision%20of%20the%202005%20law.

Franchising in China has become a relatively successful form of market entry after a slow start. Successful franchising in China requires some level of Chinese recognition of your brand and image. In support of franchising in China is the exponential growth of entrepreneurs and a Chinese desire for many things American. You must do significant research into China franchising based on your industry and individual business product or service. Many major global franchising brands open in China, not under the traditional franchising umbrella, but instead, a joint venture relationship, which does not involve individual entrepreneurs. In China, franchising can often mean “chain of stores,” instead of individual ownership. Initially, KFC, Pizza Hut, and McDonald’s all started, as chain-owned joint ventures, instead of the traditional individual franchise ownership model.

China’s vast market is growing fast, American brands are highly regarded, and new business systems are attractive to the China business environment. In order to offer franchising in China, you are required to open a business; you cannot do so as an individual. You must have a registered trademark, patent, or pending International Patent. You must also have at least two directly operated outlets in China and have been in business for more than one year.

Franchising in China also requires the evaluation of materials, recipes, quality control, customer service, and all elements of the marketing mix, as to the degree of standardization versus customization.

I had the occasion to consult with an American-owned Italian restaurant global brand, aspiring to enter the China market. This brand had 1100 restaurants in numerous countries. They owned 50 + and franchisees owned the balance. Their management negotiator, VP of global operations, goal was to extend franchisee ownership, as opposed to China corporate ownership. I obtained a group of Chinese investors, who owned hotels, resorts, and restaurants, and who sought to open franchises with this brand. Our offer to the brand, was $3.5 Million USA, ($1.4 M from my firm, $2.1 M from China investors to collaborate with my firm), to manage the brand in the China market long-term.

My firm had extensive retail and franchising experience, in China. The global brand would invest $3.0 M, and own 51% of the business. The plan was to open three locations, in various parts of Shanghai. (1) a small item fast food counter in a mall, (2) second larger operation on Nanjing Road, and (3) full sit-down restaurant in Xin Tian Di, an affluent eating and entertainment district of Shanghai. After one full year of operations, we would buy out the business, and run as master franchiser for China.

The strategy was to test each of the global brands current three-tier restaurant structure and overall brand acceptance. The experience and knowledge gained, with the close support of the brand, will enhance the chances for long-term success. The global brand management was determined to only go the franchise route and the deal fell through. The Chinese investors wanted the commitment of the global brand, and our support and management experience, to get this long-term investment structure up and running, through the learning curve and ultimately a successful business.

A couple of lessons can be extracted from this example.

• Opening an American franchise, of an American brand, in the USA holds significantly less risk, than the acceptance of both the same brand and the franchise model in China.

• If your firm is not willing to share some of the risk, China investors are less likely to assume the entire risk.

• The negotiators must have the support and commitment of their management.

18 China Foreign Direct Investment

China direct investment is a cross-border investment made by your firm that is a long-term or “lasting interest” in another firm located in China. This investment can take on many forms and structures. As we discussed in the exporting, licensing, and franchising modes of China entry, investment and risk are relatively low. Your firm may choose to start your China business in one of these modes, to gain China market knowledge; however, the element of control and profits are limited. If you prefer to enter the market with significant control, a higher degree of profits, direct investment in ownership of your subsidiary, production, manufacturing, warehouse, and/or distribution facilities may be best for you. Foreign direct investment in China has been steadily increased along with China’s economic growth (Fig. 13).

Fig. 13

(Source Trading Economics [2022])

China foreign direct investment (USD Hundred Million). Note In China, foreign direct investment refers to the accumulated foreign investment in domestic Chinese companies or entities each year

Any decisions to invest in China require close legal, regulatory, political, and accounting practices review, and understanding. It should also be noted, China scores at the top of the OECD FDI Regulatory Restrictiveness Index when compared to other countries.

The FDI Regulatory Restrictiveness Index (FDI Index) measures statutory restrictions on foreign direct investment in 58 countries, including all OECD and G20 countries, and covers 22 sectors.

Measuring FDI restrictiveness.

The FDI Index gauges the restrictiveness of a country’s FDI rules by looking at the four main types of restrictions on FDI:

• Foreign equity limitations

• Screening or approval mechanisms

• Restrictions on the employment of foreigners as key personnel

• Operational restrictions, e.g., restrictions on branching and on capital repatriation or on land ownership.

As your decision of marketing entry requires a blending of all the marketing mix elements, your decisions on standardized versus customized products, and marketing issues, your decision must address all the issues that determine your overall investment and approach (Fig. 14).

Fig. 14

(Source OECD [2022])

OECD FDI restrictions index

China direct investment can take three different forms:

• 1. Greenfield Strategy—building new facilities

• 2. Acquisition Strategy—purchasing existing facilities

• 3. Brownfield Strategy—contributing to a joint venture.

18.1 China Greenfield Investment Strategy

Greenfield is a form of FDI where your firms China market entry investment is undertaken through the construction of new operational facilities from scratch. (The word Greenfield derives from the reflection of a virgin green site and construction on it.) Your company would lease or buy the land, construct your new facility, design the facility with the most flexibility and efficiency, hire local employees, and bring in your own transfer employees. It must be noted, as of this writing, China does not allow individuals or corporations to privately owned land. Instead, the “rule of business existence” can only purchase real estate through a Chinese commercial entity. I suggest a helpful article for your initial research: Regulations and Restrictions on Foreign Real Estate Property Purchases in China, http://www.china-briefing.com/news/. It is highly recommended that you enlist the services of a corporate attorney in China, for your potential Greenfield investment strategy.

18.2 China Brownfield Investment Strategy

Brownfield is a form of FDI where your firms China market entry investment is undertaken through the takeover or purchase of an existing facility. Depending on your industry, finding a factory or facility that exactly matches your needs can be difficult, likely requiring adjustments to the design and additional equipment. Additionally, leases, national and municipal government license and approvals requirements may, or may not be up to code for the facility (Fig. 15 and Tables 2 and 3).

Table 2 Greenfield versus brownfield strategies for China

Fig. 15

China market equity/non-equity entry modes. Note Blue Modes are Strategic Alliances

Table 3 Comparisons of China market entry modes

19 Strategic Alliances

As China’s globalization continues, and technology advances, more companies look to expand their China network and strategic alliances, promoting collaboration or partnerships in China with existing companies to share the risks and opportunities. In China, “More than 60,000 strategic alliances were formed in the 1990s. About half of these were joint ventures. The other 50 percent were non-equity arrangements such as technology licensing agreements, joint marketing arrangements, and joint research or development projects” (“Maximizing Strategic Alliances,” 2009). There are differences between joint ventures and other types of strategic alliances, or partnerships, based on diverse objectives and goals, providing the basis for determining the management composition for the alliance, including equity, non-equity, and contractual agreements negotiated, and for the final optimal management and ownership structure.

Strategic alliances are no longer a strategic option, but a necessity in the China markets and industries. China strategic alliances enable firms to take advantage of strategic flexibility, facilitating them to respond to changing market conditions and the emergence of new markets and competitors. They are encouraged by a range of motives, including economizing on scales of production and research and distribution costs, strengthening market presence, and accessing intangible assets such as managerial skills and knowledge of markets. The decision between forms of strategic alliances that firms consider for expansion is complex and requires extensive research in order to customize a partnership that takes advantage of all the benefits and reduces the risks of the China market expansion. Vital among the considerations is the level of commitment by the potential partner.

There is no single formula, or generally accepted approach by all, for the numerous approaches to, or types of strategic alliance, management structure, and measuring results, which necessitates a balanced methodology in all areas of the maximization of strategic alliance opportunities from research to negotiations, implementation, and finalization. The ongoing dynamic nature of the China business environment supports continuous research and understanding of all types of strategic alliances, allowing for the maturity of economic and corporate management in foreign.

China strategic alliances are cooperative relationships between your chosen Chinese associate firm and your American firm that defines your common needs and objectives. One major element of your potential strategic alliance in China is based on your ability or inability to meet all your objectives in an efficient way. By assessing the ability of possible partners to utilize their strengths and compensate for your deficiencies. You may even find a competitor to work together, instead of against each other if the market can bare it. Strategic alliances are not the same as a merger or acquisition, since each of you remains an independent corporate entity, although they may be as informal as you like, to as formal, including mergers.

Your decisions regarding with whom, and how to work in collaboration with Chinese firms have an enormous influence on your overall success in China. Your choice of strategic alliance/s influences your planned form of operations or structure in China, and your market entry marketing strategies. Once again, the connective thread is negotiations, crossing over all the marketing mix channels. Chapter 7, strategic alliances take an in-depth look at various forms of collaboration including comprehensive and functional alliances, and the numerous forms of ownership and intermediary choices facing your China market entry.

I would offer: China Successful Strategic Alliance (creating a competitive advantage) = choosing the Right Partner + clear understanding of the Right Objectives. Foundations for a strategic alliance include a collaborative strategy for win–win methodologies for parties, utilizing reciprocal strengths, pooling of resources, and minimizing individual risks.

Fig. 16

Benefits of China strategic alliances

Fig. 17

(Source Adapted from Vaidya, 2011)

Dimensions of China strategic alliances. Note Group with Alliance Potential

19.1 Trading Alliance

Trading alliances are buyers and sellers forming a sales and distribution network, or export/export arrangements based on contractual terms.

19.2 Comprehensive Alliances

Comprehensive alliances typically involve agreements between firms that compel each to perform various and multiple stages of the process of bringing goods and/or services to the China market. Comprehensive alliances normally cover multifunctional areas, from production to marketing and finance, and tend to be complex (Table 4).

Table 4 Specialized entry modes for China business

19.3 Functional Alliances

Functional alliances usually focus on a specific or narrow scope and integrate a basic functional area of the business, less complex than comprehensive alliances. These singular functions might be a production alliance, marketing alliance, financial alliance, or a research and development alliance. Functional alliances can be used in several ways, such as collaboration in research and development, share costs, provide geographical China target market access, enhance distribution or sales interests.

19.4 Strategic Alliances and Joint Ventures

Parkhe (1993) defines strategic alliances as “relatively enduring interfirm cooperative arrangements, involving flows and linkages that use resources and/or governance structures from autonomous organizations, for the joint accomplishment of individual goals linked to the corporate mission of each sponsoring firm” (p. 794). Strategic alliances can be different, such as equity alliances, which include joint ventures, mergers or acquisitions, and non-equity alliances, including cooperative agreements or contractual alliances, such as R&D collaboration, co-production contracts, technology sharing, supply arrangements, global agreements between companies across national boundaries and/or industries, and marketing agreements.

Further partnership arrangements encompass foreign direct investment (FDI) and other forms of association among multinational enterprises (MNE) operations, such as subcontracting, original equipment manufacturing (OEM), participation in global value chains (GVCs), global manufacturing networks (GMNs), and coalitions in international market strategies, such as outsourcing, distribution, franchising, and affiliate marketing.

A study of alliances indicated that out of every one-hundred-alliance negotiation, ninety will fail to produce an agreement. Of the remaining ten that do result in agreements, five will fail to meet the partners’ expectations for the venture. Of the five that produce acceptable results, only three will survive for more than four years.

When a company decides to enter or expand a new international market, developing a collaborative process, through some form of strategic alliance requires an initial process of clarification of the overall objectives and dimensions, in order to appreciate the differences that exist between joint ventures and other forms of strategic alliances, as outlined in Fig. 18.

See Joint Venture forms at http://www.pathtochina.com/reg_jv.htm.

Further considerations regarding the management motives to enter an alliance include the positives and negatives as follows:

Fig. 18

(Source Ren et al. [2009])

A conceptual model for joint venture performance evaluation

Positives

• Strategic alliances are substitutes for acquisitions and mergers due to lower costs and speed for which alliances are formed versus mergers and acquisitions

• Take advantage of partner’s energy, and cultural market knowledge and expertise

• To ease overall market entry

• To gain economies of scale

• To reduce risk

• A united effort to pursue agreed on goals and remain independent

• Shared benefits and control over performance and shared tasks

• Continuous strategic area improvements such as technology and products

Negatives

• Government-required alliances

• Acquisition or merger is expensive and lengthy to complete

• Avoid takeovers

• Defensive measure to avoid competition from forming stronger alliances

• Closing a business is expensive, alliance is easier to exit market.

Basic differences between strategic alliances and joint ventures include legal and financial distinctions. A conceptual model for joint venture performance and evaluation as seen in Fig. 3 reflects the interaction between each of the characteristics of a joint venture. Further differences between joint ventures and the other forms of strategic alliances centers on the length of time and ease of exiting the collaboration in that as joint ventures tend to be equity-based, they are more difficult and time-consuming to end, as well as generally longer term in nature at inception

• A joint venture is a more formal arrangement than other strategic alliances created to undertake a specific business project, such as if partners want to cooperate in design, production, or distribution of an assortment offering.

• Joint ventures tend to create a new organization, owned by the participants.

• Strategic alliances tend allow companies to work together, remaining independent during the collaborative endeavor.

• Joint ventures typically exist for 5-7 years. In a joint venture, two or more “parent” companies agree to share capital, technology, human resources, risks, and rewards in a formation of a new entity under shared control. A joint venture is created with a specific project in mind and generally, dissolves once the project has been completed (US Legal.com, n.d., para. 1).

• A joint venture may need regulatory approval.

• A non-joint venture strategic alliance to move quickly into new areas of expertise, access new markets, and technology may be formed simply to allow the partners to overcome a particular hurdle or competitive situation.

• Non-joint ventures tend to be less stable than joint ventures.

19.5 Strategic Alliance Management

“Alliances need procedural justice when formulating, governing, and managing.

inter-organizational entities because this justice serves as a foundation for interparty cooperation, knowledge sharing, economic exchange, and ongoing commitment” (Luo, 2008, p. 40). A company deciding the management approach for their strategic alliance suggests an evaluation of the types of business, the level of management control best suited to the alliance for success, based on the number of partners and ownership necessities. Three basic ways of managing a strategic alliance are:

• 1. Parent companies can jointly manage the venture in which each partner fully and actively participates in managing the alliance.

• 2. An assigned arrangement is where one partner assumes the primary responsibility of managing the alliance.

• 3. Independent team of managers delegated whereby the operation is managed by the joint venture itself.

Paramount in determining the best management format for a strategic alliance is a level of commitment by each partner as part of the integral joint management considerations. Commitment reflects a partner’s positive valuation of a collaborative relationship described as the willingness of international joint venture partners (IJV) partners to exert effort on behalf of the IJV. Further, reducing the threat of opportunistic behavior, commitment reduces transaction costs and the costs associated with partnership, thereby enhancing performance in strategic alliances. (Ren et al., 2009, p. 813).

A study of management structure by Teng and Das (2008) suggests that equity involvement is a consideration, however, less important than the balance of flexibility and stability. As equity, structures promote stability, confidence, and cooperation, flexibility is lower, which may be preferable in firms that lack alliance experience. Whereas experienced firms find may find the equity structures to be unnecessarily rigid and thus prefer arrangements that are more flexible (p. 739).