As China’s professional workforce has continued to grow, professional users have become more sophisticated and are very interested in using world-class software for their needs. However, especially for more vertical solutions, many global software companies do not yet offer their software legally in China. Customers are then left with a few suboptimal choices to get the software they want: use a VPN and internationally accepted credit card (still not very common) to download the software from overseas; work with a distributor that may or may not have the legal rights to the software; or use a pirated version (oftentimes without even knowing that China software piracy is happening). This kind of activity could easily lead to thousands (maybe tens or hundreds of thousands) of professionals using your software with no revenue benefit for your company.
In fact, we have run into cases where a pirated software version has been selling in China at the full, legal price! A Chinese company saw the value of the product, hacked the software, and sold it to customers at the global price.
Why would customers pay for a hacked version, when they could buy the real product at the same price? This is where it gets interesting. In one case involving one of our clients, a distributor applied for and was granted a local trademark, which gave them access to software development tax breaks, and then built a Chinese language pack, which wasn’t available in the legal version. It was this Chinese language pack addition that was worth the (pirated) price for end users (English versions also “sold”). Remarkably, the distributor was also policing ecommerce sites and actually taking action against other pirated versions as if the distributor was the real software provider. This was definitely a shock to our client.
Before we tell you how we resolved this situation, let’s look at some reasons that Chinese customers, if given the opportunity, prefer to purchase locally, even if it means paying over the global price!
Chinese users want licensed products
While some global companies are aware of these users through anecdotal evidence or “call home” logs, many software providers are completely unaware that they may have a large, existing userbase waiting for them in China. What is especially important to understand is that most Chinese professionals would much rather be using a fully licensed version of the software on their computers. Among other positives, they understand that licensed versions get updates, offer support and training, and are inline with the Chinese government’s push to reduce piracy. Get them onboard, and you will have a near instant group of brand champions. With all this said, what are some of your options to capture this pre-existing userbase to build a large opportunity?
Fight China software piracy by getting active in the market
First of all, to make any kind of significant progress, you need to be active in the China market. While your level of engagement can vary, at a minimum you need to be able to: offer an easy way for users to download your product; offer payment options that are widely used in China; offer official receipts (this requires either your own entity or a partner’s entity); and offer documentation, training and support in Chinese (and easily accessible with the Great Firewall of China). All of this can be offered without having to go through a full China market entry process if you have the right partner to assist you.
Documentation, training and support will be especially attractive to get existing users of non-licensed software to switch to paying your company, even if your price for a legal version is significantly higher. These users have likely had to figure out how to use your software on their own, either by trying to understand English documentation, or through poor translations. While this doesn’t necessarily have to be hosted on a website within China, we always recommend it. Regardless, an active community of users – and timely responses from your support team – will also be welcome by Chinese professionals, and will benefit your brand as well as your sales through word-of-mouth.
For both existing China software piracy users that you’re trying to bring over, and for new legitimate users, putting your software download locations inside of the Great Firewall will also help with sales, as hosting outside of China can result in excessively slow downloads or even timing out. Additionally, by offering local payment methods and official receipts, it will be much easier for professional users to expense their purchases.
Legal means have strengthened in China
So what happened in the case above? We are pleased to say it ended well, but it’s important to note that not all piracy situations in China end favorably for the legitimate provider. In this specific case, ADG approached the distributor, and after numerous discussions we convinced them of our seriousness in pursuing legal action to nullify their trademark, as well as other further actions. After several months of negotiations we were able to convince them to work with our client. In exchange for covering some costs towards protecting our client’s trademark (and to continue to ferret out other pirated versions), the one-time pirate agreed to transfer over the intellectual property it had stolen, to shut down its website, and to let our client us the Chinese language pack it had developed. Today, company is a legal distributor for our client and continues to sell the solution.
So, if you are seeing some sales from China, or know that your products are being hacked and pirated there, this might indicate a real market opportunity for you. Additionally, with the significant inroads the Chinese government has made towards cracking down on piracy in recent years, if you commit to entering the market, you may have a strong likelihood to reclaim that lost revenue, and generate new legal users.
Western companies do not succeed in China based on their technology alone. For enterprise customers, business case, fit, commitment to the market, and relationships are also important aspects to getting a deal over the finish line. For consumers, it’s all about the brand and its associated social validity. In both segments, pricing is often a secondary, and flexible, consideration. Western technology companies that attempt to create a China business entity alone, or through hiring a single person on the ground, cannot reasonably expect to make substantial headway on any of these fronts in less than 18 months at a minimum. There are two main reasons why:
Forming a go to market strategy
After a company makes their first China-related hire, it will usually take a company around 6 months to form a go-to-market strategy and evaluate the competition and opportunity. Even if this timetable is acceptable to a company, it still needs to validate this strategy, which can only truly be done through real business conversations and research with multiple, trusted connections that are already involved in the market. However, this type of engagement with Chinese companies and partners can’t happen yet, because…
You need China business entity in place
Serious conversations – and virtually nothing else – can’t happen without a China business entity and the associated licenses, IT infrastructure, payment systems and a multitude of other operational necessities required to conduct business in China. This includes an in-country website, social media accounts and any other brand-related activities. Companies new to China have to navigate numerous fundamental tasks – not to mention the more complicated and/or unknown obstacles – of setting up a China business entity before they can even begin to implement a strategy. Constructing a China business entity can easily take another 6 months to complete, meaning that – at best – any company entering China on its own won’t even be “in-market” for at least a year. This brings us back to the first point…
Building trust and relationships
As we’ve said, Chinese partners and potential customers won’t begin serious discussions with a Western company until its entity is in place. There are many reasons for this, but foremost is that trust hasn’t yet been built and they won’t be assured that the Western company is serious about China. However, the real business issue for a Western company in this situation is the lack of having – or even being able to build – corporate, brand and personal relationships and trust. Further, there is no predictable timetable for building these connections, so when we say “18 months at a minimum” this is factored into that timetable. While heavy spending can somewhat alleviate barriers to cooperation and acceptance (as in any market), Chinese customers are mainly swayed by social proof and relationships, which can be hard to buy and take time (often years if done from scratch) to generate.
The above scenario is not only likely to be extremely costly, but is also slow and fraught with pitfalls, not the least of which is attracting, hiring and especially retaining qualified and experienced Chinese staff. Many Western companies that have tried this route have bowed out of the market after as little as 1 to 2 years, because their high costs, lack of momentum and competition have all made China unsustainable for them.
Get the right kind of help
Some companies that have set up a China business entity on their own and have encountered inevitable obstacles end up leaning on global management consulting firms to try to help them through. However, these firms – at best – can only offer strategic direction at 30,000 foot level, and not the kind of daily actionable advice that running a business in China requires. Further, these firms do not carry out these directions, instead leaving companies to try to implement them on their own, which again, just slows things down.
What’s more, even companies that have knowledgeable advisors on China – for instance VC investors that have supported other portfolio companies with their China GTM plans – often make the decision to go forward on their own, even knowing all of the above. Why? Because they are generally against the idea of “handing the keys” over to a third party and not completely owning the business, especially when a local Chinese partner is hired. While this is a fair consideration, with a trusted partner and contractual safeguards, companies shouldn’t let this stand in their way of getting needed help to launch their China business entity.
China Singles Day 2020 (aka “11/11”) has come and gone. We’re going to skip the usual “look at the huge numbers” – they are always huge – and instead focus on how it was structurally different in this unprecedented year.
Less hype but more livestreaming
Overall, 2020 marked the lowest hype of any recent China Singles Day in recent years because of the continued impact of the coronavirus worldwide. While China’s economy has been doing better than almost any major economy in the world since it brought the virus under control within its borders, Chinese consumer activity has been one of the last areas of the economy to come around towards pre-pandemic levels. Platforms and vendors seem to have grasped this, and toned down marketing this year around the sales event.
On the other hand, as we’ve seen throughout the year, livestreaming celebrities continued to be a central focus – and driver – of online sales. The demand has been so high for some of these celebrities leading up to China Singles Day 2020, that some outlets used up to 50 additional hosts for one channel!
More time to shop and more platforms for China Singles Day
To both spur more activity and lessen the load on delivery bottlenecks, the largest ecommerce platforms – Alibaba’s Taobao and Tmall, as well as JD.com – started their November 11 China Singles Day sales on November 1 this year. Yesterday, they were joined by many other platforms, including Suning, VIP.com and Pin Duo Duo domestically, as well as some global platforms including Mytheresa, Net-a-Porter and Fartech.
Offline & enterprise continue to jump onboard
Real estate and car dealership showrooms continued to move towards alignment with online sales this year, with over 3,000 real estate projects in over 200 cities working with Tmall for promotions. JD.com and Suning also worked with realtors, with some realtors offering a limited number of apartments for as much as 50-70% off of the listing price.
On the enterprise side, Alibaba’s cloud service, Aliyun, was offering discounts to companies, and we expect to see more of this kind of synergy in the future for enterprise software, IoT, mobile and healthcare tech providers in the future.
Tuya runs one of the largest IoT platforms in China and focuses on smart home and consumer oriented products with a global presence in over 200 countries. With over US$300 million in venture capital, the Hangzhou based company provides its 10,000+ customers a full suite of platform services to help its customers (mainly device manufacturers) quickly bring their products to market.
Tuya’s business model is to partner with chips providers and module makers to develop reference designs that can be easily integrated into devices that will be compatible with Tuya’s ecosystem of partners. Tuya supports a wide variety of technologies including Bluetooth, WiFi, mesh, GPRS and Zigbee — however, only Tuya modules can be used on the platform.
A few large appliance manufacturers in China leverage Tuya’s tech, including TCL and Changhong. Walmart, the Home Depot and AT&T are among its customers in the United States.
Tuya is processing 20 billion device requests and 6 million AI interactions daily, and supports 36 categories of devices.
ADG’s Take on Tuya
Tuya has done an excellent job partnering with the industry by providing it with the tools and integrations needed for device manufacturers to get their products to market quickly around the world. Some of the more sophisticated manufacturers, that have their own technical resources, will often prefer to work directly with their own chip and module vendors. The platform, on the other hand, requires partners to purchase Tuya qualified chips and modules from its partner network to take advantage of its platform.
Similarly, for products that need deep customization, the Tuya model doesn’t work well. Nevertheless, for companies targeting China sectors that are light on resources, and/or are providing standardized products such as light bulbs, routers, security cameras, etc., Tuya can be an attractive partner. On the down side, for products outside of China its security and data management policies remain unclear, and you can find a number of negative reviews of Tuya Smart’s functionality and design on the Google and Apple app stores.
Nevertheless, Tuya has growing influence and is looking for more partners around the world that can bring added security, features and services to its platform. It is no small feat that it can boast Jeff Immelt as a member of its Global Strategic Committee!
Please let us know if you’d like to discuss the IoT market in China further!
One of the questions Western technology companies often ask, is when is the right time to create a localized China website inside of China’s Great Firewall? This issue is multifaceted and in constant flux, and much more of a decision making and operational process than most companies anticipate.
To start, your company could bypass the entire issue and simply use your international site or a subdomain to provide information to your Chinese customers and partners. For websites that are basically translated informational text, this might be sufficient, and generally speaking, most small companies don’t have too many problems with websites hosted outside of China. However, even such basic sites run the risk of being blocked in China and/or suffer from slow loading speeds. It can work, but the more serious you get about China, the riskier this becomes.
If your company is currently hosting your Chinese language website outside of China AND you are actively (not just passively on a global scale) targeting Chinese consumers or enterprises, your risk of being blocked increases. Some of the key questions you should consider to assess your risk include the following:
Are you operating in a “sensitive” area or doing something against the norms of what is done by local companies in China? Communications, social media features, etc., are all areas that increase your risk of being blocked.
Is your China business small enough to stay off the radar and not draw too much unwanted attention?
Are you competing head-to-head with large local competitors that would be happy to make sure Chinese regulators are keeping an eye on your activities?
Are you collecting significant personal data on Chinese citizens, companies or areas that are considered relevant to what China considers national security? (what qualifies as “national security” can be quite broad)
From this point on, we’ll assume that you ARE targeting Chinese customers. Beyond having your domain completely blocked in China, hosting your website outside of China can have other detrimental effects to your business even if the site isn’t blocked (which again, can happen at any time). Among the issues you could run into are:
Sections of your site not being accessible because they are run using third party services that are blocked in China, including help videos hosted on YouTube, embedded forms, CAPCHA, single sign on (SSO) through Google, Twitter, etc.
Slow loading speeds and — for sites that host downloads — extremely slow download speeds that may time out
Payment methods not working
Inability to pass marketing and usage data to your centralized systems
Inability to leverage Chinese advertising platforms
Site performance slowing to a crawl during annual political conferences and other sensitive times
This can easily lead to frustrated customers and partners that want to use a Western company’s products and services but can clearly see that it hasn’t invested the time and resources into offering a fully functional China website. If you are starting to take the market seriously, your China consumers will appreciate you having a .cn domain that performs responsively and shows your commitment.
This isn’t to say that having a website legally hosted in China directly by your company or through a partner eliminates all risks — regulations in China are constantly in flux and are vague. For instance, one thing that has recently changed, and is now being strictly enforced, is that is also no longer possible to use a CDN or VPN service inside of mainland China without an ICP license. We have seen several situations in 2020 where Alibaba or other providers have stopped providing these services due to invalid documentation. Hong Kong might also be impacted in the future.
Navigating this environment long-term requires experience and industry and regulatory connections, and is key to success whether you work with China business growth experts like ADG China or try to do it internally.
Finally, beyond the regulatory and accessibility considerations, companies need to consider the technical and operational complexity of creating a (good) website inside of China. The bottom line is this: a fully-functional, attractive, and optimized website built for the China market is very different from a website or SaaS offering in other parts of the world. The tech stack is different (and mostly can’t be imported). The design is different. The content is different. The integrations and partners are different. All of this requires a dedicated, in-country team that can conceptualize, execute and maintain this unique web presence, while at the same time understanding and coordinating what is strategically important to global HQ.
In future posts, we’ll go in-depth into the steps and strategies required to create a lasting and successful website in China.