China remains one of the largest untapped markets for many global B2B SaaS/cloud companies. However, due to China’s complex regulatory environment there is confusion around the meaning of “SaaS” in China, and what is even possible for foreign companies. When SaaS companies explore China and discuss their business and options, they will often receive feedback like, “China is hard for SaaS companies, you will need to replicate your cloud infrastructure and get a commercial ICP licenses that can only be obtained by a controlling China partner.” Though there are cases where this is true, for the majority of companies — particularly those in the world of enterprise SaaS — there are often significantly easier paths to enter China.
This article seeks to demystify some of the issues around SaaS in China and discuss key considerations when entering the market. Most importantly, we’ll share how companies can build a go-to-market (GTM) plan for China that is compliant and starts with a smaller footprint, allowing companies to delay larger investments until after they have achieved their business milestones.
Why is putting together an effective China GTM strategy so difficult for so many Western companies, and why is it so important? On the face of it, it shouldn’t be so difficult. China has been open to the world for decades, and the options at the highest level are straightforward and familiar to seasoned global executives. The challenge is that very few companies (or their China advisors) possess the combined strategic and operational experience necessary to help a cloud/SaaS company understand the interplay of their GTM plans across strategy, IT architecture, finance and compliance, while also knowing how other companies have addressed similar issues in China.
Having the correct GTM plan can be the difference between generating revenues in months instead of years. The correct plan could also potentially allow a company to leverage its current global infrastructure, versus having to build an entirely independent China cloud. Companies can build their GTM plans to avoid strategies that force them into low chance/high risk activities, such as negotiating a complex joint venture or using questionable legal structures to circumvent Chinese regulations.
A good GTM strategy is key to finding solutions to the following common concerns from executives:
How do we start small and invest over time based on real market traction?
How do we avoid missing something obvious when building a plan, then find out 6 months after entry that the plan had no chance of success in the first place?
How do we make sure the strategy meets our desired compliance parameters?
How do we determine when a local partner is a good choice or should be avoided?
Where to start
Companies typically start their China journey by speaking with their lawyers, advisors, potential partners, and other experts to discuss the market opportunity and their high-level entry options. The initial review usually starts by discussing the company’s existing business outside the China market. The company will also ask its lawyers to identify potential risks, where they may need licenses, and some of the ways similar companies have approached the market.
Unfortunately, for companies that define and describe themselves as SaaS companies, this can quickly lead them down a rabbit hole. SaaS in China has taken on a very specific and unintended meaning from a regulatory perspective. This misconception perhaps stems from believing that because a few well-known global SaaS products (including Microsoft Office 365 and Amazon) were subject to strict regulatory scrutiny in China and had to obtain commercial ICP licenses through the Chinese partner route, all SaaS companies must follow suit. However, just because a company operates a cloud or has a recurring subscription model, does not mean it needs a partner and a commercial ICP license.
Nevertheless, companies often hear this advice or misinterpret how China’s regulatory environment works. This leads many to go down a decision path where they become absorbed in complex discussions for strategic partnerships they often prefer to avoid, or to explore “creative” structuring options that can introduce significant risk into the overall China business case. This eventually leads far too many companies to walk away from China frustrated, while at the same time wondering how so many other companies have successfully entered the market.
Alternate paths to enter China
There is no one-size-fits all solution when it comes to GTM planning for companies looking to deploy SaaS in China. Companies need to understand that their initial review should only be the starting point; it is the straw man from which to start developing a GTM strategy.
Every company has its own objectives, timing and budget constraints, risk appetite, and flexibility around business strategies and models it will be willing to consider in China. There are real choices for companies to enter the China market in a staged fashion and prove-out their business with a much lower investment. In many cases, companies will eventually operate a slightly different business in China than their global business. This may let them permanently avoid areas that involve a more stringent regulatory environment. In other cases, companies will eventually choose to go all-in with a local Chinese partner — but only after they are more confident about the market and have a significantly strengthened negotiating position.
To identify the right GTM plan for China requires a highly iterative process where companies take a deep look at every aspect of their business. This process can sometimes feel costly or premature as this type of analysis is usually done later, after companies have confirmed their high-level GTM plan and allocated the budget for their China effort. However, this process is a must for SaaS company executives who need to understand their choices earlier to reduce the “unforced errors” that so often occur to companies that copy and paste their global expansion playbooks into China.
Everyone knows that creating a joint venture (in any market) is a time consuming and complex effort, and China is no exception. That said, the most difficult part of a China joint venture is not the structure or getting regulatory approval, it’s finding the right partner to work effectively with to execute a shared vision.
Let’s take a look at what each side usually expects out of a China joint venture, some of the challenges, and ADG’s recommendations on the role a China joint venture can play in your overall China entry strategy (please note that we’re only discussing JVs here, meaning each side takes a stake in a new entity – there are many other kinds of strategic partnership types such as distribution, licensing deals, etc., that are less committing for both sides).
What are the chances?
Western technology companies often are looking at China with an eye towards finding the perfect joint venture partner. Usually, they have a wish list of a handful of well-known tech giants that could offer huge benefits to them. Unfortunately, for various reasons, the general likelihood of any China joint venture making it to the finish line is very low. So, when the target is a massive, fast growth tech company… think of it this way – what would be the chances of a mid-sized Chinese tech company forming a US-based joint venture with Facebook or Google? That said, we know firsthand that such JVs are possible, having engineered the extraordinarily successful partnership that led to the Ant Financial’s acquisition of EyeVerify. But, much more often than not – and especially without help from a local expert like us – it usually goes nowhere or worse.
Winning or losing comes down to execution
A lot has changed over the last 20 years that we have been helping companies find strategic partners in China, particularly around the rationale behind setting up a joint venture in the first place. Today, most China joint ventures are no longer about market access and regulatory hurdles, but about how to win a market and move much more quickly than one company can on its own. There are now great management teams in China, and the cultural gaps and value systems are no longer as wide as they were in the past. However, what has not changed is that success comes down to execution and operations.
Once the deal is inked and the money is in the bank, the project moves to the execution stage – and this is where problems often arise. The China side is expected to bring value and its networks to the partnership. However, unless the Western company’s product, technology or brand is already very well-known inside of China (and few Western technology companies’ brands are), the China side has a lot of work ahead of them. While the Western side can contribute experts to join the JV, the reality is that beyond consulting on technology, without meaningful China operating experience it will be almost impossible to contribute additional value, let alone build an effective go-to-market plan to deliver on a strategy.
Who will run the China joint venture?
It’s critical to point out that there is often less middle ground in China than in most other markets. In other words, if there is a business to be run, whatever the business plan says, the Western company needs to be prepared to take a meaningful hands-on role. Too often we see companies assume that their well-funded and experienced China partner is the best equipped side to run the business.
In practice, it is very difficult for a local company to run a China joint venture. The giant technology companies in China are already in a race against each other, and like in Silicon Valley, there is a talent war. As they are already struggling to hire high-level operational staff to run their own core internal initiatives, there’s little chance that they will have the right kind of people on board to also run a joint venture. Simply put, the skills it takes to build a Western business in China are not the same skills it takes to run a local China business. So, if a business needs to be built in order to make the China entry successful, don’t count on the partner to have the skills to run it unless they already operate a similar business and have proven they know what they are doing.
To maximize your chances for success we have two recommendations:
Widen your search parameters to find the companies that are specialists and operators within your industry – they can still be very large and are often already strategically aligned with the giants you were hoping to reach in the first place.
Unfortunately, most Western companies simply do not have the resources or connections to conduct an extensive search, so unless they solicit help, they might be forced to give up the idea of a China joint venture for lack of available partners.
Assume that the JV agreement will never close – and do what it takes to build success in China.
At ADG we believe that a China joint venture and other strategic partnerships can be great supplemental entry options to consider. However, JVs should be looked at as growth accelerators in parallel to building, or once you have already built, a basic China market presence – not as a standalone market entry strategy. There are some exceptions to this but as a general rule it holds.
Companies that have been operating in China for a few years (and have amassed enough experience), will be better positioned to know who are the right partners for them. Rest assured, when the time is right to pursue a China joint venture, if you have meaningful success on the ground, you will be approached regularly by local companies looking to join forces with you. Most importantly, you will be able to negotiate from a position of strength.
So, if China is on your roadmap, your first order of business should be to execute a plan to tackle many of the fundamental building blocks needed to create a high-growth China business. This allows you to aggressively create broader market awareness and ensures that the market sees you as a serious player in China. These basics can help unlock growth opportunities and get you on the right path towards attracting a great China joint venture partner. If you’re a technology company that doesn’t have the team or expertise on China and are looking for market entry help, please reach out to us.
To get China software resellers onboard with your product or platform, you need to build trust and excitement through a strong show of commitment and support on your company’s part.
While your technology certainly matters, in China, technological prowess from Western companies is both assumed, and not 100% an advantage: companies without the best technology have been very successful in China. Those successful companies understood that business decisions in China are strongly tied to relationships, deliver on the ground in China, and that putting partnerships and deals into a “China context” are key.
Since most China software resellers prefer to get to know you and negotiate the partnership in conjunction with a real opportunity, it is a huge plus if you can start by providing them with some existing leads or at least be willing to support them during their sales process. You will likely need to push them a bit, but whenever possible you want to speak with their own sales teams to get the word out to uncover some initial opportunities to pursue together. For example, introducing them to the China branch of a multinational that is using your product in other countries, can be a great way to show your willingness to work together.
Know your value
Do your homework on the China market by being prepared and showing you that you have some knowledge of the market and the value propositions that you believe will be attractive in China. Most companies are surprised to learn that the value propositions in China are often very different due to budgeting process, politics, internal non-business oriented KPIs, cost structures, competing alternatives, etc.
Sell through use cases
China software resellers like to learn how companies elsewhere around the world use your products. Case studies and use cases are very important. Many customer prospects may not have a technical orientation, so they will expect a clear value proposition on how it can improve their business. If you provide case studies, expect hard questions on how and why those customers choose your product, and use data driven methodologies to prove your points. You can leave your marketing documents with fuzzy numbers and hyperbole at home.
It’s not enough to prove how amazing your product and technology works outside of China, you need to provide China software resellers proof that it will work in China (and it almost never will in the way you expect). They can accept that you might not be ready on day one, but if your product isn’t ready, then you need to provide a plan that demonstrates you understand the problems and have a clear path to deliver. Special note: if you are a SaaS company then resellers will expect that you’re already educated on the technical, regulatory and political environment that may be associated with your product in China. Saying, “we run on AWS so it shouldn’t be a problem,” will only bring exasperation to China software resellers.
Local market integrations
China has an entire independent ecosystem of services that are typically embedded across products and websites. These could be payment gateways, customer service and communication tools, marketing tools, and other integrations applicable to your products. Partners won’t expect you to come to China with all your integrations working from day one, but will be impressed if you can discuss your plans with them and get, and try to implement, their feedback.
It will also be valuable to have tested your products in advance in China to understand which ones are going to be problematic due to issues with China’s Great Firewall. Keep in mind that many global platforms encounter problems operating smoothly in China – especially during politically “sensitive” times.
Know what you want from China software resellers
Many companies approach partners with an attitude of, “here is my technology, what can you do for me?” Western executives visiting China often walk out of meetings with partners disappointed because the executive didn’t think that the reseller grasped their technology or asked the right technology questions. The reality is, however, that resellers are not interested in learning the ins-and-outs of your product and technology: they see that as your job. What they see as their job is to deliver to a customer a product that is “good enough” to get the deal over the finish line.
While China companies are happy to discuss all the ways in the world that you can cooperate, in an ideal world it is best to be clear on your expectations in advance. Do you expect them to bring you opportunities? Host your infrastructure? Provide technical support? Co-market or independently market your products? The more you can share with them the more they are likely to have the right people in the room and respond to you directly so as not to waste time. We recommend using a straw man model or proposal whenever possible so both parties have a clear starting point to discuss what is possible and realistic. Open ended discussions almost never go anywhere useful.
While many China software resellers may not actually have a clear sense of the regulatory issues that impact foreign technology companies, they will want to know that you are generally aware of them. We generally don’t recommend that you put too much reliance on the opinions of lawyers on this topic. Laws in China are often open to interpretation and can be years behind industry practice. Lawyers will always lean towards very conservative interpretation in spite of overwhelming evidence to the contrary. We suggest you balance your advice with the opinions of advisors and industry insiders that are far more likely to provide you will practical insight on the real boundaries of the various laws and regulations.
Like it or not, perpetual licenses are how most Chinese enterprises purchase software. While subscriptions are gaining some acceptance (driven largely by Microsoft) buying a perpetual license is the norm in China for a variety of reasons, including that most budgets are project based, e.g. “use it or lose it.” Also, a perpetual license is deemed as an asset that can be capitalized, and is also considered as a way to cut down on corruption. The larger the deal and company, the more likely that they will only purchase a companywide license and not base it by seat. That said, software providers may still be able to gain recurring revenue through support and services. We will generally recommend, whenever possible, that providers maintain an open mind around pricing models.
Generally speaking, the largest difference between software distributors in China and other markets is the comparatively extra workload that Chinese resellers put on Western software companies. This is especially true for software that is not already a well-known solution in its space. While Chinese partners will often seem excited when approached, in our experience they will not commit to your products or services immediately to the level that your company is hoping for.
When Western brands do put this expectation on their software distributors in China, it often leads to significant problems. Simply put, Chinese resellers have different motivations and are not equipped to take the lead on running your channels, even if they say they will.
For example, through one of our clients, we’ve had the opportunity to work with one of the top software distributors in China in a specific vertical. The reseller is the company’s top channel in China, with over US$10 million in annual revenue, has a dedicated sales team with nearly 200 technical support staff, provides China certification, creates localized training and does monthly marketing events. When we asked the software vendor about their opinion on this partner, they answered, “they are better than most and very strong technically, but like all of our vendors in China, they don’t do much to sell or close deals and still heavily rely on us to bring them leads.”
Most partners will not agree to any meaningful business plan or minimum requirements in the early stages of a partnership. Software providers should not view signed agreements at this stage as binding, as partners very often will not. Mostly, partners see agreements in the beginning as a way to appease Western companies in order to get the partnership started. Their willingness to materially invest, however, is dependent on how the first 3 to 6 months progress. During this time, resellers will expend some resources to find qualified opportunities, but they are still taking a wait-and-see approach towards the viability of the partnership.
In these early stages, partners prefer the process of going after projects to be a collective activity with the software provider. Generally, they will start by conservatively reaching out to a select group of internal business development team members that will have discussions with their internal sales teams. Often, they will be reluctant to let providers speak directly to their sales teams – or bring you to customers – until they are familiar with your team personally, understand your products, and have confirmed the value proposition with their sales teams. As trust develops, they will start bringing you more deeply into the process, including joint sales calls with select customers.
In order to operate independently, resellers require that providers deliver detailed FAQs, case studies, technical documents and other collateral that can stand on their own and answer questions clearly and directly. In China, given the communications challenges and the number of people that can be involved in the evaluation and decision-making process, if it is not written down then it might as well not exist – too much is missed in conference calls and face to face meetings.
The sales process will typically be longer than in the West and will start at a more basic level. Once your team is involved in sales calls, expect to have to repeat basic information every time (e.g. provide the “big picture”), as there will almost certainly be new people brought into the conversation on the customer side.
Technical teams are usually only in meetings in order to receive answers to questions that their executives have asked them. It’s important to note that their evaluation process is often based on technology from previous projects. What this means, is that unless you have a local resource that can work with them on a new testing methodology, your key advantages may not come to light as their testing is based on criteria developed for another software.
Training – for both resellers and end users – is key. Software distributors in China expect providers to supply not only an extensive and localized knowledgebase, but also be available to offer hands-on support for complex issues. Many Western providers assume that Chinese end-users will “just get” the basics of their products. However, in practice, Chinese users have varying levels of experience and education, and fundamental differences in accepted UI/UX practices between Western and Chinese software mean that understanding and usability should not be taken for granted.
Well developed China channels can be a great go-to-market strategy for global technology solutions companies. On a regular basis, we are approached by companies that want to use a China channels strategy to expand into the market. Typically, the conversation, goes something like this:
“We want to find a few key China channels to invest in our business and take the lead on developing the market. We have been very successful with this strategy in [insert country] and want to replicate this in Asia.”
We wanted to touch on some of the reasons why global technology solutions companies need to be clear about what they want, and take a hands-on approach to China channels building.
China channels expect you to do the heavy lifting, at least at first
China channels have been working with Western companies for over 40 years and they know firsthand that the key to success in China is not in their hands, but in how the Western company approaches and invests in the China market. Generally speaking, the largest difference between China channels and other markets is comparatively extra workload that Chinese channels put on Western tech companies.
While Chinese channels will often seem excited when approached, in our experience they will not commit to or follow through on what your company is hoping for when first approaching the market. There are legitimate reasons why they cannot take the role you envision; and you don’t really want them to either, as it often creates more problems than solutions.
Simply put, China channels have different motivations. While they do know the local market, for most solutions they are not equipped to take the lead on building proper messaging and sales strategies.
Trust needs to be built
China channels expect and need you take the lead on driving your business in a new market. Surprisingly, they may even expect you to be equally focused on bringing them deals. They are also evaluating your credibility as a partner, and need to choose partners that show commitment to China.
In the early stages, China channels prefer the process of going after projects to be a collective activity with the provider. Generally, they will start by conservatively reaching out to a select group of internal business development staff, who will then reach out and have discussions with their internal sales teams. Often, they will be reluctant to let providers speak directly to their sales teams – or bring you to customers – until they are familiar with your team personally, understand your products, and have confirmed the value proposition with their sales teams. As trust develops, they will start bringing you more deeply into the process, including joint sales calls with select customers.
Know what you want from your partner
Many companies approach partners with an attitude of: “here is my technology, what can you do for me?” Western executives often walk out of meetings with potential China channels partners disappointed because they felt the partner didn’t grasp their technology or ask the right questions to demonstrate their level of seriousness. The reality is, however, that many resellers or distributors don’t need to learn the ins-and-outs of your product and technology: they see that as your job. What they see as their job is to deliver a product that is “good enough” to get the deal over the finish line. Ultimate success will rely on many more aspects than simply your technology and price.
While potential China channels partners are happy to discuss all the ways in the world that you can cooperate, in an ideal world it is best to be clear on your expectations in advance. Do you expect them to bring you opportunities? Host your infrastructure? Provide technical support? Co-market or independently market your products? The more you can share with them, the better. We recommend using a straw man model or proposal whenever possible so both parties have a clear starting point to discuss what is possible and realistic. Open ended discussions almost never go anywhere useful.