Creating a China business entity: Don’t go it alone

Written by Chad Catacchio

11/12/2020

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.

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