China represents a market opportunity of vast potential for start-ups and tech companies, but it is one with a rather large question mark hanging over its head. The value of going to market in China is generally understood to be lucrative. Newly formed commercial ventures and established industry players alike are attracted to the possibility of expanding into China.
Yet the exact formula for success remains elusive and largely unknown for companies in North America. Although there are economic and political signs substantiating the relevance of establishing a footprint in China, there are still considerable obstacles that can stop tech companies dead in their tracks.
The Demand for Entrepreneurial Innovation in the Chinese Market
Despite turmoil surrounding the multiyear slowdown in China’s economic growth, China remains the world’s second-largest economy and the largest contributor to global GDP growth. The National Bureau of Statistics China reported an annual GDP growth rate at 6.7% in the second quarter of 2016, meaning China contributed 1.2% of the 3.1% world GDP growth, according to IMF estimates.
In their 13th Five-Year Plan, the National People’s Congress has further prioritized innovation-driven growth in China’s long-term economic development. Public investment in capital for start-ups has significantly increased comparative to other political regions around the globe, with 1.5 trillion Yuan raised in 2015. This comes on top of heavy private investment from the newly wealthy in China who are searching for direct foreign investments.
In contrast, while the United States has had decades of legacy in terms of technology investment, much of this has been in private funds with minimal government support. The level of Chinese public sector engagement into technological innovation thus speaks clearly to China’s long-term prospects of becoming an innovation-driven economy by 2025.
One example of this growing demand for technology innovation can be found in the rise of enterprise and industrial technology solutions. As the Chinese manufacturing industry slows and the cost of labour inevitably grows, robotics and automation technology that meet intelligent manufacturing standards will soon upgrade the industry as a whole.
The implications of these economic and political developments present a strong case in market appetite for technological innovation. Strategically tied to the country’s future growth trajectory, this innovation and technology will be closely associated with the Chinese economy for the years to come. Bearing this in mind, companies in North America would be holding themselves back from a significant opportunity if they did not consider China as a market.
Universal Barriers to Successful Market Entry for North American Companies
While China presents a compelling case for global expansion to start-ups and tech companies targeting high-growth potential markets, it is not a battleground for the weak. Even high-profile tech giants such as Uber have had to throw in the towel this year due to their failure to grasp the Chinese market.
Its difficulty to penetrate is not insurmountable, however. Apple, for example, has finally cracked into China with a deal that ends years of negotiation initially begun by Steve Jobs. But, although not impossible, it is important to consider the common stumbling-blocks companies in North America have come across before attempting to land in China:
Language And Culture
Adopting a mindset to understand the Chinese language and culture is one of the key ingredients for success when accessing this market. Oftentimes, companies will operate in China the same way they do in North America. Companies that do not take an understanding approach to these differences are often dead on arrival.
In a cultural sense, the real negotiations happen after work in China, during a glass or two, or three, of wine. There is often a parallel to Japanese protocols where the meeting room is for polite and correct formalities. North American companies may therefore face frustration encountering a “yes” that turns out not to be binding or never getting a straightforward “no.”
Building relationships in China is critical, but there are many vehicles people can take advantage of to create these connections. These vehicles take the form of trade missions and forums that are held as occasions to cultivate an understanding about China.
Political Channels of Influence and Legal Regulations
The political arena plays a much more nuanced role in China’s tech space due to the heavy public spend allocated to the industry. As a result, politics and innovation are intertwined, with influence in one sphere impacting chances of success in the other. The legal regulations that surround doing business in China can also be an uphill battle for the foreigner.
From my own experience closing a buying office to source components in China, it took two years to open the office, and a year and a half to close it. For someone with a foreign passport, attaining the administrative approvals was not only an enormous endeavour but costly too.
In addition, the increasing trend towards homegrown Chinese innovation can be a roadblock for start-ups. This desire for homegrown innovation can be traced back to the country’s national security concerns, fearing their ongoing reliance on technology from the United States.
However, none of the factors discussed should ultimately deter North American companies from launching in China. In fact, it should do the opposite. After all, the tech start-up that is able to overcome these barriers will certainly thrive and can realize a longer, sustained returns.
Hugh Chow is the CEO of Istuary Innovation Group.