Forewarned is forearmed: Entering China’s MR sector

A Research Business Report Exclusive

MobileMeasure

*An abridged version of this article appeared in the February/March 2014 issue of Research Business Report. For your reading convenience, we highlighted the portions that appeared in print with a green background.

MARKET RESEARCH IN CHINA – THE COMING WAVE

China has moved quite rapidly in the last two decades to grow to be the second largest market by GDP after the USA. In the coming years, we should expect to see China increasingly dominate across a number of sectors and industries.  Take for example auto industry, where the US has been a dominant force for decades, last year saw China become the number one car market globally. As consumerism continues to grow in China whole new sectors, categories and industries are being conquered.

When it comes to market research (“MR”) however, China is still quite a laggard. The MR sector in China is shockingly small relative to the size of its economy and population (MR spending in China PP is a mere 1.21 compared to 43.31 in the USA). While MR in the US is by far the largest market globally, there are also the issues of a developed nation reaching a level of maturity and therefore stagnation that China is quite far from. Looking at recent figures, the US MR industry size is roughly 8+ times the size of China. In spite of China’s current 6th place in the MR industry sweepstakes, it is the only nation of the top 10 clocking growths of more than 5% (they grew at 7.7% in 2013). Further this 7.7% has been the slowest in the last 14 years of continuous double digit or near double digit growth!

More than GDP, the total Ad expenditures is a better indicator of where MR is at in a country. As Ad spending increases, MR spends also increase as marketing efforts get further fine tuned. From the charts below you will see that China’s ad spending per person (“PP”) is the lowest of the other countries listed. Even Brazil, the only other developing country in the list spending roughly 3 times more on ads per person than China. Finally if you look at MR spending per person the gap becomes even wider, with Brazil as the only other developing country in the list again being the closest to China. You will see though, even Brazil spends 3.4 times per person more than China does on MR. All these numbers foretells tremendous opportunities for MR in China in the coming years, as the market is still underserviced and untapped.

No.

Country

MR

(in mil US$)

GDP

(in mil US$)

Growth Rate

Population

Ad Spending PP (in US$)

MR Spending PP (in US$)

1

USA

13,756

16,244,600

2.80%

317,615,000

555.04

43.31

2

UK

5,076

2,417,600

0.20%

63,705,000

394.79

79.68

3

Germany

3,321

3,425,180

0.90%

80,619,000

351.16

41.19

4

France

2,568

2,611,221

0.00%

65,844,000

253.48

39.00

5

Japan

2,234

5,960,180

2.20%

127,180,000

389.84

17.57

6

China

1,651

8,358,400

7.70%

1,360,720,000

38.87

1.21

7

Brazil

823

2,254,109

0.90%

201,032,714

112.07

4.09

8

Canada

769

1,821,445

1.70%

35,295,770

396.65

21.79

9

Italy

749

2,013,392

-2.40%

59,943,933

230.72

12.50

10

Australia

733

1,564,419

3.70%

23,397,054

662.05

31.33

SOURCES:

  • MR and GDP figures shown in millions of US$
  • MR figures: Esomar’s GMR Study 2013
  • GDP figures: Wikipedia.org, United Nations 2012
  • Real GPD Growth figures: Wikipedia.org, CIA World Factbook 2012
  • Population figures: Wikipedia.org, United Nations 2013
  • Ad Spending figures: eMarketer.com’s Media Study, 2013

The market and Ad spending has grown so rapidly that in the recent past MR was not always a must have. The reason being that the market has grown so rapidly and in such leaps and bounds that it was simply considered not as necessary in the past. A tough global economy, a enhanced competitive market is all contributing to a demand for increased consumer insights in China. Today’s environment is not just more competitive, but with rising input costs and tightening budgets all around things are going to continue to get tougher. Despite this, China remains as alluring as ever thanks to its expanding market. It will just be a far more competitive environment.

In this new phase of China’s growth, some of the international agencies are doing well; almost all mid- and small-sized agencies are growing. However, it is the larger, international agencies that are finding things not as rosy as they envisaged. But all in all, most agencies are growing, which one would expect in this market (China grew at a rate of 7.7%  this past year, an admirable feat even being the slowest growth rate for China in 14 years[1].) From a research industry stand point, things will only get better, which also means that competition will heighten and knowledge of the market environment will become more crucial.

In my experience in China, the evolution of MR in China up to today can be broken down into three distinct parts:

  1. Pre-Beijing Olympics, prior to 2008:  I refer to this period as the ugly duckling phase, where China had been open to the world for a while, but only the most adventurous had arrived to stake their claim. These adventurers gained tremendously without having to be pushed to deliver an evolved or high quality service, as local client demands were relatively low and there was still a lot of growing business demand. MR services were largely pushed to the backburner. In this environment, a lot of shoddy research work went out the door and that naturally led to many unpolished researchers getting a foothold in the system.
  2. Post-Beijing Olympics, 2008 – 2010:  Following the Olympics, the world seemed to have noticed China more closely. It was as if everyone suddenly realized that while the rest of the world was economically shrinking or even collapsing, elsewhere China was still showing growth. Those who had hedged their bets in China early prospered. Those who entered China during this period would have struggled, as everything became tougher. Competition for research projects rose, costs started to rise and to add to that clients started demanding better research. The end of the last decade was full of action within China as firms upped their game in China. Further not only did budgets not go up proportionally, they got squeezed by multinationals and transnational corporations which were going through the toughest recession in modern times. This period saw a lot of consolidation, a lot of firms cutting flab, streamlining, closing businesses, and moving out of China upon realizing it was not the free land of milk and honey earlier dreamt of.
  3. The end of the early millennial years, post-2010: After that tumultuous post-Olympics period, I believe the real growth of market research in China truly began. The global economy stabilized (relatively), client requirements grew, research providers had upped their game and the general industry matured considerably. A second thing emerged that was always there but not considered in the mix earlier, especially by international firms and expat researchers. This was the local agencies and local talent. They have come out in droves and made an already competitive market even more so. To add to the delight of the clients, in a lot of areas they deliver a world class service.

MR Potential in China Summary

  • A huge market which is currently nowhere near its true potential
  • A dynamic market containing 34 provinces, all with their own cultural nuances and development stages
  • Rapidly changing from a former nation of shortage to growing consumerism
  • Redefines the term “you get what you pay for”. Everything is available at every conceivable price point
  • Currently the top urban centers lead the consumption, but rapidly the tier 2 & tier 3 cities are picking up the baton.
  • There is a lot of untapped educated talent available in China, which is becoming a valuable resource as the local MR market continues to develop in earnest.

These points bring up the obvious question, “If things are so rosy, then why is it so hard for foreign companies coming into the country today?” The answer can be as complex or simple as we want it to be.

Early entrants into China had some unique advantages (less competition, low expectation, etc.), though there were other challenges (language, unorganized market structures, skill shortage, etc). However, today the list of challenges has grown but they are very different. Below is a summary of the key factors making the MR market both interesting and also promising:

-Local Competition: Local firms are adapting faster than foreign companies as how to conduct research in the China market, indicating that the local talent is starting to take off as local demand is rising. These local firms are also taking on international research projects in the larger APAC region and getting competitive beyond their own borders.

-Language Barriers: For MR in China, language differences is obviously a barrier and eventually those with the necessary local knowledge (most likely native Chinese researchers or those who have spend many years in China) will be needed to complete project delivery. This is a huge blind spot that a lot of international companies never completely overcome.

-Untapped Talent: As previously mentioned, there is a lot of untapped talent available in China in the form of both growing local firms and a hoard of highly educated, job-seeking Chinese grads.  In 2013 alone, a record seven million students graduated from Mainland universities with an additional 300,000 going to overseas universities (primarily in the US and UK) to study. Higher education is quickly increasing in China, with the post-grad generation being often characterized as determined hard workers with a talent for putting in long hours. With the high unemployment rate for the newly graduated in China (there are 15% fewer jobs available compared with only last year[2]), a growing MR job market would offer a new opportunities that would be very attractive to this group.

-Uniquely Placed: Also important to remember is that China is truly incomparable to most countries in the MR world: like the U.S., it has a high GDP and the rate of growth suggests that the two countries will soon be equal in that regard. However, China’s per capita GDP still matches that of many developing countries, even as a consumer-driven middle class is starting to slowly emerge. Thanks to this gradually increasing consumerism, prominently in the urban areas, in some regards Chinese consumers are quite similar to US consumers, but of course deeper research is required. A joint study done between 2011 and 2013 by the American Chamber of Commerce & the multinational corporation Booz strongly indicated that Chinese consumers in general—but particular those in the larger, more developed cities—are expecting greater consistency and integrity in their products.

-Multiple Generations together: One particularly unique and difficult aspect of the Chinese market is that every generation is privy to a different part of China’s volatile history, with the elderly, middle-aged, and younger generations all having distinctly different values. For example, although the automobile industry is rapidly expanding in China and more well-to-do families are buying cars, the traditional methods of shopping (walking home from the market or taking public transit) still hold true for the older generation of shoppers (a sizeable group in China given 20% of the population is over 55), so that the average Chinese consumer has to go shopping far more often than their US counterpart.

-Internet and Social Media: Mobile use (for internet surfing, television watching, searching for deals and of course social media/communication) also plays a far larger role in the Chinese consumer’s life than it does the average Western consumer. In the top urban cities, which is driving the consumerism in China the social media awareness and intensity both via PC’s and mobile is arguably the highest in the world. Furthermore, a recent study of many developed and developing nations done by PricewaterhouseCooper found that China appears to be already leading the world in mobile/online shopping habits: 58% of the PwC survey respondents in China said they had shopped online at least once in the past week, compared with the 29% global average found in the study. [3]

Myths About Chinese MR

  • Knowing English is a sellable skill in China. This is simply not true. While it may have been valued as a necessary communication bridge once, it is increasingly becoming less so.
  • Business is only conducted via back channels. This may be true for some organizations, but is definitely not the norm. As China business interests and ambitions grow, a lot of checks and balances are being put in place (especially in the large corporations) which penalize rather than reward such behavior.
  • MR is not necessary in China. This perception is often to do with how some firms have found early success in China quickly or with little or no effort. For example, even products and categories which have traditionally not been consumed such as dairy and pizzas did roaring business a couple of years ago. These companies succeeded by literally just introducing their products into the market without much research or having to bother over strong marketing or delivering a quality product that would fit the local needs. Today, these same industries are crowded and consumers are getting to be more discerning, leading to a lot of rejection of bad foreign products. So product or service trial being high is not a guarantee of success.
  • China wants to “ape” or completely imitate the West so no localization of products or processes is required. This myth has led to the downfall of many a firm, or at the very least left a negative impact on its business. Multiple American chain restaurants offer similar products in the US, few have grown and dominated the China landscape as Pizza Hut has amongst the pizza chain restaurants in China. Pizza Hut deliberately changed its menu in order to better match Chinese tastes (Pizza Hut is owned by Yum! Brands, also the owner of KFC which followed the same food localization model in China) leading to its rapid growth and domination of the pizza fast food business across China. While Dominos has not been able to make the same inroads, maintaining a modest business in Shanghai and Beijing after being forced to pull out of the smaller cities, Pizza Hut has become an ubiquitous name across China thanks to its move early to localize.
  • Since China lacks skilled resources, it is best to import talent by the truck load and you are home free. Unfortunately, this is not only an expensive and wasteful drain on company finances, it is also unproductive. Ultimately, a healthy mix of culturally-sensitive foreign and local talent can make quite a heady combination.

There are enough examples of companies that seem to believe these myths, who come into China all guns blazing (including MR companies), then shut shop within a year or two. For any person who has heard these common stories of defeat, one has to wonder if only the old guard (foreign firms who entered many years prior) can survive in China, with no place for other smaller boutiques and medium sized firms to thrive.

Of course this is not true! A company of any size, both small boutique and larger, can certainly thrive in this market which is expected to continue to grow to become the largest in the world. Indeed, there are already a sizable number of foreign owned and managed companies / consulting firms which are doing very well in China.

These firms have one essential thing in common: a team that knows China intimately and has been embedded in the culture for a considerable time. Gone are the days when expats arrived fresh off the boat and could set up shop successfully. Trying to do things with the old “fresh off the boat” approach is simply considered to be asking for trouble with a capital T. All said and done, the environment is not getting easier, it is demanding more expertise and a deeper understanding of the Chinese market and landscape. The silver lining, of course, is that the market is also expanding, providing more opportunities for those willing to adapt.

Methods of Entry

Given this background we come to the big question, “So how can we successfully traverse this ocean?” Some of the well documented methods to enter China which any good lawyer would be able to give you are listed below:

  • Local partner: Known as a Joint Venture (“JV”) with a local company, where the legal hoops are minimal compared to setting up one’s own company. This is often considered a risky proposition as there is much less control and the local partner will often call the shots. However, in the JV’s favor is that it is a cheap option and good for testing the waters before fully investing in China. Be advised that it should be considered only if you know your partner very well, as JV-related fraud is still a rampant problem across China.
  • Liaison Office: Rather than being a partner, the Representative Office (“RO”) acts as the liaison or channel of communication for your firm and the client. These offices are legally one of the easiest entities for a foreign company to independently establish (source: Chinalawblog.com). However, the RO is solely a means of communication between the local activities and the company back home. RO’s are not permitted to engage in any profit-making activities of their own, nor can an employee of an RO sign any contracts or raise invoices for the foreign company. However, as a local-based research office, local coordination team or promoter of your foreign company, an RO is a safe and more affordable way in which to engage in noncommercial China-based businesses.
  • Forming your own company: The Wholly Owned Foreign Enterprise (“WOFE”) is a 100 percent foreign entity, with the holding company being located overseas. If the holding company is based in Hong Kong or Taiwan, it will be given different privileges than a holding company that is based in the US or elsewhere. This is the only way to maintain full control of your company and run all forms of business within China (including billing, contract signing etc.), but the power comes with its own baggage of set-up time, lawyers, and capital infusion limits amongst other issues. I strictly advice investing in this as an option only when completely sure of your intentions in China for the long haul with a minimum window of five years. A WOFE is not a good option for those who wish to dip their feet into the market, the least of all reasons being that exiting can be a time consuming and expensive exercise.

Some Non-Traditional Soft Entries. Please note, entry strategies vary from firm to firm based on their size, objectives and expertise. I recommend that you only pursue a strategy based on consultations, as well as your own circumstances and objectives set for yourself in China:

  • Virtual Partnership (“VP”) – In a virtual partnership, the foreign agency makes an entry by partnering with an existing company already on the ground and established in China. This VP Company will act on behalf of the foreign entity by selling, servicing, managing local billing and overall acting in the best interests of the foreign company in exchange for a retainer fee. The fee components would be calculated by the resources being allocated, the manpower required (dedicated or on a need basis), etc. This arrangement ensures that the foreign entity does not have to dedicate its own resources, while still being able to sell its branded services to clients under the umbrella of VP partner’s administrative company.
  • Remote Host (“RH”) – If a bit more skin is required in the game, the foreign agency can find a local partner and use that partner company as a “China base,” while placing their own people alongside the RH. The local partner company is essentially used only for office space and organizational infrastructure, allowing the foreign company to reach out to potential clients under its own brand. In this case the China partner company only offers administrative infrastructure, with any business advisory and management being limited. This arrangement could be a good valid option until the foreign entity has learnt enough about the environment and business opportunities. Once fully brought up to speed, if the foreign company is then willing to take it a notch higher, they can begin to bring in the required capital investment needed for setting up their own organizational infrastructure within China independently.
  • Licensing Partnership (“LP”) – often foreign companies come with proprietary solutions that are valued and have a potential to grow. However, perhaps only one client in their home country has asked to apply these services in China. Additionally, the project is not large enough to justify setting up a team and investing any capital (however modest) to execute the work for this one client. It is anticipated that once the project is implemented, more work is sure to follow both from the client and others. Both the Virtual Partnership and Remote Host options are reasonable in this case, but a third option of an LP would also work well. This allows the foreign entity to license their solution for a limited period of time to a local company until the company feels ready to enter in a more comprehensive manner.

Williams’ Advice

Setting up a WOFE (wholly owned foreign enterprise) in China can take several months, sometimes up to six months. If I had to set up my own China based firm again today, I would explore a soft entry partnership with an existing foreign-based market research company in China. Because things today have become more competitive and the input costs to run an organization also keep growing, I feel a partner helps to ease the learning curve and ease into the environment painlessly until one gets into the rhythm of the China business environment. Although I did not achieve results painlessly, the path I did choose has worked well for me and I am grateful to be here in China during this dynamic period of growth and change.

China is doubtlessly an exciting and fascinating place, but I must advise caution, extreme caution when entering this market. China can be very rewarding to those who thread carefully and profit from its size and growth; at the same time it can be also expensive, tough and unforgiving on organizations and individuals who discount the challenges the environment poses. Think carefully about how you want to enter and the amount of resources you are willing to put on the table for China. I would like to finally advise that in addition to being cautious, come with a lot of patience. There are many rewards to be had in this huge market, despite things getting more competitive and demanding, but success will not come without creative thing and perseverance. Most of all enjoy your time in China as there is much to see and experience.

Feel free to contact me at navin@mobile-measure.com, seek a telephonic or in person meeting with me if you have China on your mind.


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