Everyone is talking about the People’s Republic of China (PRC or China), and not just because the country is hosting the next Olympic Games. Today China stands tall as a one of the fastest growing economies in the world. In the last three decades, as per the latest figures, China’s economy grew by 10.6%. The Chinese economy has gone from being a lumbering agrarian economy 25 years ago to a rapidly developing economy today. China-based factories make 70% of the world toys, 60% of world’s bicycles, 50% of world’s shoes, and 33% of world’s luggage.

In the first part of this article, I discussed the miracle of China’s economic growth and what multinational corporations have done to succeed—and fail—in the Chinese marketplace. In this, the second part of the article, I will address some of the challenges international marketers face in their efforts to win the hearts and minds of Chinese consumers and other stakeholders. I have discussed issues relating to global branding, counterfeiting, non-tariff barriers and product adaptation in my previous articles and will briefly address them here.

MARKETING IN CHINA: MEETING THE CHALLENGES

Many businesses that could not make it in China failed to realize the challenges they might face as they rushed to woo 1.3 billion residents of China. One of the biggest discoveries these businesses made was that outside the major urban areas of Beijing, Shanghai and Guangzhou, it was a real challenge to do business here even when they had local partners. Widely dispersed consumers with limited spending power; fragmented retail, distribution and media channels; and scarce local talent throughout the industry value chain created marketing barriers that were costly and time consuming to overcome.

Some of the challenges faced by international marketers in China are discussed below:

Cultural Challenge

China is one of the big emerging markets with strong leadership, hardworking and intelligent people and a habit of self reliance. China represents political, traditional and business cultures with their own unique characteristics and distinctiveness. Confucianism, the Dynasties, the Republic of China, Buddhism and Communism have all influenced the beliefs, behaviors, and practices of Chinese people and businesses.

Many different cultures and Chinese comfort zones (tastes, beliefs, values, attitudes and a second generation of the Chinese one-child policy) have produced a culture of high expectations. These consumers are not worrying about how to pay for a pack of cigarettes, a television set or a bicycle, as they did two decades ago. Along with this new culture there exists an ancient culture representing a billion or more people who essentially buy food and clothing at or slightly above the subsistence level.

Marketing opportunities exist in both these cultures. Savvy marketers must find profitable niches in one or both these segments by understanding the cultural differences before pushing products or services in this land of 1.3 billion inhabitants.

Regulatory Challenges

Beijing has officially complied with its commitment to open up the domestic construction market as part of the agreement on China's accession to the World Trade Organization (WTO) in 2001. But it has placed formidable obstacles in the way of foreign companies trying to take advantage of this opportunity. International marketers continue to have concerns about fair market access due to strict testing and standards requirements for some imported goods. A lack of transparency in the regulatory process makes it difficult for businesses to plan for changes in China’s market structure.

Intellectual Property Right (IPR) Challenge

China has long been the number one source of counterfeit goods marketed across the globe. The United States Trade Representative (USTR) 2006 report to congress states that the levels of piracy in China across all lines of copyright business range between 85% and 93%, indicating little or no improvement over 2005 despite repeated anti-piracy campaigns in China. Since joining the WTO in 2001, China has strengthened its legal framework and amended its laws and regulations regarding IPR, but weak enforcement continues to impede the IPR system prevalent in China. My article on counterfeiting will shed further light on this issue.

Segmentation Challenge

Global marketers are beginning to realize that China is not a single homogeneous mass market. A good starting point is to review six distinct markets in China and research and analyze the unique characteristics of each region to identify the markets that offer the best opportunities given your corporate mission, culture, competitive advantage and resource constraints.

The World Bank ranks the six regions from the most attractive to least attractive in the following order:

1. Southeast (Jiangsu, Shanghai, Zhejiang, Fujian, and Guangdong);
2. Bohai (Shandong, Beijing, Tianjin, and Hebei);
3. Central (Anhui, Henan, Hubei, Hunan, and Jiangxi);
4. Northeast (Heilongjiang, Jilin, Liaoning);
5. Southwest (Yunnan, Guizhou, Guangxi, Sichuan, Chongqing, and Hainan),
6. Northwest (Shanxi, Shaanxi, Neimenggu, Ningxia, Qinghai, Gansu, and Xinjiang).

Since market research is quite underdeveloped in China, marketers find it hard to find accurate facts, figures and consumer insights for any of these markets. Primary research is almost a prerequisite to understanding the market including the six regions identified above.

Product and Pricing Challenge

In China, the winning consumer product companies are literally forced to routinely and regularly improve both the products and marketing methods to remain viable. In other words, successful companies must undertake rapid product innovation and adaptation supported by extensive product testing and creative use of pilots. Companies willing and able to participate in multiple categories are able to amortize their fixed costs across a broad range of products and are able to secure greater cooperation from distribution channels and generate profits within a reasonable time. Multinationals such as Nestle, President Foods and DANONE are successful because they are able to do just that. Moving beyond the premium or luxury brand even in everyday product categories is also a challenge.

When it comes to product positioning, taking the high ground and introducing cutting-edge products is effective in building the brand image. Consumers pay a premium for products they like to be seen using in public as is evidenced by the success of the Starbucks and Nike brands. New approaches to China’s consumer markets include stretching premium brands vertically to reach the mass market, adjusting product formulations and packaging, and modifying manufacturing processes so that prices can be set at lower levels for price sensitive segments.

Branding Challenge

As the Chinese economy booms, a proliferation of products—both home-grown and international—use branding to gain and maintain mind and market share. If a brand in a product category is successful in China, it often opens flood gates of competition from local and global players. Due to linguistic and cultural differences, global branding rarely works in China. Chinese consumers appreciate a brand name that is catchy, memorable and distinct and says something about the product. Chinese consumers expect more in terms of how the names are spelled, written and styled and also whether they are considered lucky. My article on “global branding” provides additional insights relating to this challenge.

Distribution and Logistics Challenge

Consumer product companies find it extremely expensive to get their products into the mass market in China. The country’s transportation and logistics sector is only just developing. Historically state owned producers tended to transport their own goods, and logistical services were practically non-existent. Many warehouses in the country are still poorly designed and equipped (e.g., for climate control, segregation, automation).

China Rail’s near monopoly on rail transport has discouraged development of a service orientation. Loading can be subject to approval of the consigner’s loading plan, one or more inspections of containers, and loading fees that represent 20% to 30% of actual transport fees. Access to service may depend upon relationships with local rail authorities.

Apart from a limited number of major department and grocery chains in major cities, there are tens of thousands of small stores and street outlets in the countryside, all of which have very cluttered shelves and antiquated operating practices.

Communications Challenge

Marketing communications which includes positioning, advertising, public relations, sales promotion and personal sales management is equally challenging in this market. Chinese consumers are not easily persuaded by advertising, although advertising is absolutely essential to create brand awareness. Brand values, on the other hand, are better established by word of mouth. Chinese shoppers peruse package information very thoroughly when making purchases. Packaging plays a strategic role in marketing communications here.

Final Words

To investors and marketers, China represents a low-cost base for export-oriented production as well as a vast market yet to be tapped. The market, however, is viciously competitive, and competition is not just from global corporations. China is attempting to build "national champions" that can compete with foreign companies, not just in China, but in the global marketplace. To win in this market, the players must commit the best of their tangible and intangible resources to match their key global and newly emerging domestic rivals.

Entering the market with a clear understanding of China’s business and buyer culture and psyche, it’s regulatory and technological environment, marketing infrastructure, and other market barriers goes a long way in separating the winners from losers. Finally, no business can expect to succeed in China through remote-controlled management from overseas headquarters or through ‘paratrooper’ managers from overseas. Setting foot on Chinese soil and developing the requisite relationships and contacts with government and non-government entities is an important first step in this challenging market environment.