China has become one of the most lucrative markets in the world. With its huge domestic market, rising middle class, a slow but steady diffusion of Western brands, practices and consumption patterns, and the rapid expansion of its second- and third-tier cities, China offers global brands an enormous growth opportunity. It is not surprising then that most global brands have made a beeline for the Chinese market, either on their own or via strategic alliances, joint ventures or acquisitions.
While the market opportunities are plentiful and evident, what makes success in the Chinese market challenging is the underlying, and often subtle, differences in Chinese customers’ attitudes toward global brands. While the general trend in bigger cities, like Beijing and Shanghai, has been an all-out embrace of Western ways, this is not the same beyond these hugely urban, affluent, tier-one cities.
Most of the global brands that made an early entry into the Chinese market were almost exclusively focused on the relatively safer tier-one cities. However, three factors are increasingly impacting how global brands will continue to operate in the coming years, and more important, how they will continue to remain profitable in the various market segments of China.
The first factor is that the realities of competition and market saturation are catching up with these lucrative market segments. When China signed the terms and conditions of the World Trade Organization to let foreign competition into Chinese markets, the immediate boom was restricted to a few pockets of highly affluent, urban centers. But in the last few years, the Chinese government and the many companies operating in the country have enabled the growth of many second- and third tier cities.
Competition has increased as established brands look to expand beyond the rapidly saturating urban markets. This has resulted in the creation of many diverse markets beyond the Chinese urban core and facilitated in the expansion of brands and businesses alike.
The second factor is the growth and challenge of local Chinese brands. As the Chinese market opened to foreign competition, many local entrepreneurs grabbed the opportunity to start companies to leverage the local knowledge of customers and create local brands.
During the early phase of China’s explosive growth, customers increasingly favored Western brands. However, young Chinese have gradually come to patronize homegrown brands, especially after the successes of the likes of Lenovo, Li Ning and Haier in global markets. So what was once a landscape open to global brands is now contested by many highly popular homegrown Chinese brands. Having access to critical resources, these local brands are venturing beyond just being the original equipment manufacturers to Western brands and gradually capturing the hearts and wallets of Chinese customers.
The third factor is having a profound effect on the way the Chinese business landscape is shaping up. With economic conditions improving in China, the overseas Chinese diaspora is increasingly taking note of the changes. Indeed, one of the defining trends of the Chinese market is the return of many Western-educated, second-generation Chinese managers and entrepreneurs to the mainland to found and run businesses. This is contributing to a gradual shift in and an acceptance of modern ways of doing business and building brands.
This, combined with the government’s push to encourage local entrepreneurship in terms of providing favorable loans and access to regulatory infrastructure, is altering the Chinese business landscape significantly.
These three changes have begun to have a profound effect on global brands trying to establish a strong hold in the Chinese market, especially by leveraging the growth of multiple business centers beyond Beijing, Shanghai and Guangzhou. As these brands seek to target these newly emerging centers of business, they will benefit by acknowledging that the business practices that worked in tier-one cities are not readily portable to tier-two and three cities.
Brands should adapt the variants of products they offer, the price-points at which they target customers, the diverse mix of communication channels to reach customers and the channels they use to connect with customers. Adapting this mix to match the needs of customers can greatly help these brands successfully manage the changing landscape.
Martin Roll is a global business and brand strategist. His website is at www.martinroll.com.