The subject of the classic 1973 Bruce Lee movie Enter the Dragon involves unforeseen risks developing when seeking opportunities. Likewise, companies seeking to sell their products and services in the Chinese marketplace have encountered unforeseen obstacles in implementing successful strategies. While many companies such as Proctor & Gamble Co., Honda Motor Co., Ltd. and Motorola, Inc. have enjoyed success, some have suffered costly struggles. Success in the Chinese marketplace requires a comprehensive understanding of markets, channels, competitors, and customers in order to implement a strategy with the appropriate risk-and-return profile.

Recently, I joined Stout Risius Ross (SRR), a financial and operational advisory firm. We partner with companies and their suppliers to transform operations and develop a roadmap for remaining competitive long term. When it comes to being an automotive supplier, we have identified several key factors that should be considered when developing long-term strategies. One key opportunity to remain competitive in a global market is expanding into developing regions such as China.

In a recent conversation with my colleague Jeffery Pluto, managing director of SRR Asia, we discussed what an organization should consider when developing a strategy for entering the Chinese market. Ultimately it boils down to three fundamental questions.

1. What is the market opportunity?

Any assessment of the market opportunity requires a thorough understanding of the “3 C’s”: Customers, Competitors and Channels.

• Customer—Identifying major customers; overall market size, profit potential and growth potential (by product line). In addition, the customers’ buying criteria, such as brand, price and sourcing decisions, must be determined.
• Competitor—Includes the identification of primary competitors and their key attributes, (e.g., industry and product range covered, product differentiators, pricing and margins, future moves and financials). This analysis also allows for the identification of potential partnerships.
• Channel—Incorporates the current channel structure (and relative share by channel), channel evolution and key trends, purchasing criteria by channel and important channel candidate selection criteria (e.g., the ability of channel members to provide timely product support).

2. What are the best entry options?

The best entry options depend upon five primary factors:

1. Strategic focus on select segments, followed by product line expansion (customer focus).
2. Sufficient product breadth and customization to local culture and tastes to provide customers with several choices (product depth).
3. Geographic priorities in terms of key cities, provinces, or nationwide coverage (geographic coverage).
4. Channel options, such as areas to cover, direct sales and/or channel partners (distribution options).
5. The cost of resources available for entry weighted against the potential rewards in the marketplace (economics)
   • Channel options such as areas to cover, direct sales and/or channel partners (distribution options).

Three to five alternatives are typically developed for each factor. The alternatives are analyzed in terms of Conservative, Realistic and Aggressive approaches and lay the foundation for several market entry strategy options, which are mapped against the client’s risk profile, return objective, available resources and time horizon.

3. What degree of control must be maintained during implementation?

A “de novo market entry” strategy is extremely difficult to achieve in China. The challenges of identifying and hiring local talent—in addition to understanding the maze of laws (local and national) and regulations—are daunting. As a result, many companies strongly consider establishing a relationship with a Chinese partner to smooth the entry process. However, working with a partner requires addressing several key issues, including:

• Operational Control—Dynamic changes in the marketplace, business cultural differences and, in some areas, a less sophisticated information infrastructure create difficulties with operational control.
• Intellectual Property (“IP”) Protection—While the Chinese culture views the appropriation of knowledge for use by the people of China to be morally right, the central government has finally recognized the deleterious effects of piracy and is moving to enforce protection more rigidly.
• Strategic Alignment—It is a necessity to achieve goal alignment at the beginning of the relationship and frequently thereafter.

While the Chinese marketplace provides excellent opportunities for the right automotive company, it is not a solution for reducing operational costs. Only with careful consideration of China’s unique risks may a Chinese market strategy achieve success. 

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