Why China? Five strategic factors for entering the China market

During our recent webinar series ‘Doing Business in China – FAQs’, Sovereign’s experts addressed many questions in respect of taxation, HR and other practical issues facing foreign companies in the China market.

With so many perceived challenges, why, then, do companies still want to do business in China? Sovereign has identified five strategic factors as to why foreign companies should enter the China market, which are as follows:

1. Attractive Market – China’s vast size, growing wealth, changing demographics and economic transformation continue to create opportunities for well-prepared firms. The China market is larger than that of the UK, Japan and Germany combined, and although China’s economic growth contracted sharply in the first quarter of 2020 due to the COVID-19 pandemic, it has rebounded quickly. The IMF forecasts that China will be the only major economy to post positive growth in 2020 and its economic growth will rank among the top economies in 2021.

Example: Canadian coffee-and-doughnut chain Tim Hortons entered China in February 2019 as investors jostle to convert a nation of tea drinkers into coffee consumers. Since then, the company has grown to 200 locations across 10 cities in China, and its loyalty programme has nearly three million members. The firm secured a further round of financing in May to help accelerate growth toward its initial target of more than 1,500 coffee shops throughout China. World Coffee Portal estimates the total Chinese branded coffee shop market exceeds 21,400 outlets, with annual outlet growth of 2.9% over the last 12 months.

2. Pull Factor – Major client is requesting the company to have a presence in China
Your global customer has a presence in China and strongly suggests you do as well. E.g. SOVCN Client which is a large international tire suppler for automobiles.

3. Competitive Threat – Main competitor(s) has a presence in China that could affect your current market position or hinder your ability to expand in the future.

Example: In global terms, McDonald’s has long been at the top of the fast-food pecking order with 36,000 restaurants worldwide, compared to KFC’s 23,000. But in China, the tables are turned. KFC opened its first branch in China in 1987. It now operates almost 6,000 restaurants in more than 1,100 cities across the country and claims 11.6% of China’s fast-food market. McDonald’s came to China only three years later but has only 2,500 restaurants and a market share of 5.6%.

4. Cost Savings – China’s enormous cost advantage over the leading industrial economies may have reduced in recent years, but with its unmatched scale, immense internal market, heavy investments in automation, well-developed supply chains and steady advances in technology-intensive industries, China very much remains the world’s workshop.

Example: SOVCN client who sources and assembles toys for export to Europe.

5. Push Factor – Company’s stakeholders are insisting on a China presence
PE investor requires the company to enter the China to create synergies for their portfolio

Sovereign China has been assisting foreign clients with their China ventures for almost 20 years. We can support your business and give you the best chance of success. For more information about our services, please contact Sovereign China