China is going through an unprecedented economic boom and people’s pockets are getting deeper with many ready to embrace new lifestyle concepts and habits. What was until recently unavailable, forbidden or unaffordable is now available and affordable. At the same time, this is a China with many sub-Chinas – the city and the countryside, farmers and businessmen, young and old. Out of 1.3 billion people, only about 400 million live in urban areas. And income distribution is extremely uneven.

A country of contradictions
China is not just a country of extremes, but also a country of contradictions. On the one hand, Chinese people don’t mind traveling for miles in pursuit of a good deal or spend an hour bargaining on bare essentials. On the other hand, they will spend a fortune on premium brands as a manifestation of their social and economic status.

That’s not all. There are significant differences among Chinese buying habits - influenced by their generational gaps and place of origin. For example, those above 35 are more traditional and prefer to shop from local stores while those under 30s are more exposed to Western products. Similarly, those living in coastal cities like Shanghai and Guangzhou have higher spending power as compared to smaller inland towns and villages.

The young consumer group and emerging middle class
It is the young breed of consumers with high disposable income and the vast aspirational middle class of China who are the target audience for foreign companies.

An increasing number of young Chinese with high levels of education belong to the majority of the big-earner-big-spender class. Instead of concentrating on the 8-million affluent households, companies are now increasingly catering to the 30-million middle class families, many of them in second-tier cities. In fact, it is the emerging middle class that has propelled the sale of consumer products like televisions, mobile phones and personal computers in China.

Competition in the market
Amid all the hype on China’s rapid modernization and growth, the Chinese marketplace is not without its fair share of challenges for new entrants as well as those already established there.

Competition is intense. It not only comes from other foreign companies attempting to capitalize on the China opportunity, but also from home-ground companies who enjoy regional patronage, strong connections and a deep knowledge of the local environment. Some of them have grown to become local powerhouses and have become stronger by applying global know-how in a local context. For instance, companies like home appliance giant Haier and PC maker Lenovo have the traits of truly global competitors.

• Haier has grown from a refrigerator factory in Qingdao into the biggest home appliance manufacturer in China and a major supplier to over 160 countries over the last two decades. Its phenomenal success is attributed to the company’s “one low, three high” strategy, the one low being “cost” and the three highs as “value, growth and quality”.
• Lenovo is undeniably the “global Chinese company”. From its humble beginning 20 years ago, it has become the world’s third largest manufacturer of personal computers and its purchase of the PC division of IBM is recognized as the most daring overseas acquisition by a Chinese company. The company’s aggressive strategy of combining low price with cutting-edge technology has made it a stunning success.

However, by using the right strategies and having a long-term approach, many global companies have cracked the market. Procter & Gamble, for instance, is a success story. It entered the market in early 1980s, just about the time China opened its doors to the outside world. Seeing the opportunity, it has taken a long term view to success in China.

Specifically it has shown a long-term commitment to its China operation, introducing world-class technologies to China, building firm relationships with the concerned authorities at both the local and national levels and has developed itself into a strong local company. P&G’s meticulous groundwork as part of its market entry strategy also paid huge dividends. It went to the market three years before it actually started selling its products, during which time it solely focused on creating brand awareness.

Lessons from the front lines
James McGregor, having lived in China for almost two decades as a successful journalist and China investor, in his book “One Billion Customers” mentions that:

• China is modernizing, not necessarily Westernizing. It helps to retain a Chinese essence in your business.
• Avoid joint ventures with government partners unless there is no choice. If required, understand that the partnership is about China obtaining your capital, technology and know-how while maintaining Chinese control.
• Don’t just go by the Chinese feasibility market study. It will be aimed at attracting your interest and not always painting the real picture. Do your own due diligence.
• A long-term approach to China is a must. One must not be bogged down if the initial returns are not as promising as was hoped. Losing focus will ensure you do not recover the value of the time and resources spent initially.
• There is no place for passive investment in China. A company has to be actively engaged in forging relationships, building its brand and securing itself as a local company.
• Don’t equate language ability with business acumen. The savviest of the Chinese businessmen may not know a word in English or has an overseas qualification.
• Don’t bribe. Focus on building a long-term, mutually beneficial relationship.
• An entrepreneur in China must understand politics, but cannot directly participate in politics. Your company also has to help solve the country’s problems.

Conclusion
Despite large-scale investment and interest from foreign players, China still remains a medium-sized market. The high GDP rate notwithstanding, it will take many more years for the Chinese to prove that their spending ability matches the promise their population offers. Overzealous companies, who jump on the plane to China simply looking at the impressive figures, are in for a nasty surprise. However China remains a huge opportunity with many untapped sectors and a large population and growing middle class demanding new products and services. The key factors lie in adopting sound business practices and taking a long term view to developing a local business.

(Source – Knowledge@Wharton, http://knowledge.wharton.upenn.edu/, Emerging Opportunities in BRIC, www.atkearney.com; China’s Growing Consumer Market, www.klakogroup.com)