Major brands can be found all over tier one cities, but the areas with the greatest potential for profit are possibly third and fourth tier cities in Western China. With so many companies expanding into western China, I wondered if the effort was worth the cost and which companies benefitted the most. For further research, I went back to the books and asked Professor Schwarz, the Marketing Professor of ESSCA School of Management, to get the inside scoop.
Should companies start their business in lower tier or upper tier cities?
That depends on the industry and the capabilities of the company. Luxury brands should start in the larger cities and build a sense of exclusivity. However, if a company is targeting a more price-sensitive Chinese consumer, starting in a smaller city may be a better choice. Every city and industry is different. What works in a company’s home country will probably not work in China, therefore localization is crucial.
Is social media a good medium to advertise through in Western China?
If you are targeting a younger consumer in China, yes. Chinese online shoppers take pains to thoroughly research and know extensive details about products before they buy. If you are targeting China’s growing elderly segment, traditional media tends to be more effective.
What social media platforms are ideal for reaching out to most Chinese consumers?
According to a Boston Consulting Group report in 2014, Chinese online shoppers don’t care much about brands’ painstakingly crafted official sites. Rather, they spend 80 percent of their time online on news, video, and e-commerce sites, and most of the remaining 20 percent on search engines, forums, and microblogs to research the product that they will potentially buy. Having lots of traffic on Chinese based websites such as WeChat, Sina Weibo, Youku and online blogs of key opinion leaders may be more effective than the official websites.
How important is a brand’s digital strategy in China?
Absolutely critical. Brand managers need to know of the rapidly changing digital and e-commerce space in China. One common issue is gray market sellers on Alibaba’s popular T-mall take advantage of popular brand names if the brand doesn’t have the store on that platform already. Burberry, which opened its official T-mall store in April 2014, saw the number of gray market goods drop precipitously after the debut of its store.
Stopping counterfeit goods remains a big concern for many brands. Many companies are bringing new technologies into their supply chains to ensure that genuine product is being delivered to the end-user. For example, a lot of pharmaceutical companies have cracked down on their supply chain and tracked their goods with either barcodes or with radio frequency identification (RFIDs). Since companies can regularly check these tags, pharmacies can detect if their product has been replaced with any counterfeits. By using these technologies to minimize counterfeits, customers can be more willing to trust that the product they are buying is the legitimate product and they may be more open to buying it, thereby expanding the potential market for a product.
What important steps should brands take to ensure that they have rights to their Intellectual Property (IP)?
China has a first to file trademark registration system so brands thinking about entering the market should start the process as soon as possible. In particular, for companies that manufacture and export from China, registering the English language trademark is essential. For companies that sell products and services in China, registration of the existing English and the Chinese language marks for the product is essential. It is a bad idea to build brand identity on a logo or trademark until after it has been formally approved by the trademark office.
Will companies encounter language barrier issues in Western China?
Language misunderstandings are a huge problem. When registering your brand as a trademark in China, make sure to consider how the brand’s name in Mandarin characters is pronounced and perceived in the local dialect. Some foreign brands have a great name in Mandarin, but are laughed at by Cantonese speakers in south China. The best way to remedy this potential problem is to hire local help.
How risky is it to engage China’s western market?
There is a great risk, but also great opportunity. My advice for foreign companies is to move slowly and to conduct due diligence by studying the local market and taking time to build a relationship with local government officials. Also, think carefully before signing any contract.
What is the number one piece of advice you would give to any company looking to expand into Western China?
China is no longer a cheap place to do business and foreign companies need to maintain a sense of trust with the Chinese consumer. For example, the Chinese do not trust local milk brands due to the notorious milk contamination incident in 2008. As a result, there is a high demand for foreign milk brands and the local brand lost most of their customer base. When buying critical products, especially those that are ingested by children, Chinese consumers are willing to pay 20 percent or more for brands they trust. For products at home, they will pay an even larger premium if it is something that children will come into contact with. One quality misstep and this trust can be damaged overnight.
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