With USD 39 billion worth of import, China was the second largest importer of chemicals in 2002 after the United States. Conservative estimates based largely on past growth rates show that China is set to overtake the US by the year 2010. The Chinese government is encouraging investment in the industry with various incentives and foreign investments are pouring in at the rate of about USD 20 billion every year. Today even the most critical observers concede that China is the one investment that no serious industry player can afford to miss.
However, years of communism and a closed culture that shut its door to the external world for decades have made it very difficult to understand the entry methods into China. Rumours of problems like corruption only add to the confusion.
Let us look at some of the strategies that a smart investor should adopt to enter this market.
Entry Options
Any foreign chemical company must choose between foreign direct investment and direct import while considering an entry into the market.
This selection depends upon the companies’ prior international experience, end-user distribution, product/service of the company, financial and managerial resources, and long-term as well as short-term strategic objectives in China.
For Foreign Direct Investment
The main advantages of direct investment in China are:
• Payment Flexibility. Companies can be paid in Chinese currency (RMB). This is important in that some domestic companies and government organizations often have great difficulty paying in Euro, British Pound and other currencies.
• Tax Benefits. Chemical products manufactured in China are taxed much less than their imported counterparts.
• Moreover, most foreign funded companies can enjoy great preferential tax benefits in government specified development zones or in government encouraged development industries.
Direct Imports
The main advantages of direct imports into China are:
• Lower set-up costs and risks.
• Gain local experience at lower costs. Companies can build up their brands, establish social networks and distribution channels, and identify the potential market opportunities in China in order to establish a sound foundation for local production in the future.
• The most serious disadvantage of using direct import strategy is that the price of imported products is normally 10 to 15 percent higher than that of the local products.
Another disadvantage companies may face is that most direct local Chinese customers do not have foreign exchange. As a result, companies have to sell their products to export distributors or those companies which have foreign exchange savings.
Most companies prefer to set up a representative office as the first step in exploring a new market.
For those companies whose products serve a large range of end-users, it is best to use China based distributors. Through this route, foreign companies can quickly access the Chinese market without bearing high marketing costs. However, most distributors serve a broad range of clients and hence they may also be the agents of the company’s competitors. How much effort these distributors are willing to contribute and how well they know their clients’ products are potential areas of concern. As the result, the performance of these distributors may vary significantly.
The Right Path
There is considerable flexibility to choose the entry strategy. Sometimes, different strategies can be adopted at the same time. For example, Degussa Chemical Group set up five representative offices in major Chinese cities and put their manufacturing centre in Jin Zhou. By doing so, the company could take advantage of both the high exposure to potential customers in large cities and the low running cost of a business in an underdeveloped city.
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