Selling to China: Strategies for Uncertain Times

Main Content

Selling to China: Strategies for Uncertain Times

With China’s economy still struggling as 2016 dawns, I continue to hear questions from merchants who do business or are considering doing business in the PRC. They’re wondering about how an economic slowdown might affect sales, of course, but they are also concerned about stock market volatility, Xi Jinping’s reform plans, the stability of the yuan and myriad other uncertainties.

Underlying all is a more fundamental question: How can a business make plans when the economic road ahead is shrouded in fog and the possibility of bad economic news seems to lurk around every corner?

This question is not specific to China circa 2016. Any rational businessman or woman, poised to enter any new market, is going to ask the same. Effective business strategy often hinges on predictability. We all crave the familiar and we can more easily build our projections and goals when we are operating in known territory.

Unfortunately, new market entry is by definition a bit of a journey into the unknown. So at the start, a company has to develop a consensus that it will be able to tolerate a greater degree of variability in results when playing away games than it experiences at home.

China ain’t Ohio, no question. But during uncertain times and in uncharted waters, there are steps you can take to position your company to succeed regardless of geography and current economic conditions.

First, understand that commercial growth is usually not highly correlated with economic growth. Consumer spending tends to outpace overall economic growth, especially in emerging markets, which means your sales growth can outperform GDP growth—and many consumer products regularly do. Because of this, it’s counterproductive to base go/no go decisions about market entry on any given economic growth rate. If you are looking to expand in Europe, for example, you need an all-weather business model that can work no matter what GDP rate pundits are predicting for the sluggish Eurozone in the coming year.

What might this all-weather model look like? Here are three strategies to consider, some drawn from my Export Now book:

  • Adopt a flexible, scalable model, with a low break-even. From the outset, you might want to sacrifice some efficiency to reduce your cost structure by, for example, outsourcing for the first 2-3 years while you establish your market position.
  • Be cautious about taking on debt and fixed costs. If your home market model calls for you to operate your own fleet of trucks, you might lease trucks or even outsource delivery. If you normally build your own warehouse on the assumption you will hit $30 million in sales, instead try leasing a warehouse for a year or two until you are certain you will reach that target. The golden rule for any new market is, be wary of debt. You might not have the volume to service it.
  • Have an FX strategy. Every company has a different view of foreign currency as it depends in part on your RMB requirements in-country. If you have growing China payroll, for example, you can simply use your RMB earnings to offset those costs.When I served as regional practice head at Citibank, we advised clients to keep a watchful eye on currency movements and be prepared to adjust prices. We also urged them to establish how much RMB they needed so that surplus funds could be regularly converted to another currency and remitted offshore.

These practices apply all over the world. For those worried specifically about China, it’s important to keep in mind that the country’s GDP is still well in positive territory. China is the second-largest economy in the world, is the fastest-growing major economy in the world, and has the fastest-growing middle class. As a reference point, in 2014 China’s economy grew 7% and consumer spending grew 30%, so even with this “slowdown” China will likely to continue to see solidexpansionof goods-and-services consumption this year and in years to come.

And what about an all-weather strategy for China? We believe that, thanks to the outsized popularity of online shopping among Chinese consumers, e-commerce provides the most cost-effective way to enter the market rain or shine.

A flagship store can frequently be set up on, the country’s largest B2C site, for about $100,000, including deposit, registration, trademark registration, product testing and approval, web page design and set up, warehouse operations, and CRM training. This is a dramatic reduction in market entry costs compared with setting up brick-and mortar shops, and as a result, the break-even point is much lower online than offline.

E-commerce means no fixed assets and no debt. A company that uses an e-commerce strategy does not have to set up a legal entity or have any assets onshore besides inventory. There is no need for financing or debt. And e-commerce allows you to more easily manage FX exposure: if there are currency moves, prices can be readily adjusted—far more rapidly than trying to manage price changes through offline distribution.

Any new market entry strategy demands the flexibility to operate in an unpredictable environment. China is no different in this regard, but because of geographical distance and language gaps, foreign firms tend to have less familiarity with this market, and often a lower comfort level. E-commerce can instill confidence by reducing complexity, costs, and time-to-market, giving companies the room to succeed in good times and bad.

(Frank Lavin is the CEO of Export Now, which runs online stores in China for U.S. brands. He formerly served as U.S. Undersecretary of Commerce for International Trade.)

Cross-Border E-Commercemanagement
Reuse this content

Sign Up For Our Newsletter

Stay updated on the digital economy with our free weekly newsletter