Cross-border commercial due diligence in China

If you are going to invest in a company with international expansion plans, you want to make sure that their product or service has good chances of being successful in the countries where you have ambitions.

This of course is also important for China. Only with the right knowledge about demand, competition and regulations it is wise to invest in market entry.

Business opportunities in China

China, as the world’s second-largest economy, is a critical market for businesses looking to expand internationally. Its massive consumer base, rapid urbanization, and growing middle class offer unparalleled opportunities. However, understanding China’s unique market dynamics, regulatory environment, and consumer behavior is essential for success.

Key Market Numbers

China’s economic scale and diversity make it a complex but rewarding market. Here are the key statistics:

Population: Approximately 1.41 billion (2023), the largest in the world.
GDP per capita: Around $13,000 USD (2023), with significant regional disparities between urban and rural areas.
Urbanization: Over 64% of the population lives in urban areas, with major cities like Shanghai, Beijing, and Shenzhen driving economic growth.
Economic Structure: Services account for 54% of GDP, followed by industry (39%) and agriculture (7%). Key industries include technology, manufacturing, and e-commerce.
Ageing Population: Yes, China faces an ageing population challenge, with 18% of its population aged 65 or older. This impacts labor markets and increases demand for healthcare and senior-focused products.

Language and Documentation

Language and cultural nuances play a significant role in doing business in China.

Official Language: Mandarin Chinese is the official language and is widely used in all business and consumer interactions.
Language Considerations: While English proficiency is growing, especially in urban areas and among younger professionals, Mandarin is essential for effective communication. Translating marketing materials, contracts, and product documentation into Chinese is often a legal and practical requirement.
Packaging and Documentation: Chinese regulations mandate the use of simplified Chinese for product labels, manuals, and marketing materials, especially in regulated industries like food, pharmaceuticals, and electronics. Non-compliance can result in fines or product bans.

Consumer and B2B Buying Behavior

China’s consumer and business landscapes are heavily influenced by digitalization and cultural preferences.

Consumer Behavior: Chinese consumers prioritize quality, brand reputation, and innovation. E-commerce dominates the market, with over 70% of retail sales occurring online in 2023. Platforms like Tmall, JD.com, and Pinduoduo are essential for market entry. Sustainability and health-consciousness are rising trends, especially among younger consumers.
B2B Buying Behavior: Chinese businesses value relationships (known as “guanxi”), trust, and reputation. Decision-making processes can be hierarchical and time-intensive, requiring patience and persistence. Local partners or representatives often ease market entry.
Online Presence: A strong digital strategy, including a presence on Chinese social media platforms like WeChat and Weibo, is crucial for both B2C and B2B engagement. Localized websites and SEO strategies optimized for Baidu are also essential.

Market Challenges and Opportunities

China offers significant opportunities but also unique challenges for foreign businesses.

Products/Services that May Struggle: Products that do not meet local tastes, lack localization, or fail to comply with strict regulatory standards may struggle. Luxury goods or premium products without a clear value proposition may face challenges due to rising competition.
Test Market Potential: China’s diverse regional markets make it an excellent test ground for scalable innovations. However, businesses must adapt to local preferences and rapidly evolving trends.
Regulatory Environment: China’s regulatory landscape can be complex and dynamic. Businesses should ensure compliance with local laws regarding product standards, taxation, and intellectual property rights.

Comparing performance in existing markets

If the company the we are assessing already has sales in different countries, you can determine distributor performance or sales staff performance.

One do this by correcting the actual turnover with data about:

the buying power in the market;
the geographical reach of the distributor or sales team;
the competition intensity;
the number of years active in the market.

Combining the data of the various countries over time leads to a growth curve where overperformers and underperformers can be easily identified.

You can then do selective interviews what causes any underperformance, and you can take corrective measures.

A curve like this also helps to estimate the potential in a new market.

Before you focus only on China

Please note that there are many countries in the world and the biggest ones or the ones nearby are not automatically the best choice. It all depends of the market growth, the competition and the barriers for entry.

Therefore we would advise you to make a short-list of at least three, but preferably five potential new markets and compare them against the same criteria.