One of the first questions to ask yourself when considering China market entry is what tier to start in. If you aren’t familiar, Chinese cities are divided into tiers based on size and level of development. First tier cities are all the ones you’re probably already familiar with – Beijing, Shanghai, Shenzhen, etc. Second tier cities are the next level down and include cities such as Chengdu, Hangzhou, and Kunming. So what are the advantages and disadvantages to entering markets in China’s different tiers?
First Tier: Advantages and Disadvantages
It depends on what you’re looking for and this is the perfect conversation to have with your China consultant. Big tier cities have many advantages that appeal to businesses entering the China market for the first time. They are more economically developed with better infrastructure that can make the road much smoother. Consumers and other local businesses are much more likely to be used to foreign businesses as well and income levels are generally much higher.
The disadvantage is that everyone with a similar product or service may want to take advantage of these favorable conditions, making competition fierce.
These cities still have high levels of development and lots of support for foreign business, but may not be as saturated. A big advantage of entering lower tier cities is that other businesses in your market may not have ventured there yet. Maybe they took the path of least resistance and started in the biggest cities, so you’ve got an opportunity to enter the market with less competition.
Third Tier and Below
You are least likely to have competition in third tier and below, especially if your business is something that hasn’t previously been introduced to the China market. Operating costs will also be extremely low, which is why you find a lot of manufacturing located in these cities.
However, the challenges can be tremendous. There won’t be much infrastructure, people may be completely uninterested in your product or service, or they just may not be able to afford it. To ensure quality, you’ll have to build all corollary systems from the ground up. Third party vendors may not exist and, if they do, are probably unreliable. Entering lower tier China markets really require an excellent consultant by your side and a willingness to invest for the long-term.
Is there a market already established in your destination of choice? If you’re a smaller company, you may want to let the big boys pave the way by developing infrastructure and generating market interest. From there, you can piggy back off of their hard work at much lower cost and effort.
What’s your level of experience in moving into East Asian markets? If you’ve done this before, you may be more confident about taking risks. If this is your first venture outside the US, mitigating as much risk as possible could be a much better fit.
Whatever your decision regarding China market entry, you’ll want it to be a well-thought out one. Discuss all the options with your China consultant and make sure you know the pros, cons, risks, and challenges regarding your target market.
Casey W. Xiao-Morris is China Business Consultant at Leverage China, LLC, specializing in capturing China’s market opportunities for American companies. Casey can be reached at cxmorris@LeverageChina.com