China Market Entry Strategies (Entry Modes)

 


Fig. 1 : Generic procedure for the market entry in foreign economies like China

Entry modes

Entry mode 1: Home production (export strategy)

  • Indirect exporting
    • Local agents (in home country)
    • Local trading companies (in home country)
  • Direct exporting
    • Foreign sales representatives (in target country)
    • Foreign distributors (in target country)

Entry mode 2: Contractual market entry strategy

  • Licensing
  • Franchising

Entry mode 3: Foreign production (equity strategy)

  • Strategic alliance
  • Joint ventures (JV)
    • Wholly Owned Foreign Enterprise (WOFE)
      • M&A
      • Greenfield investment

Breakdown (percentages) of China entry modes
Fig. 2 : Breakdown (percentages) of China entry modes of foreign enterprise

Brief description of various entry modes

Entry mode 1: Home production (export strategy)

Exporting refers to the transportation of goods from one country to another. Re-imports also fall under this category (many Western luxury products in China are re-imports). Exporting itself can be divided into direct and indirect strategies:

Indirect exporting

In an indirect market entry scenario the company is selling through an independant entity that is located inside the exporter's home country. Products and services are sold through intermediaries such as agents and trading companies. Agents may represent one or more indirect exporters (often in the form of cross-selling) in return for commission on sales.

Direct exporting

In a direct market entry scenario the company is selling through an independant entity that is located outside the exporter's home country. Products and services are sold directly to the target markets either through local sales representatives or distributors. Sales representatives promote their company's products and do not take title to the merchandise. Distributors take ownership of the goods (along with the risk) and usually on-sell through wholesalers and retailers to the end-users.

Entry mode 2: Contractual market entry strategy

  • Licensing

    • refers to a scenario where one company, which owns intangible property, grants a foreign company the right to use that property over a specific period of time. The licensed property may consist of copyrights, patents and formulaes as well as trademarks (designs and brand names). It is common in the manufacturing industry that companies are granted the right to use certain process technologies in exchange for royalties (e.g. beer breweries, soda manufacturers).
  • Franchising

    • is a special form of licensing and refers to a scenario where one company supplies another with intangible property and other assistance over an extended period of time in return for compensation in the form of fees or royalties. While licensing is more common in the manufacturing sector, franchising deals are often made in the service sector e.g. hotels, car rental companies and restaurant chains (e.g. KFC, McDonalds, Holiday Inn, Avis).

Entry mode 3: Foreign production (equity strategy)

  • Strategic alliance

    • In a strategic alliance at least two businesses cooperate to achieve strategic goals. Strategic alliances usually exist between a company and its suppliers, buyers or even competitors.
  • Joint venture (JV)

    • In a joint ventures (JV) the partners form an independent and jointly-owned separate company to achieve specific business goals. Forms include forward/backward integration, buyback and multi-stage.
  • Wholly Owned Foreign Enterprise (WOFE)

    • A Wholly Owned Foreign Enterprises (WOFEs) is a facility that is fully owned and operated by a single parent company through foreign direct investment (FDI). WOFEs can be the result of acquiring an existing facility (M&A) or a from-scratch development of an entirely new facility (greenfield investment).

    Breakdown (percentages) of foreign investments in China
    Fig. 3: As of 2008 WFOEs (wholly owned foreign enterprises) were by far the most preferred form of FDI (foreign direct investment) in China

  • Examples

  • French fashion designer Pierre Cardin gained a first-mover advantage by being the first Western company to hold a fashion show in Beijing in 1978 after China opened it's economy and society. Today Pierre Cardin sells its products in China through distributors by granting them exclusive rights to sell in a particular geographic region (e.g. the Qingdao-Weifang area is a single exclusive distribution territory).

    Austrian food enterprise Bäckermeister entered the Chinese market in Qingdao in 2007 through a joint venture agreement with a Chinese partner (Bäckermeister Bakery Co., Ltd.). The Austrian group provides regular training to its branches throughout China to maintain taste and quality standards.

    DEFA (Qingdao DEFA German Style Meat Processing Co.,Ltd) offers a wide selection of authentic German products as well as a weekend BBQ. The company dates back to 2008, when three Qingdao expats invested in setting up a meet processing plant in Chengyang (a Qingdao suburb next to the Liuting airport). The company does not only sell its products through its own butchery store (located in the Shilaoren area), but also delivers restaurants and retailers (e.g. Metro group) all over China. DEFA is an example of a greenfield operation (WOFE).

 
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