An artificial reflex
Mention global sales expansion to an SMB and the conversation naturally turns toward China. It’s reflexive. But it’s not a natural reflex – rather one born of incessant headlines and misunderstandings. And it’s sadly one that kills many legitimate international sales efforts.
A natural reflexive response would be to find similar, nearby markets – Canada for instance – as a launching point for export sales. But that’s almost always ignored in favor of China.
The superficial appeal of Chinese market expansion is clear. Actually all 1.3 billion reasons. The population is enormous – and stories of growing wealth, middle class disposable income, increasing urbanization and hunger for western brands attract businesses seeking growth.
An Asian mirage – for most businesses
A small minority of companies that set out for China as their first export destination (or one early in their global sales growth process) eventually succeed. But they are outliers. For most the market opportunity remains a tantalizing mirage on the horizon; one that they continue to expend dwindling energy and resources in pursuing; one that always remains just a bit further away. Eventually they collapse, figuratively dehydrated, with several times their originally allocated business development resources exhausted.
Companies that have committed to success in China, nearly always citing 1.3B as the reason, then tend to cling to their sunk costs (more on that here and here) and persist in the naive hope that suddenly they’ll get traction. Most don’t.
Some “don’t lose”, eventually reaching a break even point a decade into the project. Others “lose big”, withdrawing after three to five years of substantial investment, often without any notable sales success.
But the worst consequence of it all? Many companies assume that their failure and frustration in China is representative of what they’ll face in all markets. As a result they eschew global sales thereafter, missing the revenue, profit, diversification and other benefits.
1.3B vs. 11
Instead of focusing on the mirage of a market that is theoretically 4X the size of the domestic US market, companies should consider 11 reasons why China is a disastrous market for an export program launch.
- It’s like 5 or 7 or 10 different countries – you need to plan to manage a very complex market effort which will entail enormous sales channel and localization challenges. And you will face frequent conflicts. The alternative is to select a major metro, say Shanghai, but in that case your focused on a 20 million person market.
- Relationship building will consume your resources – plan on three to five years of frequent travel and extensive investment to grab your first order.
- IP jeopardy – no news flash for sure, but you’ll find yourself competing against counterfeits long before you have your first sale.
- Corruption – although the Chinese government appears to be making genuine efforts to tame the rampant corruption, it is nevertheless a business reality which many SMBs find hard to overcome.
- Demographics – the market is aging.
- Actual market size – estimates and projections vary, but the population which is actually in a position to consume your products is probably in the range of 300M and may grow to 500-700M. So realistically the market is roughly equal to the US and may grow to 1.5X.
- Trade barriers and regulations – currency controls, local ownership, preference for domestic brands, etc. are examples of challenges you will face
- Their growth depends on ours – One of the reasons to grow global sales is to diversify against downturns in the domestic market. Although there is a certain interconnectedness among all markets, growth in China is particularly susceptible to fluctuations in their export sales. Guess where most of those exports go….you know. The point is that if Chinese growth automatically slows in parallel with American growth, are you gaining diversification, or amplification of pain?
- Culture – this is always a factor in global sales growth. But realistically some cultures, particularly business, are closer to ours. China represents a big leap – and simply overcoming that will consume resources to reach an equilibrium from which you can then BEGIN to develop relationships and perhaps business.
- The numbers – the growth is slowing. Will it continue on a shallower trajectory? Probably. Are there some perspicacious and mainstream folks who foresee a dramatic reversal? Absolutely.
- Political risk – why do you suppose major retailers have established targets for reduced dependence on Chinese manufacturing? And how do periodic nuclear capability “reminders” from high level Chinese military officials strike you?
Let me quickly reiterate – some companies (very few) pull it off. Often they have a well-connected Chinese national employee in their US operation who establishes and leads a very focused effort in China. But would you launch a new product with a miniscule chance of success?
Your alternative – manageable, profitable growth
So companies considering a global sales expansion have two choices. They can select markets based on a robust matrix of relevant market attributes, or they can reflexively jump into China (or other BRICs.)
The first approach doesn’t sound as cool or impressive, but will likely yield the benefits of revenue, profits, diversification, reduced taxes, etc. within a reasonable time frame and at a pace which the company can manage. The second most likely leads to huge cost and ultimately an abandoned export program.
Which makes more sense? Maybe it makes sense to draw upon some experienced insight.….