Shipping Solutions Newsletter

Everyone is talking about the People’s Republic of China (PRC or China), and not just because the country is hosting the next Olympic Games. Today China stands tall as a one of the fastest growing economies in the world. In the last three decades, as per the latest figures, China’s economy grew by 10.6%. The Chinese economy has gone from being a lumbering agrarian economy 25 years ago to a rapidly developing economy today. China-based factories make 70% of the world toys, 60% of world’s bicycles, 50% of world’s shoes, and 33% of world’s luggage.

In the first part of this article, I discussed the miracle of China’s economic growth and what multinational corporations have done to succeed—and fail—in the Chinese marketplace. In this, the second part of the article, I will address some of the challenges international marketers face in their efforts to win the hearts and minds of Chinese consumers and other stakeholders. I have discussed issues relating to global branding, counterfeiting, non-tariff barriers and product adaptation in my previous articles and will briefly address them here.

Many businesses that could not make it in China failed to realize the challenges they might face as they rushed to woo 1.3 billion residents of China. One of the biggest discoveries these businesses made was that outside the major urban areas of Beijing, Shanghai and Guangzhou, it was a real challenge to do business here even when they had local partners. Widely dispersed consumers with limited spending power; fragmented retail, distribution and media channels; and scarce local talent throughout the industry value chain created marketing barriers that were costly and time consuming to overcome.

Some of the challenges faced by international marketers in China are discussed below:

China is one of the big emerging markets with strong leadership, hardworking and intelligent people and a habit of self reliance. China represents political, traditional and business cultures with their own unique characteristics and distinctiveness. Confucianism, the Dynasties, the Republic of China, Buddhism and Communism have all influenced the beliefs, behaviors, and practices of Chinese people and businesses.

Many different cultures and Chinese comfort zones (tastes, beliefs, values, attitudes and a second generation of the Chinese one-child policy) have produced a culture of high expectations. These consumers are not worrying about how to pay for a pack of cigarettes, a television set or a bicycle, as they did two decades ago. Along with this new culture there exists an ancient culture representing a billion or more people who essentially buy food and clothing at or slightly above the subsistence level.

Marketing opportunities exist in both these cultures. Savvy marketers must find profitable niches in one or both these segments by understanding the cultural differences before pushing products or services in this land of 1.3 billion inhabitants.

Beijing has officially complied with its commitment to open up the domestic construction market as part of the agreement on China's accession to the World Trade Organization (WTO) in 2001. But it has placed formidable obstacles in the way of foreign companies trying to take advantage of this opportunity. International marketers continue to have concerns about fair market access due to strict testing and standards requirements for some imported goods. A lack of transparency in the regulatory process makes it difficult for businesses to plan for changes in China’s market structure.

China has long been the number one source of counterfeit goods marketed across the globe. The United States Trade Representative (USTR) 2006 report to congress states that the levels of piracy in China across all lines of copyright business range between 85% and 93%, indicating little or no improvement over 2005 despite repeated anti-piracy campaigns in China. Since joining the WTO in 2001, China has strengthened its legal framework and amended its laws and regulations regarding IPR, but weak enforcement continues to impede the IPR system prevalent in China. My article on counterfeiting will shed further light on this issue.

Global marketers are beginning to realize that China is not a single homogeneous mass market. A good starting point is to review six distinct markets in China and research and analyze the unique characteristics of each region to identify the markets that offer the best opportunities given your corporate mission, culture, competitive advantage and resource constraints.

The World Bank ranks the six regions from the most attractive to least attractive in the following order:

Since market research is quite underdeveloped in China, marketers find it hard to find accurate facts, figures and consumer insights for any of these markets. Primary research is almost a prerequisite to understanding the market including the six regions identified above.

In China, the winning consumer product companies are literally forced to routinely and regularly improve both the products and marketing methods to remain viable. In other words, successful companies must undertake rapid product innovation and adaptation supported by extensive product testing and creative use of pilots. Companies willing and able to participate in multiple categories are able to amortize their fixed costs across a broad range of products and are able to secure greater cooperation from distribution channels and generate profits within a reasonable time. Multinationals such as Nestle, President Foods and DANONE are successful because they are able to do just that. Moving beyond the premium or luxury brand even in everyday product categories is also a challenge.

When it comes to product positioning, taking the high ground and introducing cutting-edge products is effective in building the brand image. Consumers pay a premium for products they like to be seen using in public as is evidenced by the success of the Starbucks and Nike brands. New approaches to China’s consumer markets include stretching premium brands vertically to reach the mass market, adjusting product formulations and packaging, and modifying manufacturing processes so that prices can be set at lower levels for price sensitive segments.

As the Chinese economy booms, a proliferation of products—both home-grown and international—use branding to gain and maintain mind and market share. If a brand in a product category is successful in China, it often opens flood gates of competition from local and global players. Due to linguistic and cultural differences, global branding rarely works in China. Chinese consumers appreciate a brand name that is catchy, memorable and distinct and says something about the product. Chinese consumers expect more in terms of how the names are spelled, written and styled and also whether they are considered lucky. My article on “global branding” provides additional insights relating to this challenge.

Consumer product companies find it extremely expensive to get their products into the mass market in China. The country’s transportation and logistics sector is only just developing. Historically state owned producers tended to transport their own goods, and logistical services were practically non-existent. Many warehouses in the country are still poorly designed and equipped (e.g., for climate control, segregation, automation).

China Rail’s near monopoly on rail transport has discouraged development of a service orientation. Loading can be subject to approval of the consigner’s loading plan, one or more inspections of containers, and loading fees that represent 20% to 30% of actual transport fees. Access to service may depend upon relationships with local rail authorities.

Apart from a limited number of major department and grocery chains in major cities, there are tens of thousands of small stores and street outlets in the countryside, all of which have very cluttered shelves and antiquated operating practices.

Marketing communications which includes positioning, advertising, public relations, sales promotion and personal sales management is equally challenging in this market. Chinese consumers are not easily persuaded by advertising, although advertising is absolutely essential to create brand awareness. Brand values, on the other hand, are better established by word of mouth. Chinese shoppers peruse package information very thoroughly when making purchases. Packaging plays a strategic role in marketing communications here.

To investors and marketers, China represents a low-cost base for export-oriented production as well as a vast market yet to be tapped. The market, however, is viciously competitive, and competition is not just from global corporations. China is attempting to build "national champions" that can compete with foreign companies, not just in China, but in the global marketplace. To win in this market, the players must commit the best of their tangible and intangible resources to match their key global and newly emerging domestic rivals.

Entering the market with a clear understanding of China’s business and buyer culture and psyche, it’s regulatory and technological environment, marketing infrastructure, and other market barriers goes a long way in separating the winners from losers. Finally, no business can expect to succeed in China through remote-controlled management from overseas headquarters or through ‘paratrooper’ managers from overseas. Setting foot on Chinese soil and developing the requisite relationships and contacts with government and non-government entities is an important first step in this challenging market environment.

By Tracy A. Smith email | bio

My previous article addressed the availability and requirements for the use of License Exception BAG when traveling with your personally owned PC. In this article I will address the options available for those of you traveling with a PC owned by your employer.

License Exception TMP authorizes the temporary use of commodities and software abroad as long as the item(s) are returned to the country of export no later than one year from the date of export. Eligible commodities and software include the usual and reasonable kinds and quantities of tools of trade, commodities and software for use in a lawful enterprise or undertaking of the exporter or employees of the exporter to destinations other than Country Group E:2 (Cuba) and Sudan.

See 15 CFR §740.9(a)(2)(i)(B) for the specific requirements regarding authorized exports of tools of trade to Sudan under TMP. Please note these requirements include restrictions on the PC’s Adjusted Peak Performance (APP) and software, including encryption software loaded on the PC. Only software controlled under ECCN 4D994, 5D992 and components controlled under 5A991 and 5A992 installed in the listed equipment are authorized under this section.

The company owned PC, operating system such as Microsoft Vista, software applications such as Microsoft Office, and other corporate standard load applications installed on the system you are planning to travel with qualify under the provisions of TMP—tools of trade.

I know what you are thinking: “What about encryption items that may be loaded or installed on the PC?” No problem. Note 2 to Category 5, Part 2 of Supplement No. 1 to Part 774 authorizes the use of License Exception TMP for encryption products when accompanying their user for personal use or as tools of trade subject to the terms and conditions of the License Exception.

In order to utilize License Exception TMP, the PC must remain under the “effective control” of the exporter or the employee of the exporter. The Export Administration Regulations (EAR) define effective control as retaining physical possession of the item, or securing the item in such an environment as a hotel safe, a bonded warehouse or a locked or guarded exhibition facility.

As previously mentioned, TMP requires the exporter to return to the United States as soon as practicable but no later than one year after the date of export. If you are planning to remain abroad beyond one year, you must request authorization from the Bureau of Industry and Security (BIS) by submitting Form BIS-748P 90 days prior to the end of the one-year period.

If you intend to sell or permanently dispose of the PC abroad you must request authorization from BIS in the form of a license application unless the export is authorized under NLR or by another applicable License Exception.

Several compliance colleagues have brought up some good points regarding controlled technology. While TMP specifically authorizes the temporary use of commodities and software abroad subject to the terms and conditions of the License Exception, it does not mention technology. If you work in an industry subject to the dual-use controls found on the Commerce Control List (CCL) and you have controlled technical data on your company PC, you should remove it prior to leaving for your travels abroad.

To ensure consistency across all segments of the business, your company may want to consider implementing an equipment travel policy. In the process of developing the policy think about the possibility of the PC being lost or stolen.

Under this scenario License Exception TMP is now out the window since the lost or stolen PC is probably not coming back into the United States. It also raises the question of “effective control” as required by the License Exception. You also need to consider what data was contained on the PC and deal with it being out there and in the hands of who knows whom.

To lessen the risk of possible compromising situations, some companies are providing a “clean” system loaded with an operating system and the basic corporate software for the employees to checkout for use while traveling. This way the company knows that the software loaded on the computer and the data contained on the system is only the basic stuff the employee will need to perform their duties while away from the office and doesn’t include any controlled technical data or sensitive information.

Don’t just think in the terms of the PC. What about those handy jump/flash drives and external hard drives? When developing an equipment travel policy you have to decide and balance the appropriate level of due diligence and reasonable care employed to mitigate unnecessary risk while accommodating your specific business needs. For example, an insurance company may not necessarily need an overly cumbersome equipment travel policy; however, a manufacturing firm that develops lasers may want to employ a more comprehensive policy.

In summary, the use of License Exception TMP—Tools of Trade—when traveling with a company owned PC:

Requires return to the country of export within one year unless prior authorization is requested from BIS;
Applies to encryption products including PC’s with pre-loaded encryption when accompanying their user as a tool of trade to authorized destinations;
PC must remain under the “effective control” of the exporter or employee;
Has no reporting requirements;
Is restricted to Country Group E:2 and Sudan;
Does not include provisions for controlled technical data; and
Applies to items controlled by the EAR.

This article is based upon the requirements for License Exception TMP—Tools of Trade. The requirements and controls for other types of temporary exports under TMP are not the same. License Exception TMP applies to commodities and software subject to the EAR. It does not apply if your company PC contains hardware, software or technical data for defense articles or services that are subject to the export licensing requirements of the International Traffic in Arms Regulations (ITAR), 22 CFR Parts 120 - 130.

Last, but certainly not least; the information presented here is based upon the regulations as written at the time of publishing. Regulatory requirements are subject to change. You should always consult the most current and up-to-date versions of the relevant regulations prior to exporting to ensure you are complying with all applicable requirements.

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