Henry Hua, founder and CEO of IDFsoft, a startup company focusing on mobile gaming and gamification, took to the stage at the National University of Singapore (NUS) School of Computing (SoC) last Friday and shared with us certain insights as to how foreign entrepreneurs should go about entering the Chinese market.
As most of us are well aware, many foreign Internet giants tend to lose their foothold in the Chinese Internet industry. That is the sad reality, but why is it happening and why are the subsequent players not learning from the previous failures?
One famous example he cited was Google China, which ultimately came down to – quite apart from the hacking controversy that so soured relations between it and authorities – a very different view of how to let people access the web. Unfortunately, this has resulted in Google losing its market share in China and it is currently struggling to fight for its online mapping license in the country.
Similar cases do happen to other Internet giants such as eBay, Amazon, Yahoo, MySpace, and Groupon. So what are the various factors that contribute to all their failures? Mr. Hua, in his talk, identified these seven areas:
Government and Policies Makes Foreign Entry Impossible
Henry shared that especially for the Internet industry, almost no sole foreign investor – without a joint-venture (JV) partner; more on that later – is able to obtain the mandatory Internet Content Provider (ICP) license. These tend to be restricted so as to prevent Chinese citizens viewing some ‘sensitive’ material from foreign websites.
Hence, one of the most common approaches done by most foreign entrants is partnerships, such as Groupon did with Tencent.
On top of which, one would need many business licenses in order to operate in China. Additional business licenses are very high barriers themselves because one would need to understand which license is required for which side of the business operations. In Henry’s opinion, the reason why such licenses are being set up is (partly) to raise the barriers to entry for foreigners.
Protection for Innovation and Intellectual Property is Weak
In China, there is hardly any protection for innovation and intellectual property (IP). In fact, you would find that there is no protection for business models and user interfaces in the Internet businesses. We’ve seen a couple of cloning examples and undoubtedly the Internet has better facilitated the cloning process, where source codes could be easily ripped and copied from pages and apps.
So-called ‘copy-to-China’ is still the main business model of the China Internet market. If there is a successful site or service in the West, it would be replicated, built, and localized in China. With such a well-oiled process in place, it makes it pointless for foreign companies to enter when their business models could be easily replicated in China.
Some say the JV between Groupon and Tencent - called Gaopeng - is an example of a poor partnership: Tencent has its own rival daily deals site, and little reason to want Groupon's effort to succeed.
Poor Partnerships
In most cases when a foreign company approaches a local company to set up a joint-venture, they approach with different agendas in mind. For the foreign companies, their main aim is to obtain the license and learn how to run a business in China. On the other hand, the local partners would want to obtain the transferable skills and learn the technology from their foreign partners.
However, once they achieve their goal, they want each other out of the JV. The relationship and trust between the two partners weakens and breaks. So that is why some businesspeople say the JV is the kid that brings bad luck to the ‘marriage.’
Problems with being a Global Organisation
Often in big organisations, decision making tends to be very slow. They have to go through levels and levels of red tape before making a decision, which slows down the entire implementation process. This makes them less agile than most startups.
That aside, foreign Internet giants are always aiming to keep to global standards but fail to recognise that the China market itself is very different and fragmented. One cannot plainly copy the common practices that they use in big mature markets and implement them in the Chinese market.
Inability to Attract Top Chinese Talents
Instead of companies choosing their employees, now the choice is given to top talents. In recent years, working in the government sector was the favored choice for many top talents within China. Why so? It gave them power and status being in government and state-owned companies. [And very long lunch breaks. -Ed].
Also, Henry states that it is a common misconception that labour in China is cheap. This is not true, especially for highly sought-after skills. These days, top talents are paid according to international standards and receive global salaries.
How to Build Success in China?
Henry advises that in order to build a successful company in China, you have to first build strong government relationships which will help pave the way for the subsequent operations.
Apart from building strong relationships, you need to play by China’s market rules. If your website mainly thrives on user-generated content, put in a dedicated team to regulate the content being placed on your site. Remove any inappropriate content to prevent your site getting blocked. That’s the oft-misunderstood process of self-censorship that goes on on the Chinese web – it’s the web firms themselves that do most of the policing.
Of course, where is your sincerity when you claim that you want to build a product for the Chinese market and you do not even have offices and staff placed in China? Make a long-term commitment: build a local team, understand the various cultures in numerous cities in order to successfully localize your product. Develop trust between foreign and local employees, because locals know how to better localize your product that you do.
Advice For Foreign Entrepreneurs
Henry advises that if one is sincere about doing and starting a business in China, be based in China. If possible, work in a startup to understand the culture before starting your own business.
For aspiring entrepreneurs who are still students, he advises that one should start his or her career in a China startup, though he does not recommend studying in China. Yes, undoubtedly it allows you to understand the culture and language, but one will never learn how to overcome the struggles startups will face throughout their entire startup journey.
Starting a business in China is never easy, but it is important to learn from why foreign companies fail and avoid their missteps, so the route to building a successful startup in China will be much easier.
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