Lecture by Dr. Victor Yuan: Victory in the Chinese Market
On 17 and 18 February 2014, the International Business School of the Hanze University of Applied Sciences Groningen and the Groningen Confucius Institute co-organised a lecture by one of China’s leading entrepreneurs, Dr. Victor Yuan (袁岳). In his lecture entitled Victory in the Chinese Market, Yuan shared his experience in marketing data and gave suggestions to European business people on how to make it in the Chinese market.
Big Data: Data Collection in China
In commercial terms, China is a huge market with an abundance of business opportunities. At the same time, it is also a market with millions of competitors. Therefore, in order to succeed you need intimate knowledge and a clear understanding of China’s economic data. Unfortunately, as Yuan points out, it is not that easy to acquire the necessary data. To begin with, the government does not supply a lot of data. In addition to that, for many years, Chinese companies did not see the significance of collecting market data. About twenty years ago, when he was a government official working for the Minister of Justice, Yuan had to write all kinds of reports full of terminology like “everybody of the Chinese people agree that”. When he asked the minister, “we never even asked one person, how do we know everybody agrees that?” the minister replied: “we never needed to ask people because we represent the people”. This made Yuan think, and made him want to start doing research. Unfortunately, the idea of ‘we represent the people’ had been standard practice in China for many years, so it was not easy to start up a research company; he was not allowed to register a data collection business. At that time, the Chinese did not do any research into public opinion. Companies just assumed they knew what the public wanted; after all, they were the public too. Also, companies had quite a limited view on doing business: you have a product, you sell the product and you make a profit. So, no one really felt the need to do research and collect all kinds of data. But then in 1992, when Deng Xiaoping (邓小平) called for reformation in China and improvement of public administration, Yuan’s data research and data collection company was allowed to be registered, making Yuan a real pioneer in marketing research in China.
Nowadays, the Chinese government does provide some official data in the form of general figures from the National Bureau of Statistics of China (NBSC), such as Gross Domestic Product (GDP). However, according to Yuan this data cannot be trusted because the figures provided to the NBSC are often adjusted. Yuan claims that companies adjust their data depending on the individuals and groups to whom they are reporting. If a company reports its annual revenue to the tax bureau, the reported numbers are lower so they have to pay less tax to the government, but if they have to report to someone from the National People’s Congress (NPC), the numbers would be higher because that might give you a chance to become a member of the NPC. He calls this strategic (or reported) data, and that is the reason the NBSC data does not always represent reality. That is why Yuan decided to start collecting his own data. Yuan does point out that this kind of strategic data is slowly becoming a thing of the past. Because of all the new technologies, it is becoming increasingly difficult to report different figures to different organizations without getting into trouble. Because of that, China today is moving towards more reliable data. It is not reliable yet, but Yuan is very optimistic about the improving quality of government data.
Big Market: Economic Development in China
Although the Chinese government does not really play an important role in market research and data collection, it does play an important role in driving the economy in the form of government investments. Yuan reports that because of the contribution of government investments, China’s GDP grew over 50% last year, which means the Chinese market is driven by the government, not by market force. That makes Chinese economic development different from economic development in European countries, and that should be taken into account when thinking about doing business in China. Government investment plays a very important role in driving the economy.
Unfortunately, Yuan says, there is still quite a lot of corruption in China. It is not the same as several decades ago when people could be bribed by giving them some money. Yuan claims that today there is a lot of indirect, project corruption. He explains by giving an example about the national freeway network. It was decreed by the government that there should be a highway to every village in China’s rural area. The national requirement for how wide these roads should be was 3 metres. But, the officials involved in building these highways, made the roads 2.7 metres instead, thus saving on expenses and making some money. The people are satisfied, because a 2.7 metres wide highway is still better than nothing, and the corrupt officials are also satisfied with the profit they made. And now, driving to the Chinese countryside is much better than driving in any big city in, for example, India.
Despite the indirect corruption, things do get done in China. This is because most projects are government driven and not driven by private companies. And because the government owns almost all of the land, the logistics are highly efficient. This high efficiency also attracts many more foreign investors. Before, international investors were investing in the coastal areas only, but now they are also investing in Sichuan (四川), in Chongqing (重庆) and western China. Given these highways, it has become so easy to do business anywhere in China, opening up an even bigger market. So currently there is a lot of economic development in China which is to a great extent government driven, but is also driven by international investors who are becoming increasingly interested in the Chinese market.
Big Decisions: Decision Makers in China.
This development is especially welcomed by the young generation because it allows them to have a certain quality of life. As Yuan puts it, young people nowadays are very materialistic; they really value having a lot of nice and convenient things. Yuan has noticed that as a result of the one-child policy (introduced in 1979), Chinese culture has changed tremendously. The family now does whatever they can to help the child. Traditionally, Chinese culture was all about respect for the elders, and the older people in the family had the power, they decided everything. But now, because of the one-child policy, biologically the child has become the centre of the family. Yuan calls it the phenomenon of the panda; rare species will receive more power and more resources. The same happens within a family: when you only have only one child, the family will do whatever it can for the child. Interestingly, this translates largely into consumption. For example, the average house buyer in China is 27 years old. In other countries, the average age is about 45 to 46 years old (Germany 43, US 40, Japan 46 and Brazil 43). But, Yuan points out that for 70% of them, the first payment is made by the parents, and for the other 30% it is partly paid by the parents. And if they want to buy a car, 35% is bought by the parents and then given to the children. According to Yuan, that is why the younger generation is the key decision maker nowadays. Even though many young people feel that they really do not spend that much, they are the driving force behind family expenditure. The young generation dominates the family needs.
Paradoxically, research has shown that in China there is a lot of ageing. According to MillwardBrown (华通明略 Huá Tōng Míng Lüè), 36% of the Chinese population will be 55 years old and above by 2030. Yuan has noticed that many companies have tried to focus their business on this segment of the population, but so far nobody has proved successful in that area. According to Yuan, this is because the older generation is used to a simpler and sober life style and instead of spending money on themselves; they spend it on their grandchildren. That means if you want to be successful in the Asian market, you need to find out what the children want. If you only consider the older generation, you will not succeed. As the main purchasing power is in the hands of the young generation, this demographic dominates the market, and they have quite extensive consumption needs. In addition to wanting their own cars and apartments at the lowest possible prices, they are also very active in buying products and fashion items on the internet. And most of these children have two parents, four grandparents, sometimes even eight great-grandparents, and all these generations will help the children in their pursuit of material things. From a consumption perspective, that is a good development. It also means that if you can catch young people, you can catch the market. So, if you want to be successful in the Asian market, consider what the children want.
Big Opportunity: Cell Phone-Based E-commerce
Yuan goes on to explain that as a result of the dominance of the younger generation, there is a clear movement towards E-commerce in China. The young generation is basically the internet generation: they find friends, gather information, buy things and pay for anything via the internet. Today, there are 50 million webstores on a huge number of different E-commerce platforms. China’s online shopping transactions in 2013 were $2 trillion (€1.44 trillion), a 42% increase compared to the year before. According to Yuan, E-commerce is currently the most interesting business market in China. At the same time, there is also clear move away from PC-based E-commerce towards cell phone-based E-commerce. Alibaba (阿里巴巴) (an online business-to-business trading platform for small businesses) is the biggest PC based E-commerce platform in China, and its chairman Ma Yun (马云) has voiced concerns that WeChat (a mobile text and voice messaging communication service developed by Tencent) is well on its way to pushing Alibaba from its number one status. The reason for that, as Yuan explains, is WeChat is cell phone based, while Ali Baba is PC based. And on a cell phone, people can purchase anything, anywhere, anytime. Yuan advises people who ask him what kind of entrepreneurship they should do in China, to aim at cell phone based E-commerce.
Yuan also points out that Western entrepreneurs should be aware they should not blindly follow all the Western world’s business rules if they want to succeed in China. For example, over the last five years there has been a tremendous growth in local express delivery companies in China, mostly delivering small E-commerce items that only cost a few Renminbi (RMB). In Europe, they would not use express delivery for such small articles because the costs could never be covered. But in China, it is possible because of the scale on which people are using E-commerce. As many people buy so many different items, the costs can be covered. That is the unique quality of the Chinese market.
Big Innovation: China is a Good Experimental Market
So there are many opportunities for Western entrepreneurs in the Chinese market, but, Yuan points out, you must be innovative. China is not a conservative country, contrary to what many Europeans might think based on their ideas of Confucianism. The Chinese believe in many different things and are also very open to many things. As Yuan puts it, you could never imagine Korean fashion being very popular in the Netherlands, or in the US, because they are not used to it and not open to it. In China, any type of fashion can be popular, be it Korean or French, or American because the Chinese can accept and are open to anything. Because the Chinese are so open, China is a good experimental market to try out innovative and experimental things.
It also means you have to be innovative and you have to be able to make changes quickly to survive in the Chinese market. Chinese consumers really appreciate the quality of European brands and products, but in order to compete with everything else on the market, you have to stand out, especially on the cell phone-based entrepreneurship platform. According to Yuan, if you develop an app, you have to innovate every four months because information and competition changes quickly. So, you need to have a new vision every four months to stay ahead of the competition. Nevertheless, cell phone-based E-commerce is the most promising business field in China today. As Yuan puts it, the big difference between the Dutch and the Chinese is how we look at our cell phone. The Chinese are ‘glued’ to their cell phones from morning to evening. So, they have a constant source of information that they can and do access anywhere, anytime. So to succeed in business in China today, you need to be very quick; otherwise you cannot provide what the market needs because the market constantly changes from being stimulated by so much different information.
In conclusion, Dr. Yuan’s lecture demonstrates that when it comes to doing business in China, there are many interesting opportunities for Western entrepreneurs. He pointed out that Western entrepreneurs need good, clear insight of China’s economic data to succeed: it provides them with a better understanding of the market. Given the development of the internet and of independent private research and information sources, such as provided by Yuan’s own research company, people now have access to reliable market information. Yuan pointed out one of the most interesting market phenomena in China: children dominate the family’s needs and they act as decision makers nowadays. Companies should, according to Yuan, focus their marketing efforts specifically on this group. Another important development in China which Yuan addresses is the speed of growth of E-commerce, in particular cell phone-based E-commerce, which is actually changing consumer behaviour fundamentally. These rapid changes, and the apparent openness of the Chinese consumer towards new developments, are what make the Chinese market an interesting market, good experimental ground and a great place to try innovative, experimental things. At the same time, that is also what makes it a challenging market because you need to be able to respond to and move along with these rapid changes. But, according to Yuan, as long as you keep in mind that success in the Chinese market is based on being innovative, then China can prove to be a very rewarding business environment indeed.