China market entry - License

Trading and export as means to enter the China market are sometimes in low efficiency. It might be possible that the cost of production and transportation are excessively high in the manufacturers' native country, or the Chinese government may have limited the import of certain products.

However, manufacturing in China has always been encouraging. With huge market and inexpensive labor market, lots of foreign manufacturers are being attracted to choose manufacturing in China. By locating their production here, the manufacturers can customize the design, products, sale and after-sale service to suit the local markets. With a lower cost of production, it has also increased the competitiveness of the manufacturer's product in the international market.

Some of license and contract model as means in China market entry are listed below:

Assembling in China

In this way, the manufacturers may produce some or most of the spare parts in their native country and then transport them to China to be assembled. They can then sell the end products in China market or export them to the overseas market.

This will have some benefits. Firstly the amount of investment can be reduced, the customs duty is low and the labor force in china is inexpensive, coupled with China huge domestic market and incentives from the Chinese government, these make it worthwhile.

Contract manufacturing

Contract manufacturing is always referred to as OEM. In this method, what the manufacturers will do is that they can sub-contract the manufacturing of their products to local Chinese manufactures and once the products are produced in accordance to the manufacturers' requirements, the foreign manufacturers will be in charge of the sales of their own products.

The advantages of contact manufacturing are that the foreign manufacturers' superiority may lie in their technology, craft and marketing, but not in manufacturing. Hence by sub-contracting to local Chinese manufacturer, they can reduce capital investments and investment risks. As the foreign manufacturers still have the rights to sell the products, they are able to control their market. By manufacturing their products in China, it is beneficial to the relationship with China government as well.

However this method has its own limitations. Firstly, it might be difficult to find a suitable local manufacturer and if they do, they will have to share their profits with them. Once the contract with the local manufacturer ends, the local manufacturer might become a key competitor then. If this happens, you may lose control of the technical "know-how" in China.

Trade permit

Through trade permit, foreign companies will sign an agreement with Chinese local companies such that the Chinese companies are given certain rights to the patents, the trademarks, service marks, technologies etc. The Chinese companies will produce or sell the products under certain conditions while paying the foreign companies some royalties. Franchise is one of the most common methods of trade permit.

By entering the Chinese market through trade permits, the foreign companies will be able to break into the Chinese market with minimum capital and at the shortest time possible. The foreign companies are also free from having to pay any taxes and transportation costs. The risk will be smaller and the foreign companies can also avoid having their license confiscated. At the same time, after the product is sold in the local market, should there be any amendments to the products; the foreign companies need not pay the expenses.

Since the local companies are given so many responsibilities, this would mean that the foreign firm will have little control over the product's quality and how the product is being projected and marketed. Moreover, if the agreement with the local companies has ended, the Chinese companies might become a potential competitor as they will be familiar with the operation of the foreign enterprise.　

Back