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A Playbook for Entering China

A step by step guide for B2B Startups who want to learn more about entering the Chinese market.

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A Playbook for Entering China

  1. 1. – The China Playbook Industrial Tech
  2. 2. – 2 Methodology 5 Expert Interviews 1 Master Thesis* In-depth research on China Analysis of European Startups * Internationalisation Strategy – How European Tech Start-Ups Should Enter the Chinese Market by Eggers, L. (2020)
  3. 3. – Agenda - A Six Step Approach to China Why China? Product Readiness Team Readiness Financial Readiness Entry Modes IP Rights Location Case Study 1 2 3 4 5 6
  4. 4. Why China?
  5. 5. – 5 A vast homogenous market China offers a great ground… grow with a massive market Source: Eggers, L. (2020) Population of 1.4 bn people offers a massive market opportunity for start-ups. Tech-Savvy Users almost 850M people use smartphones and are highly adaptive to digitalisation. Digital Leadership many sectors incl. manufacturing are rapidly evolving into digital benchmarks. Software Market the IT and software industry accounts around $790bn China SaaS Market Size (in Bn RMB) and Growth Rates *projected growth 0 5 10 15 20 25 30 35 40 45 50 0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 2013 2014 2015 2016 2017 2018* 2019* 2020* Market Size Growth Rate
  6. 6. – 6 With big potential expected in B2B Internet giants enlarge the B2B ecosystem and invested in more than 200 B2B enterprise startups in 2019. Enterprise SaaS grew by 48% with many new startups entering the market forming a new tech development wave in China. SMEs are only starting to invest in enterprise software offering great opportunities for startups to grow. IT spending expected to grow with Chinese enterprises investing only $88bn (~0.8% of GDP) compared to Germany (2%) or US (4%) B2B is just at the beginning... ...with few enterprise software companies. Source: Fung BI (2020), Bain (2019) Top 20 Chinese software companies by market cap in $bn (2020) Source: FT, Chinese Characteristics Consumer Software Enterprise Software 0 200 400 600 800 A l i b a b a T e n c e n t M e i t u a n J D . C o m P i n d u o d u o N e t E a s e B a i d u A l i b a b a H e a l t h C t r i p B i l i b i l i K i n g s o f t I Q I Y Y o u n y o u H u n d s u n V i p s h o p W e i b o K i n g d e e B a o s i g h t T r a v e l s k y
  7. 7. – 7 Driven by a demand for Industrial Innovation − Made in China 2025 - a program comparable to Industry 4.0 in Europe − Government committed investment power of more than 300 billion USD for advanced manufacturing alone − China is willing to evolve into a global benchmark for high-tech sectors such as smart manufacturing, robotics, AI, mobility − Strong demand of innovative companies to make Chinese industry globally competitive New energy vehicles High-tech ship components New and renewable energy equipment Industrial robots High performance medical devices Agricultural equipment Mobile phone chips Wide body aircrafts 2020 2025 China has ambitious goals… ...towards industrial leadership Made in China Growth Targets for 2025 in % Source: McKinsey (2019)
  8. 8. – 8 And a thriving ecosystem to scale-up Scale-Ups Funding 9.993 7.043 $337bn $125bn China is an innovation powerhouse with a unique infrastructure to scale. It is home of 10.000 Scale-Ups (>$1M funding) with 1.610 companies in Industrial Tech. They raised +$330bn since inception, around 1.3% of the country‘s GDP. Source: MindTheBridge (2019), (2020) Industrial Scale-Ups 1.610 531
  9. 9. – 1 Product Readiness
  10. 10. – Define a clear reason why your startup should enter China (e.g. large corporate partnership, strategic investor, product adoption in China) and why you believe your product has the potential for the Chinese market. Customer behavior and culture are very different – be prepared to completely start from scratch to create product- market-fit (PMF). This also offers a great opportunity to try a new product alteration due to a highly digitalized market and willingness to adopt. Have a viable product that has been tested in the European market – this will help you to convince initial supporters and first clients in the Chinese market. Adapt your product to the Chinese digital ecosystem: “The Great Firewall” is the government-imposed internet censorship which has led to the development of an own digital ecosystem including social media application, search engines and streaming platforms. It forces you to alter APIs and change technical environments. Product Readiness a b c d Source: Eggers, L. (2020), Wirtz, J & Lovelock, C.(2016)
  11. 11. – 11 “ “Mismatches in their [UBER] strategic focus and an almost pretentious belief in their product led to the ultimate failure of their entry attempt.“ Matthias Roebel – MING Labs
  12. 12. – 2 Team Readiness
  13. 13. – Team Readiness One of the most persistent obstacles for foreign tech companies are cultural and commercial differences. You should strongly acknowledge the cultural differences and necessities. A high level of commitment to the market entry in China is very important. This means that you as a founder must be willing and able to dedicate the necessary financial resources and personal time to the expansion. Some business decisions might require in-person executive power and cannot be handled from your headquarters. Chinese natives should be involved every step of the way to guide the process. There are also network facilitators from Europe (including MING Labs or the Startup Factory) who can serve as a great entry point for startups that want to get connected to relevant stakeholders. It is impossible to build up great traction with a foreign landing team. Make sure that your team is composed of local human resource. Local market knowledge and deeper understanding of Chinese business are indispensable. a b c d Source: Eggers, L. (2020)
  14. 14. – 14 “ “The main message is, you have to have really good people on the ground that are in China”. C. Bereiter - WKO
  15. 15. – 3 Financial Readiness
  16. 16. – 16 Financial Resources Choosing the right entry mode is decisive for your need of financial resources i.e. Partnership requires the least financial resources and a Wholly Foreign Owned Enterprise (WFOE) requires the most. In most cases the expansion to China is much more costly than into other countries. It is advisable for start-ups to ensure large amounts of funding prior to expansion, i.e. a recent funding round. Startups often have secured Series A or B investment before scaling-up in China. For some Startups it might be advisable to secure funds from the Chinese private equity market. The benefit here may be two-fold: first is the additional monetary resource and the second is the market knowledge and the network of the investor. Prepare a financial buffer as you might have to sustain the business in China for a longer period in case you have to adapt your first product launch etc.. Source: Eggers, L. (2020) a b c d
  17. 17. – 17 “ “I have seen Western entrepreneurs who just did not make it there because they always thought “I know it better, I am smarter”. Do not fall into that trap.” David-Matthias Roebel– MING Labs
  18. 18. – 4 Entry Modes
  19. 19. – 19 “ “[The Chinese market] is too big not to go into but at the same time it is very challenging because they somehow want you in the country but not really.” M. Halser - KONUX
  20. 20. – Entry Modes for Tech Startups Choosing the right vehicle for entry is one of the most crucial decisions you can make when entering China for the first time. As a foreign startup you should first consult the China foreign investment catalog, which divides foreign investment projects into ‘encouraged’, ‘restricted’ and ‘prohibited’ categories e.g. high-end manufacturing services are highly encouraged It is critical to spend time researching and understanding the regulatory environment prior to making any decision to enter the market. Every entry mode is different in commitment and reward/control (see next slides). The market entry through Hong Kong is also possible, however due to the current political situation, changes can be expected. Source: Eggers, L. (2020), China Foreign Investment Catalog 2020 a b c d
  21. 21. – 1 - Partner Agent or Distributor Mode: The start-up works with a partner agent or distributor and outsources the sales to them. „You can’t do it fully on your own. So, look for the right partner and make sure that they are legit. Do some background checks on them. We – for example – also had some investors do some background checks on the people we were already dealing with.“ - M. Halser (KONUX) - Source: Eggers, L. (2020) − Lower costs, spreading of risk − Agents have localized knowledge, such as cultural, language and regulatory differences and a network − No direct contact to end consumer − More difficult to adapt product to demands of the market Advantages Disadvantages
  22. 22. – 2 - Licensing Mode: Transfer of knowledge, technologies and knowhow from the owner of the product to another company by way of granting permission to another party to use the software while the original owner retains ownership of the intellectual property (IP). Source: Eggers, L. (2020) − Lower costs of entry − Branding and reputation − Wider exposure − Spreading of risk − Possible IP infringement − Trade names can be spoiled − Royalty payments may be lower than potential profit when going alone „You find a local licensing partner, that is then able to host your software on a local server in China and sell your product, and legally invoice and pay the taxes, and everything. This is one [great entry] option.“ - Christian Bereiter (WKO, Beijing) - Advantages Disadvantages
  23. 23. – 3 - Joint Venture Mode: A joint-venture (JV) is a limited liability legal entity created by a Chinese and a foreign partner who hold joint operations and ownership. The distribution of shares can in some industries be set by the government. In some industries, JVs are the only way for foreign companies to enter. Source: Eggers, L. (2020) − Lower costs, spreading of risk − JV partners have localised knowledge, such as cultural, language and regulatory differences and a network − Chinese partner gains full access of IPR − Less managerial control − Long negotiation period „If you have a joint-venture, you have more control, but it costs you more money, more resources. I think, that’s a very individual decision. There is no better or worse in our opinion.“ - Christian Bereiter (WKO, Beijing) - Advantages Disadvantages
  24. 24. – 4 - Wholly Foreign-Owned Enterprise Mode: A wholly foreign-owned enterprise (WFOE) is a limited liability company that is 100% owned foreigners. In some industries, the government does not allow for WFOEs to be set up. Source: Eggers, L. (2020) − Full control over operations and management − Better IP protection − Sole recipient of revenue − Potential lower tax rate in innovative industries − No Chinese partner − Higher operating costs (registered capital) − Some industry limitations − Minimum number of staff requirement − Tax and repatriation of profits challenging „It is always good to have a wholly foreign-owned entity. We have that – for example. Because then you have things under control to a certain extent at least, but then there are sectors where it is just not allowed […].“ - David-Matthias Roebel (CEO, MING Labs) - Advantages Disadvantages
  25. 25. – 5 IP Rights
  26. 26. – 26 Intellectual Property Rights IPR infringement is frequent in China - as a startup entering the market for the first time, you should work under the assumption that your technology will be compromised at some point. Protection is crucial in China. While law enforcement on IP theft have improved in recent years, it is still important to treat IP carefully. China recognizes a “first-to-file” patent system = it is possible for local Chinese companies to register another company’s patent even though it is not the original inventor. Thus, it is important to register an IP prior to entering the market both in the home country and in China. China also has a “first-to-file” trademark system = your startup‘s legitimate brand and logo cannot be used if these trademarks have already been registered by a local Chinese company. Same as for c). Once in the market, companies should monitor the environment closely for IPR infringements. In case of an infringement, companies should ensure to enforce their own IP rights and build a reputation of doing so. Source: Eggers, L. (2020) a b c d e
  27. 27. – 6 Location
  28. 28. – 28 Choosing the right location Source: Crunchbase, Eggers, L. (2020) Beijing Industries: Finance, entertainment, electronics Scale-Ups: 3.400 Shanghai Industries: Software, E-commerce, chemicals, pharmaceutical, automotive Scale-Ups: 1.800 Hangzhou Industries: E-commerce, electronics, textiles, mechanical manufacturing Scale-Ups: 700 Guangdong & Shenzhen Industries: emerging tech, semiconductors, bio tech, automotive, textiles Scale-Ups: 1.500 Hong Kong, as a financial hub, is also often chosen as an entry location.
  29. 29. Case Study
  30. 30. – 30 KONUX is a leading German AI scale-up, transforming railway operations for a sustainable future. Case Study KONUX Location: Munich Industry: Predictive Maintenance Funding: +$130M (Series C) The customers are railway companies and operators. With China being the world’s largest and fastest growing railway market an expansion is crucial for the scale-up. Key facts Why China? 1. Product Readiness 2. Team Readiness 3. Financial Readiness 4. Entry Modes 5. Intellectual Property Rights 6. Location Built the product around the customer and the specifics of the country. With only one big customer, product development is very customized. Started with a sales agent and is in the process of setting up a WFOE as well as a JV. Is setting up a local development entity – 100% owned by the company - so that the IP remains within as much as possible. Hired a native Chinese market entry business development lead and an external advisor to work on the topic and the setup for the the Chinese market. Raised a Series B of $33bn with Alibaba’s VC arm to secure enough funding for a successful market entry. For the initial entry, KONUX set up their APAC office in Hong Kong.
  31. 31. 31 Speedinvest Münchner Freiheit 2, 80802 Munich, Germany Contact Andreas Schwarzenbrunner Associate Partner Niklas Fip Analyst
  32. 32. – 32 Disclaimer Please note that the information contained in this discussion document is subject to further assessment by professional advisors. This discussion document does not constitute an offer or an invitation to submit an offer to invest in any business and/or venture described herein. Please note that any information provided in this discussion document as well as any information received in connection with the presentation of this discussion document shall be treated as strictly confidential and shall not be shared with any third party, including the existence of this discussion document.