Tony DeOrsey’s Views on Doing Due Diligence Before Entering the China Tech Market
By Tim Lindeman
Making a successful China market entry is especially challenging for foreign technology companies. In fact, many companies spend a great deal of time and money attempting to establish a foothold in China, but later find that their product isn’t a good match for the market. TechCode’s Tony DeOrsey advocates a disciplined approach to evaluating opportunities in China that includes legal due diligence, market research, and product validation with Chinese customers.
Chinese tech competitors are a force to be reckoned with
China’s domestic tech industry is growing rapidly fueled by government support, a healthy entrepreneurial culture, and abundant investment. Chinese companies may not always have the best technology, but they have a better understanding of local requirements and are extremely competitive.
Not all foreign products are suitable for the China market
In order for foreign tech companies to succeed in China, they must have a market-ready product with a clear value proposition. Products solving broad market requirements typically perform better than those focused on the particular needs of a foreign market.
Preliminary research improves the odds of success
Learning to succeed in China by trial and error can be expensive, time-consuming, and risky for your business. Taking adequate time to research the market and perform due diligence will save you time and money in the long run and help you make better decisions from the outset.
Gallery: TechCode Accelerator
TechCode works with tech entrepreneurs around the world, providing education and support to enter the China market.
Discipline vs. Opportunity
Setting up a successful China business requires immense commitment, a differentiated product, and relentless execution. And even if you are able to deliver all three, there are lurking risks that could undermine your best efforts. Therefore, foreign businesses should be cautious and conduct adequate due diligence before making the decision to enter the China market.
However, being disciplined about entering the China market is not a typical approach. All too often a foreign company will participate in a trade show or event and meet a Chinese company in a similar vertical that claims to have a great opportunity. “If you do a joint venture with me, I have the market, I have the customers and we’ll both make a lot of money.” It is very tempting to jump at the first opportunity that presents itself. But this can lead you down a spiral where you are motivated to pursue the singular opportunity without considering other options that may make more sense.
Going to China requires a disciplined approach. Companies need to be very smart about validating their own potential and ability to do business. Think twice before pursuing any type of partnership or engagement, especially anything as binding as a joint venture or receiving investment from a Chinese investor. Take time to understand what your opportunities are, how you can best leverage those opportunities, and how you can mitigate the risks.
A Competitive Market
Typically, when foreign companies consider entering China, some of their first concerns are intellectual property, changing laws, and challenges associated with culture and language. While these concerns are all valid, the biggest challenge for foreign companies in China is competition.
China has a fast-growing tech sector fueled by a vibrant startup culture with new companies emerging every day. These startups tend to raise funds quickly and go on a very fast sprint toward an IPO or acquisition. Chinese entrepreneurs are accustomed to intense local competition and are not easily frightened by risk.
Chinese startups and tech giants are also able to attract very high caliber staff. The Chinese government has prioritized investment in major universities and is steering students toward technology sectors.
With competition being the number one challenge, it is really important to get up to speed with what local competitors are doing. It is a mistake to assume that since you have gained positive attention or built up a strong market share in the West that you are guaranteed to be ahead of Chinese competitors. This is not a safe assumption, especially if you compete in software, internet of things, or anything to do with AI.
Prerequisites for Success
Given the highly competitive nature of the market, foreign companies should carefully evaluate their offerings before making the decision to go to China.
The first thing to consider is whether your product is mature enough to demonstrate strong use cases. If the product is still in the concept stage, it will be difficult to convince Chinese buyers, especially large corporations, that you have the potential to add value. You should be able to show how your product is going to solve pain points for a client.
A second consideration is whether you solve problems that are relevant to the China market. If your product is specific to your local business environment, it may not provide value to Chinese customers. Particular industries, such as digital health and fintech, have very wide market applications. Therefore, foreign products in these industries are more likely to be successful.
Key Steps for China Market Entry
While it is relatively straight forward to set up a legal entity in China, it is much more difficult to establish a viable and sustainable business. Do not assume that succeeding to register a subsidiary and getting a subsidy from a local government is good enough. Realistically, this is going to be the easiest part. Instead, you will want to understand all that is entailed with getting your business off the ground and approach the market in a really smart way.
Before you set up your China business, you should first validate the legal risks. Then make sure you have a full understanding of your ability to compete in the market. And finally, figure out how much investment is required and how long it will take to establish a revenue stream.
Within each of these categories, there will be many considerations to address. So, don’t underestimate the time and resources that this effort will take. And don’t be shy about engaging advisers.
Validate Legal Risks
The first step is to talk with lawyers in your home country. Ensure that anything you do in China is not going to be subject to export controls. Also, take appropriate steps to protect your IP. Do not wait until a problem emerges but make the effort to control risks prior to even exploring the market.
In the tech sector particularly, it is important to be cautious. Pay attention to changes on both sides of the ocean, both regarding laws and political sensitivities. And if possible, avoid anything that could be misconstrued as politically sensitive.
Conduct Preliminary Market Research
In order to assess the market opportunity, you will want to conduct some initial research to understand the competitive landscape and determine if your offerings are differentiated versus Chinese competitors. To do this you will want to investigate Chinese language information sources and speak with potential customers and partners.
Don’t assume that if you have not heard of a Chinese competitor that one does not exist. Because by the time you hear about a Chinese startup in the foreign media, it is probably too late. If a Chinese company is making the news in TechCrunch or the New York Times, then people have likely already known about them in China for a long time.
Given the vibrancy of the market, the strong capital sector, and China’s interest in technology, there is no longer the idea that a Chinese tech company is only strong if they are doing business overseas. The domestic market is strong enough and is growing rapidly enough to support plenty of Chinese tech startups. And these companies can grow pretty large just by going after the home market without receiving much attention overseas.
Depending on your company’s familiarity with the market, you might choose to conduct the initial research in-house, hire someone who is savvy with Chinese information sources, or retain an agency. The initial research can be fairly high level. Look for other companies operating in your target industry, identify the types of customers they are working with, and try to get a sense for the overall level of market saturation.
After you have determined who your competitors are and how you differentiate from them, you can then move to present an initial value proposition to potential customers and partners. Depending on the feedback you receive, you should get a sense for whether China is the right fit for you.
Get Outside Advice
Often for companies where China is not the best fit, it is only after engaging with multiple advisors that they find out the idea is not really going to work. So, it is good to start engaging with people who understand your technology and target market in China at a very early stage.
There are many places to go for help, including accelerator platforms like TechCode, your local foreign trade office, China market consultants, or chambers of commerce in China. By working with these experts, you will ensure that all of your important decisions have been validated by people with experience in the field. And you will avoid making costly mistakes through trial and error.
Think twice before chasing your first opportunity in China
Unexpected opportunities from potential customers and partners can be a good springboard into the China market. However, take the time to evaluate the broader market opportunities to understand if this is the best first move.
Consult with a lawyer before taking any big step
There are many risks associated with entering the China market. Talk with a lawyer who understands these risks and make sure you comply with export regulations. Also, take appropriate steps to protect your intellectual property.
Search Chinese information sources for local competitors
Just because you haven’t heard of Chinese competitors in your space doesn’t mean they don’t exist. Work with an individual or company to search Chinese sources for information about your competitors and then evaluate how you differentiate.
Talk with potential Chinese customers and partners
Introduce your product and value proposition to individuals who can benefit from it. They can provide you with first-hand feedback about how competitive your product is and how much money Chinese customers might be willing to pay for it.
Involve China tech industry consultants
There are experienced business professionals who have already blazed trails into the China tech market. Involve them in your strategic planning, gain inspiration from their successes, and learn from their failures.