Selling Technology to the Chinese Government

Considerations for Foreign Vendors Facing Growing Competition and Protectionism

By Tim Lindeman

Selling Technology to the Chinese Government

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About Guests: Nicole Guo is Business Development Manager for Alicloud responsible for government sales in the Guangdong province. Nicole focuses on smart city projects to help the government automate its services and workflows. Prior to working for Alibaba, Nicole worked for Dimensional Insight in China marketing data and analytics services to Chinese hospitals.

Summary

Selling technology to any foreign government can be challenging due to national security concerns and a bias to support the local industry. This is especially the case in China, where heightened international tensions and protectionist policies in the West have caused China to look for ways to reduce its reliance on foreign technology.

Despite these challenges, the Chinese government remains an attractive target for many foreign technology vendors, because it is a major technology consumer that relies on foreign suppliers to meet many of its needs.

This article explores key challenges foreign tech vendors face when selling to the Chinese government. And for companies up to the challenge, it investigates important considerations and tactics for succeeding in government sales.

Takeaways

The window of opportunity for foreign vendors is closing
While there are still technology categories where foreign products have a strong competitive advantage, the government is increasing support for domestic firms to close the gap.

Planning and procurement processes make selling complicated
A sophisticated planning cycle influences technology purchases at all levels of the government. And foreign vendors have a hard time navigating the government’s complicated procurement process.

Relationships remain important despite the crackdown on corruption
The anti-corruption campaign has changed the way that vendors interact with the government. Vendors must learn new ways to build relationships, so they can build trust and win favor.


An Unlevel Playing Field

In recent years, many in the West have criticized China’s “unfair” trade practices. And although fairness is difficult to judge, it is clear that many foreign technology firms struggle in China’s “socialist market economy.”

Some point the finger at China’s central planning. They claim that the government’s interference in the market creates a home-field advantage for domestic firms.

To illustrate this point, the government’s Made in China 2025 initiative aims to upgrade China’s manufacturing capabilities by subsidizing domestic innovation and targeting 70% “self-sufficiency” in high-tech components. (see endnote 1) Foreign opposition has been so loud that China has largely suspended media promotion of this initiative. (see endnote 2) However, it is unlikely that the government has given up on the policy’s core objectives.

Another example relates specifically to government technology purchases. According to the Financial Times, China issued a directive to replace all foreign hardware and software used in the government and the public sector with domestic technology by the end of 2022. (see endnote 3) However, no other media outlet has been able to provide independent confirmation of this directive. And experts from major analyst firms see little evidence that such a policy exists. Furthermore, analysts suggest that the reported aims are not achievable given current gaps in the maturity of Chinese technology.

Regardless of whether there is a formal policy in place, the Chinese government is clearly working to support domestic vendors and reduce reliance on foreign technology. And government procurement of domestic technology is a powerful tool to support the development of the local industry.

In addition to the government’s favoritism towards domestic firms, foreign tech vendors selling in this space have other significant hurdles. Finding opportunities to sell requires deep local relationships. The procurement process is complex and highly regulated. And if successful, managing government projects is very difficult and getting paid for the work is also challenging.

Does Targeting the Chinese Government Make Sense?

Given the unlevel playing field, does it even make sense for foreign tech firms to target the Chinese government and public sector? This is a complicated question. And the answer is different for each company. But one thing is certain, the size of China’s government IT budget is huge and is growing rapidly. (see endnote 4) The following key considerations should help you decide if this market segment is appropriate for your company.

Consideration 1 – Availability of Chinese Substitutes

While the government would like to use domestic technologies wherever possible, there are still gaps where suitable local technologies are not available. In such cases, the government relies on foreign technologies to meet its needs.

In general, China is relatively strong in emerging technologies. The main reason for this is it takes many years of development to recreate mature technologies. Therefore, the government has identified strategic areas to invest in, such as cloud, artificial intelligence, internet of things, 5G, and blockchain. By investing in these areas, China has the opportunity to get ahead. Furthermore, some of these emerging technologies have the capacity to leapfrog mature technologies by offering similar functionality using an entirely new platform. (see endnote 5)

China is also relatively strong in applied technologies. In contrast to foundational technologies, which require specialized knowledge and significant R&D investment, applied technologies rely more on quick market execution. Chinese technology companies excel in this area because they are willing to work long hours and have a better understanding of local requirements. They are able to produce a wide variety of workflow systems and specialized applications and get them to market very fast.

Foreign technologies, on the other hand, have relatively few substitutes in the foundational and mature technology spaces. Some examples of such technologies include computer processors, operating systems, engineering and design software, database management systems, and application development frameworks. (see endnote 6) Foreign technologies are also strong in high-end emerging technology and application spaces. In these areas, foreign companies benefit from access to expert talent and have accumulated years of development in sophisticated applications.

Figure 1: Foreign vs. Domestic Technology in the Chinese Market

Foreign vs. Chinese Technology

The matrix in Figure 1 provides a high-level guide to determining if a particular technology is likely to have substitutes in the Chinese market. Regardless of where your technology sits in the matrix, you should perform market research to uncover and evaluate competing domestic products. If you have strong domestic competitors and are still interested in going after the market, you should consider ways to make your product less “foreign.” (see consideration 3 below)

Consideration 2 – Target Segment Within the Government Market

Since the Chinese government is large and complex it is good to break the market into segments. (see Figure 2) At the top is the central government with its many branches. And underneath is a myriad of agencies at the regional and local levels. In addition to the core government, there is a secondary market that includes the government-controlled public sector and state-owned enterprises (SOEs).

Given its massive size and the limited availability of domestic technologies, the government will likely take a staged approach in reducing reliance on foreign technology. It will take years for domestic vendors to offer competitive substitutes for all the government’s technology needs. And during that time, foreign vendors will have a sizable window of opportunity to sell to segments with lower priorities for domestic adoption.

The core government segment is the highest priority. Sensitive agencies such as the military and other groups related to national security are already early adopters of Chinese tech. They often pay high prices for fledgling technologies in order to support the development of domestic products. State-owned enterprises in industries like banking, insurance, telecommunications, and media are the second priority. And the public sector, which includes schools, universities, hospitals, research institutes, and cultural organizations, are a much lower priority.

Figure 2: Government Priorities for Replacement of Foreign Technology

Government Priorities for Tech Replacement

Consideration 3 – How “Foreign” Your Product Is

In the globalized world, it is really hard to pinpoint a given product’s country of origin. This is especially the case for complex products with numerous outsourced parts. Computer hardware is a good example. Lenovo may be a Chinese company, but it uses a foreign-acquired trademark (ThinkPad) and its products are filled with foreign parts. Even Huawei, which is arguably China’s leading technology innovator, still depends on many foreign hardware and software components for its products.

Two of the most important factors that make a product “Chinese” are branding and sales. Foreign technology companies can acquire a Chinese brand and sales force by partnering with local application vendors, system integrators, and resellers. Such partners frequently bundle foreign technology into complex solutions or build entirely new products on top of foreign foundational technology. In the minds of many Chinese buyers, these products are essentially Chinese.

For foreign companies selling end-to-end solutions, stand-alone tools, business applications, or services, the challenge is more difficult. As China favors the acquisition of domestic tech, it will be increasingly important for foreign vendors to invest in local research and development to dilute their technology’s foreign origin. In some cases, especially when targeting sensitive market segments, forming a joint venture with a Chinese company can be the most effective approach.

Another important strategy is to support compatibility with Chinese hardware and cloud services. Foreign technologies that do this will continue to function well as more Chinese technologies dominate the ecosystem. Chinese government agencies will also consider such technologies to be more secure.

Central Planning and Influence

Central planning is a key feature of China’s “socialist market economy.” The government’s plans influence the direction of technological development for the entire country and have a significant impact on government technology procurement. While it is generally important for all technology firms to pay attention to these plans, it is particularly important for vendors who sell to the government.

The government’s five-year planning cycle provides a framework for planning at all levels of the government and covers many key areas of China’s society and economy. The planning process is continuous and dynamic. It covers all stages of planning, from analysis and policy creation to implementation and monitoring. (see endnote 7)

Some important planning milestones include:

  • Five Year Plan: general growth targets and milestones across a broad range of topics related to China’s social and economic development.
  • Issue-based plans and sub-plans: hundreds of more detailed documents about each objective in the Five Year Plan.
  • Implementation notices and measures: programs from government departments at all levels spelling out specific instructions for achieving the various targets and milestones. (see endnote 8)

Figure 3: The Chinese Government’s Five Year Planning Cycle

The Chinese Government’s Five Year Planning Cycle

For any particular industrial sector or technology area, the relevant information is spread across a variety of plans at the national, provincial, and local levels. Figure 4 provides an example of a large number of documents that are relevant to one particular industry. (see endnote 9)

Figure 4: Example of Relevant Chinese Government Plans in Specific Industry

Example of Relevant Chinese Government Plans in Specific Industry

It is important for technology vendors operating in China to follow the major planning milestones, pay attention to relevant plans and sub-plans, and stay current on the latest policy changes. While this is not an easy task, understanding the direction the government is going is essential for identifying opportunities where a particular technology can help the government to achieve its aims. Fortunately, industry-focused institutes and associations in China can provide excellent resources to help technology vendors in a particular industry keep abreast of the government’s priorities. (see endnote 10)

From Plans to Opportunities

After gaining an understanding of the goals in a particular area, you can begin to have conversations and work to create a vision for how your products or services can help the government obtain these goals.

First, identify an initial government agency or government-controlled organization to target. Before visiting the office, find out as much as possible about their particular business by reading published reports and related plans. Prepare custom talking points that address specific goals and provide examples of how you have helped other clients solve similar problems. It is crucial to speak the same language of your target audience and understand the issues that are most important to them. If they are interested in what you share, they may give you a chance to brainstorm opportunities to work together to achieve their goals.

Since government procurement typically involves multiple leaders, you should look for opportunities to speak with both business and technology departments. If possible, get an introduction through your professional network. Otherwise, approach the office directly. It can take time to work your way up the org chart, but if you have a strong message this approach will also work. (see endnote 11)

Another option is to work with a Chinese partner. Look for a firm that sells complementary technologies and has a good reputation in the government market. An effective partner can make introductions, take on responsibility for selling, or even deliver the technology independently. In more sensitive government sectors, being able to sell your services under the umbrella of a Chinese company is an excellent way to reduce bias against your product being foreign.

From Budgets to Public Tenders

Once you find a suitable project to help a government agency or government-controlled organization to obtain its goals, the next step is to get a budget for the project. If the project is small, it may be possible to use an existing budget. Otherwise, the purchasing office will likely need to pursue funding during the annual budgeting process.

The budgeting process is different depending on whether the purchasing office belongs to the government, a state-owned enterprise, or a public-sector organization. For government offices, the process begins at the end of each year. Each office drafts a budget then submits it to higher-level government offices for review, revision, and inclusion in the national budget. Finally, the National People’s Conference approves the budget at its annual meeting in March. (see endnote 12)

Figure 5: The Chinese Government’s Budgeting Process

The Chinese Government's Budgeting Process

After obtaining a budget, the government office must spend the funds before the end of the year. Otherwise, they will need to reapply for a budget for the following year.

The process for purchasing technology is formal and complex. Government offices and government-funded public sector organizations typically use public tenders for large technology projects. They first create a request for proposal (RFP) document outlining the project requirements and criteria for vendor selection. (see endnote 13) And then they collaborate with a purchasing center to publicly solicit bids, organize a panel of experts to evaluate vendor submissions, and select the winning bidder. (see endnotes 14 and 15)

Figure 6: China’s Public Procurement Process

China's Public Procurement Process

Although the process is transparent, the purchasing office can still influence the tender in favor of a particular vendor. A common way to do this is to include very specific selection criteria. Some examples include requiring the vendor to have a local branch, minimum registered capital, a certain number of employees, and domestically-sourced technical components. Additionally, some categories of procurement are only open to companies on an approved vendor list. (see endnote 16)

Vendors also have opportunities to influence the process. For example, they can share RFP templates including specific requirements for functionality that are unique to their product with the purchasing office. Another common practice is to collude with other businesses to submit competing bids. (see endnote 17) Naturally, the friendly competitors submit tenders designed to ultimately lose.

In the past, unless a vendor got involved very early in the purchasing process, there was little chance to win a deal. In recent years the government has made big strides to make the process fairer. One way they have done this is by investing in information systems that track procurement details and make it easier to identify purchasing fraud.

Now it is possible for vendors to compete for projects where they have no existing relationship with the customer and have a reasonable chance of winning. There are a number of information services in China that collect data on public tenders. (see endnote 18) Vendors who subscribe to these services can set up alerts to notify them immediately when a new tender is published that matches their search criteria. This way, vendors have adequate time to contact the relevant purchasing center, acquire the bidding documents, and participate in the tender. These information services also provide valuable market intelligence. Not only do they include information about the purchaser, project, and selected vendor, they also list the price of the winning bid. Vendors can use this information to understand the size of the market, the areas of opportunity, and the competitive landscape.

Relationships and Corruption

Although China has made significant progress in making government procurement more transparent and impartial, relationships are still very important.

Traditionally, vendors relied on social interactions outside of work to build relationships with government officials. This involved fancy meals, alcohol, and entertainment. And all too often, when these interactions were not enough, vendors used bribery to bridge the gap. (see endnote 19)

Much of this changed in 2013 when Xi Jinping began a sweeping campaign to crush corruption. Xi targeted individuals in high and low positions, arresting 100,000 government officials and businesspeople and removing even more from their posts. (see endnote 20) This had a significant impact on technology vendors, forcing them to start over and build new relationships without traditional tools.

On the surface, the crackdown on corruption has brought about considerable change. Government officials are now much less willing to have dinners or accept gifts from companies. But under the surface, businesses have found more discreet ways to obtain favor. (see endnote 21) And there are recent signs that the campaign is winding down. (see endnotes 22 and 23)

Figure 7: China’s Anti-Corruption Cases vs. Corruption Perception

China's Anti-Corruption Cases vs. Corruption Perception

Regardless of how effective Xi Jinping’s crackdown on corruption has been, it has led to significant changes in purchasing behavior. (see endnote 24) And these changes are especially challenging for foreign vendors because they often lack the cultural nuance needed to adapt quickly.

One way to manage this weakness is to give Chinese partners more responsibility for developing relationships with the government. However, this approach has the disadvantage of reducing the exposure to end customers and control over the selling process.

Another approach is to increase investment in pre-sales activities that demonstrate business value, such as proof of concepts. (see endnote 25) By doing this, vendor staff will have more opportunities to build working relationships with individuals in the government and prove the advantages of their solutions.

Recommendations

Set a high bar before targeting the government market

Before choosing the government as a target market, make sure your product has a sustainable competitive advantage. Consider the government’s priorities for domestic technology development and determine if your category is at risk. Also evaluate adjacent markets, such as state-owned enterprises and the public sector, that may be a lower priority for domestic technology replacement.

Use knowledge of government plans to create value propositions

Every branch of the government is focused on obtaining goals set in the Five Year Plan and related planning documents. Become knowledgeable of all of the plans concerning your technology and the government segment you are selling to. Use this knowledge to create value propositions showing how your product can help the government obtain its goals.

Consider partnering with local companies to increase odds of success

Given the preference for local vendors, consider working with Chinese partners to embed, rebrand, and fully localize your product for the Chinese market. With complex technologies, few products are 100% Chinese. By working with local partners, you can make your offering more “Chinese” and benefit from your partners’ relationships and experience handling the government’s complex procurement process.

Suggested Reading

Why Foreign Tech Vendors Should Carefully Consider the China Market
Case Study: Analytics Software Company Goes It Alone In China
A Disciplined Approach to China Market Entry


Endnotes

  1. Source: “Why Does Everyone Hate Made in China 2025?” Council on Foreign Relations, March 28, 2018 (https://www.cfr.org/blog/why-does-everyone-hate-made-china-2025)
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  2. Source “’Made in China 2025′ Unmade?” Macropolo, August 20, 2019 (https://macropolo.org/analysis/made-in-china-2025-dropped-media-analysis/)
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  3. Source: “Beijing orders state offices to replace foreign PCs and software,” Financial Times, December 8, 2019 (https://www.ft.com/content/b55fc6ee-1787-11ea-8d73-6303645ac406)
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  4. Using the Beijing city government as a benchmark, IT expenses accounted for approximately 1% of total government expenses in 2019. This percentage applied to the projected 2020 national budget of nearly 26 trillion RMB ($3.7 trillion USD) is about $37 billion USD.
    Source: “Beijing Shi 2019 Nian Yusuan Zhixing Qingkuang he 2020 Nian Yusuan,” Beijing City Finance Department, January 2020 (http://czj.beijing.gov.cn/zwxx/czsj/czyjs/202002/P020200204437920220330.pdf)
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  5. One good example of the leapfrog effect is the cloud replacing traditional desktop operating systems and client applications. Services such as Alibaba Cloud have emerged as an alternate “network operating system” and offer a rich marketplace filled with Chinese-made cloud applications and services.
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  6. China has identified 35 critical technology areas where it relies almost exclusively on foreign producers.
    Source: “Ka Zhongguo Bozi De 35 Xiang Jishu,” Eeworld, December 14, 2019 (http://news.eeworld.com.cn/mp/s/a78050.jspx)
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  7. Source: “China’s Five-Year Planning System: Implications for the Reform Agenda,” Oliver Melton, April 22, 2015 (https://www.uscc.gov/sites/default/files/Melton%20-%20Written%20Testimony.pdf)
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  8. Source: “An Intro to China’s Policymaking Process,” Trivium, viewed on January 17, 2020 (https://triviumchina.com/2018/09/03/an-intro-to-chinas-policymaking-process/)
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  9. Source: “Overview of China`s Five-Year Plans in the Transport Sector,” GIZ China, December 1, 2017 (http://www.sustainabletransport.org/wp-content/uploads/2017/12/20171201_GIZ-Chinas-Five-Year-Plans-in-the-Transport.pdf)
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  10. There are many different sources to collect information about Chinese government planning. Each government department has its own website and makes plans available for the public. The Ministry of Information Industry and Statistics Bureau also provide valuable reports.
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  11. Source: “Xiaoshou Xinshou Ruhe Dakai Zhengfu de Da Men,” Renhe Wang, viewed on February 6, 2020 (http://www.renhe.cn/answers/44770)
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  12. Source: “Difang Caizheng Yusuan Guanli Liucheng,” Licun Chen, Baidu Wenku, September 19, 2019 (https://wenku.baidu.com/view/64edbaaf2a160b4e767f5acfa1c7aa00b42a9dc4.html)
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  13. The winning bidder is usually selected based on a weighted set of criteria that includes price, technology capabilities, and other business requirements.
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  14. Source: “Public Procurement in China: overview,” Thomson Reuters Practical Law, November 1, 2013 (https://content.next.westlaw.com/Document/I2ef129701ed511e38578f7ccc38dcbee/View/FullText.html)
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  15. Source: “Zhengfude Caigou Liucheng Shi Zenyangde,” Baidu Jingyan, June 6, 2009 (https://jingyan.baidu.com/article/cb5d6105b4056e005c2fe0c8.html)
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  16. For some categories of technology, the government keeps a list of approved vendors. The requirements for getting included in this list vary.
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  17. Public tenders usually require a minimum of three qualifying bids. In cases where there are not enough competing bids, some vendors will solicit inferior bids from friendly businesses. As procurement systems improve, the government is collecting more information about “fake” bids and getting better at identifying tender fraud.
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  18. One such information source is Qianlima Zhaobiao Wang: http://www.qianlima.com/
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  19. It is important to note that not all Chinese leaders in this time period were corrupt. And even those who accepted bribes often made responsible purchasing decisions. The money spent on building relationships was a basic cost of doing business. However, there were also many cases where greedy or miscalculating government officials and business leaders spent far too much money on “greasing the wheels.” And in order to complete their projects with the limited funds left over, they made disastrous compromises on quality and safety.
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  20. Source: “It’s no wonder China’s Xi Jinping is winding down anti-corruption efforts – they’ve barely made a dent,” The Independent, January 29, 2019 (https://www.independent.co.uk/voices/xi-jinping-china-corruption-scandal-new-figures-a8751206.html)
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  21. Government officials are generally much more cautious about receiving benefits from businesses then they were in the past. Before, careful officials would distance themselves from direct exchanges of benefit by encouraging interactions with trusted family members. Now, such officials are distancing themselves even further and are becoming more creative about the third parties involved. Also, some insiders have shared with us that instead of inviting government officials to luxurious venues, businesses are now using “underground” venues that look like shacks on the outside but employ 5-star chefs and have an abundant supply of Maotai.
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  22. Source: “China’s False War on Corruption,” The Walrus, January 10, 2020 (https://thewalrus.ca/corruption-chinas-false-war-on-corruption/)
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  23. Source: “Visualizing China’s Anti-Corruption Campaign,” ChinaFile, August 15, 2018 (https://www.chinafile.com/infographics/visualizing-chinas-anti-corruption-campaign)
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  24. Source: “Corruption Perceptions Index 2019,” Transparency International, viewed on March 17, 2020 (https://www.transparency.org/cpi2019)
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  25. Proof of concepts (PoCs) are an approach that technology companies use during pre-sales. The vendor will typically work with the customer to select a quick project that offers clear benefits and implement the project for little or no money. By doing this, the vendor has the opportunity of building a relationship and gaining vendor commitment for its product. Often the costs of performing a PoC are significantly less than entertaining potential clients.
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If you are interested in having a conversation about whether or not it makes sense for your company to sell technology to the Chinese government or other China business-related topics, please connect with me on LinkedIn.


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