The question “Why China?” is quickly answered for many startups: The combination of the large market, availability of investment capital and political support for innovation projects makes China an attractive target market, particularly for scaling technologies. China’s leading role in the field of digitization and the resulting opportunities for startups are also current topics of discussion. Yet in this case it is important to distinguish between digital
- B2C markets, whose speed and dimensions are impressive but which are also characterized by intense local competition and the specific requirements of Chinese customers, and
- B2B markets, in which technological standards (such as in mechanical engineering) are still generally set by Western providers.
In classic production industries such as steel, cement or the chemical industry, China accounts for roughly half of global output, which means in many B2B sectors, it’s more a question of “how” than “whether” to enter the market in China.
Before taking the first steps in China, it is crucial to clearly define the target market and what is needed from local partners. Based on its size alone, China shouldn’t be viewed as one single market. Many Chinese companies – and potential local partners as a result – often only have a good positioning and networks in specific regions. Another specific feature is the role of private and government-owned companies. Startups often express a wish to have a partner in the private sector to tap into the market, but this is often not feasible or advisable, particularly in strategic industries such as energy or telecommunication as well as the majority of processing industries.
China for startups
Something that is now relatively easy for startups is establishing contacts with China. Support is offered by a host of competitions, delegation visits, industrial parks, accelerators and technology scouts. Excellent examples include the TIE² International Lab of UnternehmerTUM as well as the “4th China (Shenzhen) Innovation & Entrepreneurship International Competition.” It’s important for startups to identify the players behind these initiatives early on as well as their strategic, financial or political motivation.
When doing business with China, documents such as simple memorandums of understanding or letters of intent (MOUs, LOIs) can also be quickly signed with potential local partners. It is advisable to draw up goals that are as specific as possible, planned milestones and basic responsibilities at an early point in time to create an initial point of reference for subsequent negotiations.
As soon as contract negotiations begin, they are generally accompanied by a time and resource-consuming process with many iterations in which the results of negotiations can once again be called into question. Especially for startups, who typically find themselves in the role of the smaller “junior partner,” it is absolutely essential to stay focused on your own goals and technological strengths as your position during negotiations.
It is also advisable to prepare one or more fallback options before negotiations begin. Due to the size of the country and intense competition among Chinese companies, there are almost always good alternatives for locations or partners.
Innovative technologies often require a lot of explaining
One aspect that is just as important as strict negotiation skills is being “on the ground” for implementation in China. In many cases, startups’ innovative technologies need to be explained in great detail to Chinese partners – especially when you’re no longer talking with managers in the finance or M&A departments who have Western training, but rather with those who are responsible for production or sales in daily business. Basic aspects like English language skills or process documentation are often lacking in these areas.
In addition to elements such as knowledge transfer or training, one of the main objectives for regularly being on site should be to establish personal relationships and mutual trust. Establishing and maintaining these relationships is one of the most basic tasks of startup founders/CEOs both while initiating and implementing cooperative projects.
In a nutshell: Real “quick wins” for startups are rare when doing business in China. Instead, the following factors promise medium to long-term success:
- Go to China from a position of technological strength and not of financial weakness
- Clearly define your market, goals and what you need from your Chinese partner
- Try to understand what motivates your Chinese partner, why they are collaborating with or would like to invest in a German startup
- Collaborate with Chinese companies that have experience in international projects or, better yet, their own presence in Germany/Europe
- Always work with fallback options, especially in terms of locations and partners in China
- Establish personal relationships – especially as the founder/CEO
Guest contribution by Bruno Rudnik
Bruno Rudnik is the Managing Director of SusTech Consult. He advises European startups and their investors in scaling and financing environmental technologies and in entering the market and finding partners in Asia. Moreover, he works for the German-Chinese Business Association (DCW) in an honorary capacity. He serves both as the technical spokesman for environmental technologies and as the Chairman of the DCW Region Southern Bavaria. The DCW has been the leading association in Germany for promoting economic relations with China for more than 30 years.