Last year I wrote a post about foreign entrepreneurs in Shanghai that included a Big Question with a link:  Who gets rich in China? The page attracted a ridiculous amount of search engine hits considering its dumb content, which proves that it was indeed a hot question. Time passed and I never got around to writing more, but my intention was just to echo the phrase I so often hear from disgruntled expats:

“Who gets rich in China? The Chinese!”

I am afraid I don’t have a better answer now than I had then, but recently I’ve been talking business with some entrepreneurial friends, and one problem has come up so many times that I think it is worth a post. And I hope this is useful for foreign start-ups in China to avoid making a bad decision from day zero and ending up, a few years down the line, mumbling the bitter phrase. The problem I refer to is the market dilemma, otherwise called the expat trap.

The Expat Trap

The idea is simple. In China there are two completely different markets: the massive Chinese market and the tiny market (but strong in per capita spending power) of the foreigners stationed here. If you plan to sell something in China, you need to choose one, and usually there is only one good choice. Of course, most large companies are after the Chinese markets, and the question expats/locals never arises. But for small entrepreneurs planning to start a venture in China, it is an essential decision, and all too often they take the easy road.

The expats are rich, they are accessible, they speak the same language and they have lots of time to spend reading your website or speaking about your product. Who wants to dive into the complicated world of the Chinese, where competition is cut-throat and many consumers have the wrong tastes? For many first-time China entrepreneurs, expat is the obvious choice, and so they move on with their idea. And sometimes they make a good job of it and they build up a nice little company that becomes popular in the expat community. And then, they are in the trap.

Now, I don’t pretend to have a solution for everyone, and surely not all business ideas area applicable to the Chinese market. But the point is many startups don’t give enough consideration to the market question. Even businesses that were intrinsically meant for foreigners can find ways to appeal the Chinese public. Look, for example, at the popular Chinese teaching company ChinesePod, which is now looking to turn around its business with the new website: EnglishPod. Unfortunately, this change is often impossible for a company unless it has been looking at the Chinese consumer from the beginning.

The barriers are enormous to switch markets: the product positioning, the culture of the company, the pricing strategy, all things you can’t change without upsetting your existing customers. Language is also a big problem, especially in the case of internet companies with active content, which find translating a whole website into Chinese is an impossible task.  Finally, the company has not been learning about the Chinese all this time, and chances are somebody else has instead. By the time a successful start-up figures out it should be looking into the Chinese markets, there are already a bunch of Chinese copycats that have taken its place.

In most of the cases, starting a company focused on expats is just a bad decision. Some might argue: there are enough expats in China to run a successful business, and there is nothing wrong in staying small. Right, they might be the kind of pretzel-selling Marge Simpson who is contented with little, but normally this argument just hides frustration. If you came all the way to China to start a business it is because you had big ideas in mind, and the only big thing here that you don’t have in Europe is the Chinese market.

Put it this way: you have moved across continents to have access to a market of 500,000* people at most, roughly the population of Luxembourg, and probably with a lower average income. Besides, these Luxembourgers are weird clients. They keep moving out all the time and a large part of them is replaced every year, which has a strong impact in their loyalty. Worse still, although their numbers are growing, the trends in expatriation policies indicate that their average income will be going down, as massive expat packages disappear from the scene and more locals are able to do the jobs expats used to do.

And the answer to the Question

Of course, the expat trap is only applicable to companies selling in China. Some business models are doing just the opposite, selling China to the World. Often they sell information, and their markets are far away, which makes them resistant to Chinese traps. Another possible exception might include businesses that manage to franchise their model to other expat cities around the World, or even run it back home. This is possible in theory, especially for internet companies, but I don’t know many start-ups around who have succeeded.

On the other hand, I know many companies in China that have seen the expat market work as a sweet bait, and then found themselves caught in a dead end. I was going to give some examples here, but I don’t like to hurt the image of companies that I know and admire in other ways. Instead, I can give a couple of examples of foreign entrepreneurs, like the ones behind Tudou, Neocha or DaD, who worked with Chinese partners and got their markets right from the outset.

So, in conclusion, if you are an entrepreneur and you plan to sell in China, beware of the dangers of the expat trap. And for the curious who scrolled down this way, this is and has always been the correct answer to the question above:

Who gets rich in China? Those who find their way to the Chinese market.

NOTES

* I am, of course, only considering Western expats. The large Korean and Japanese communities tend to have their own companies here, and are usually not a good customer base for Western companies. Other communities, like Russian workers, are also difficult for Westerners. Remind me to do a post about the number of foreigners in China.