Exporting Destination Study for Canada - CHINA

Updated: Sep 13

The opportunity for Canadian SMEs exporting to China's eCommerce is enormous, and the early adopters will gain a significant strategic advantage. Canada's exports to China are minimal, and there is high import demand from growing segments of the Chinese population. Plus, Canada's exports are over-reliant on one country, the US, which puts us in a position where we must diversify markets to reduce trade risks and create checks and balances for our exporting portfolio. It’s time for Canadian SMEs to enter the Chinese e-Commerce market.


The main purpose of this article is to cover key aspects of the Chinese market as a potential exporting destination for your business. In the article, we touch on key topics, such as macro and micro perspectives regarding the Chinese market, and cover new market entry strategies. Above all, we highlight key insights into the lucrative opportunity available to your business by entering China through eCommerce and what resources you can leverage to help you succeed in your international expansion.



Chinese Market is Massive and still Growing


(Size) Over the past 20 years, China has been the biggest and most reliable source of growth in the world economy. China joining WTO in 2001, as a catalyst, has stimulated China’s Compound Annual Growth Rate from 7.8% prior to joining to 13.4% 1. And, since 1960, China’s GDP growth rate has increased by 24,554% 2.


(Growth Speed) Now, China is the world’s second-largest economy after the United States, as measured by the purchasing power of GDP; and takes the top position as the largest year-on-year growth rate of GDP, showing an 8.1 percent growth year-on-year 3. Although China’s zero-covid policy has caused a slump and may condemn the economy to a stop-start pattern, China’s GDP in 2021 reached RMB 114.4 trillion, showing an increase of about RMB 13 trillion (US$3 trillion) compared to 2020 4.


(Import Demand) China’s imports of goods and services represented 16.01% of GDP, or US$ 2.36 trillion, which is 1.4 times larger than the entire Canadian GDP in the year 2021 5.



Chinese Retail Market is Advanced and Complex


(Retail structure) China also remains one of the leading retail markets in the world. In 2021, the country generated a retail sales revenue of over 6.5 trillion U.S. dollars 6. The rampant COVID-19 pandemic brought profound changes to China’s retail landscapes. Retail eCommerce has become increasingly crucial in China’s retail industry and reached over 2.64 trillion USD in sales in 2021 6.


(Geographic Complexity) China is the world's fourth largest country covering an area of approximately 9.6 million square kilometers. It spans five geographical time zones, borders 14 countries, and consists of 23 provinces, five autonomous regions, four municipalities, and two special administrative regions. The Chinese market is so large that it has to be artificially segmented into four independent sub-national markets 7:

East China

Anhui, Hubei, Jiangsu, Shanghai, Zhejiang

South China

Fujian, Guangdong, Guangxi, Hainan, Hunan, Jiangxi, Macau

North China

Beijing, Gansu, Hebei, Heilongjiang, Henan, Inner Mongolia, Jilin, Liaoning, Ningxia, Qinghai, Shaanxi, Shandong, Shanxi, Tianjin, Tibet, Xinjiang

West China

Chongqing, Guizhou, Sichuan, Yunnan

(Population & Demographic Complexity) China has the largest population in the world, and its population density is 153 per Km2 (or 397 people per mi2) 8. From the spectrum of marketing demography, Chinese customers can be broadly segmented into seven key groups 9:

  • THE GEN-Z - Consumers born after 1995 can be considered part of “Gen Z”. They grew up using technology and leading “digital lives.” By 2025, this group of consumers will make up about 27% of China’s population, with about half earning a university degree. From a report by McKinsey, this consumer group will make up more than 20% of total spending growth in China from 2017 to 2030.

  • THE MILLENNIALS - Over 400 million Chinese people fall into this group, making it a powerful consumer group, especially within the digital sphere. Millennials are much more digitally aware than their predecessors, and most spend a significant amount of time on social apps, short video platforms, and mobile games

  • THE URBAN SENIORS - The Urban Seniors have not grown up with technology but are eager to adopt new tools. This consumer group is interested in new experiences, learning, and social opportunities. By 2050, 35% of China’s population will be over 60 years old.

  • THE CHINESE MEN - Men above 40 tend to have accumulated wealth and status, allowing them to have higher spending power and purchase more expensive or high-end products.

  • THE INDEPENDENT WOMEN - In general, Chinese women have become better educated and make up a larger proportion of the workforce in the past decade, providing them with financial and personal freedom. As women are spending more on themselves, while still primarily being the ones in charge of household expenses, this group of consumers has a significant influence on China’s consumption habits. In general, women over 30 have much higher disposable income and are more focused on self-care. They are willing to purchase luxury products that make them happy.

  • THE LOWER TIER CITY YOUTH - Over 930 million Chinese people are currently living in cities that would be considered Tier 3 or lower 29, or in rural areas. This category has seen massive growth in consumption and has been driving significant e-market growth.

  • THE WORKING PARENTS - China’s implementation of the three-child policy has led to a natural expansion of the maternity and baby products/services market. This sector is expected to continue growing at a rate of 20-30% for the next 10 years. Currently, there are about 300 million active online users who are parents aged between 25-40 and have children below the age of 12.


Canadian Businesses should Consider Entering the Chinese Market


(Exporting should be in your toolbox for growing your business sustainably) Exporting is vital to Canada's economy. It is a driver of economic growth and strongly correlates with real gross domestic product growth. Furthermore, exporting can provide a strategically important means of growing a firm by expanding its market beyond the confines of Canada's relatively small domestic market.


(Canadian SMEs have been doing too little for such a big opportunity) China is Canada’s second-largest trade partner, and its import value is 1.4 times larger than Canada's GDP (2021) 10. That’s a significant market opportunity for Canadian SMEs. But, currently, Canadian businesses play a small role in China’s overall imports, sharing as little as 1.4% of China's potential market 11. Considering the size of the opportunity and how little Canadian business is targeting it, there is tremendous growth potential for Canadian exports to China.


(The familiar option might be a risky option) Generally only looking to our southern neighbours, Canada is overly reliant on trade with a single (and often unpredictable) export market, namely the US. In 2021, nearly 80% of Canadian exports went to the US 11. Canada needs to diversify its markets by chasing more international trade business. With China as Canada's second-largest trade partner, it makes sense to grow your presence in that market.



Top Four Market Entry Strategies


No two businesses are alike, especially when it comes to an international trade expansion strategy. Factors impacting an individual business impact decision-making, but so do various industries when compared to others. But, in general, the criteria for selecting the best-suited market-entry strategy include a timeline, capital cost, human resources, and legal matters. Based on these four foundational criteria, here are the four most common Chinese market entry strategies that businesses from abroad often consider:


1. Establishing a representative office in China: A Representative Office (RO) is an extension of a foreign company. However, ROs are permitted to engage in only a limited number of activities and are not allowed to make a profit. For example, these legal entities can only be used to facilitate the activities of a foreign company in China, such as market research, display, and publicity activities that relate to company products or services, Liaison activities that relate to product sales or services, and domestic procurement and investment are also acceptable activities. As such, they are a suitable option for companies procuring from China that need staff on the ground for quality control or keeping in touch with suppliers 12.

Advantages

Disadvantages

  • Easiest foreign investment structure to set up

  • No registered capital required

  • Paves way for future investments

  • Can hire foreign/local staff

  • Less expensive solution

  • ROs are permitted to engage in a limited number of activities and are not allowed to make a profit

  • It can only be used to facilitate the activities of a foreign company

  • If there is any violation related to their activities, ROs will be fined and their illegitimate incomes will be confiscated.

  • As it is not a capitalized legal entity, they are not allowed to directly hire Chinese employees.

2. Establishing a wholly foreign-owned enterprise in China: A “wholly foreign-owned enterprise” is a limited liability company, which is wholly owned by one or more foreign investors. These enterprises can make profits and issue local invoices in renminbi (RMB), China’s official currency, to suppliers. The liabilities of shareholders to a wholly foreign-owned enterprise (WFOE) are limited by the assets they bring to the business. They can also employ local staff directly 13.

Advantages

Disadvantages

  • Greater freedom in business activities than a representative office

  • 100% ownership and management control

  • A suitable investment mode for having a long-term presence in China

  • The ability to provide a wide variety of services

  • The ability to hire employees directly

  • The capability of converting RMB profits to U.S. dollars for remittance to its parent company outside of China

  • Protection of intellectual property

  • Capital cost for establishing a WFOE business in China e.gl office leasing, equipment purchasing,

  • Prolong process and time-commitment of set-up the business

  • Need to complete an environmental evaluation report if to set up manufacturing WFOE

  • Must undergo customs and commodity inspection registration

3. Establishing a Joint Venture in China: A Joint Venture (JV) is formed by one or more foreign investor(s), along with one or more Chinese entities. Usually, a foreign investor should own at least 25 percent of the shares 14.

Advantages

Disadvantages

  • Use of local partner’s existing workforce and facilities

  • Existing sales and distribution channels

  • Access to industrial sectors which exclude wholly foreign-owned investment

  • The upfront investment required from the foreign investor is likely to be lower for a JV than a Wholly Foreign-Owned Enterprise (WFOE) as shared with the JV partner

  • Each partner must relinquish some control over the operation

  • Management decisions must be shared.

  • In situations in which the partners have differing views about how to proceed, serious problems can arise.

  • If one partner wants or needs to pull out of the partnership, it can be very difficult to regain any of the funds invested in the venture

  • Similar problems can result from the sharing of profits if one of the partners considers their inve