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Case study: How  can Chinese companies expand presence and compete in the European Market? 

Since the news about the U.S.-China trade war broke out, the investment of the Chinese enterprises in the European market became a hot topic once again. Overall, the driving force for investment in the European market is mainly derived from the the following four points:

  1.  Since the reform and opening up the domestic industrial base has reached a developed level. The production capacity is surplus from the overall perspective. In contrasts to this, due to high labor costs and lack of motivation, there's a need for Chinese products and financial support in Europe. 
  2. Europe has strong research & developement capabilities, as well as  advanced technology & design, which is precisely what Chinese enterprises need.
  3. Chinese enterprises have strong financial resources and support, as well as a sound supply chain management and production capacity. The conditions for entering foreign markets are mature. 
  4. Recently, during President Xi's visit to Italy, the Chinese government reached a cooperation on the Belt and Road project alongside with the Italian government. Italy one of the seven largest countries in the world, will undoubtly bring opportunities to Chinese companies investing in Europe. 

Over the years there have been countless Chinese businessess entering the European market, there are succes stories and failures. This article analyses the following three cases and aims to understand how Chinese businesses can effectively compete and expand market share in the European market.

Case 1:  European distribution centre

A domestic industrial product manufacturing company has been doing OEM production and processing for European customers for many years. 

In 2009, in order to expand further in the European market and promote it's own brand, the company decided to set up a sales office in Belgium. 
 

They selected Belgium for three main reasons:

First, the company's European customers we're mainly located in the UK, Northern Europe, Germany, France, Switzerland and Italy. Belgium is not only located in the very center of these countries, but it also has strong logistics and hinterland resources in the port of Antwerp, Europe's second larges port.

In addition, the total economic output of the Benelux region where Belgium is located, is equivalent to the sum of all Eastern European countries together, although the total area of the Benelux is not as large.

Lastly, Belgium has three official languages: French, German and Dutch.

Belgians must have mastered two of these languages from a young age and are proficient in English. This language advantage is crucial for Chinese companies that want to succeed in Europe.

At the beginning of the establishment of their sales office, the company made the correct decision of recruiting a Chinese-speaking student graduate from the local Sinology department as one of their first employees. From a very early stage, this helped the company register, recruit and train local and Chinese employees in Belgium, and communicate and coordinate with the headquarters, as well as manage local stocks.

In the course of many years of work, they found that although the companies business volume had increased year by year, the profit margin remained low. In contrast, the company's channel in Europe has grown from scratch, having rapidly growing profit margins many times higher than the company.

Quickly they reported the situation to the Chinese headquarters as: "The main profit of our industry comes from marketing. At the moment, although we have our own products and teams in Europe, we're still working for our channels. We suggest under the premise of getting along with the channels, we start a online business. "

Because they have enough inventory, they concluded the initial investment in an e-commerce business wouldn't be large. As a result, their profit margin could increase exponentially.

This domestic listed company didn't immediately agreed with the idea, because of the expectations of shareholders and having the inherent mode of thinking as a production company. 

That way after many years the company's channel dealers began to buy luxury cars, homes, European castles, but this company was still surviving in the European market. 

Not long ago, the company finally realized the importance and feasibility of it's own end-user sales and marketing. The agree with their year plan and began to let the once graduate student take charge of the e-commerce business in the European market.  Amazon France, UK, Spain and Italy began to sell and promote products, and as of today the effect on the company has been very good.

Case 2: Sino-foreign joint venture, the complementary adventages

There's this famous industrial product company in Europe. In the local market, due to the performance and quality of the products, many European governments and banks are willing to purchase their products at a much higher price than well-known brands such as Siemens. The company has a small factory and team in China. Over the years, they have tried to open the domestic market many times, but they have been unable to establish effective sales channels.

At the moment, the domestic factory of the European company mainly undertakes the procurement and assembly business of the headquarters and other foreign countries. 

When we docked the domestic customer resources for this company, we found that domestic companies are very interested in their products, not only willing to act as agents for their products in China, but also willing to consider buying shares or acquiring the company. Through the channels of the European companies to export to Europe and Africa, and through the introduction of their technology and advanced products in the country, to give play to the advantages of domestic companies in the local sales channels, the technology and products imported into the country. This will not only bring additional sales to domestic companies, but also improve the overall competitiveness of domestic companies and improve their position in the domestic market of the industry.

Case 3: Joint development

Our company's main business in the past six years has been to introduce European advanced products and technologies to China. In the process, we have developed a number of local customers and sales channels in Europe. In the past six years, we have noticed that since the reform and opening up, China’s door has been open to the West for more than 40 years. Companies that want to enter the Chinese market, or who should enter the Chinese market, have already come in. At present, the slowdown in domestic economic growth and fierce competition have led to an increase in customer acquisition costs and a decline in profit margins. But in turn, the pace of Chinese companies going out is becoming a trend.

In such a big environment, our company decided last year to enter the European market as a trading company. At the time of site selection, we considered the market size advantage of Germany and the advantages of Swiss tax policy. But in the end we chose Belgium because he is at the heart of our existing European customers, where customers have easy access to transportation, logistics and logistics costs are low and efficient. Not only that, our independent sales team in Belgium is multilingual and able to carry out sales in any European country.

In terms of taxation, Belgium's value-added tax is 21% and corporate income tax is above 20%. Although this is not the most competitive country in European taxation policy, as a trading company, the purchase and sale of value-added tax can be deducted. Moreover, since most of our customers are non-Belgian countries, and Belgium's VAT is only applicable to local businesses, most of the income is VAT-free. In terms of corporate income tax, because Belgium and China have bilateral tax treaties, companies only need to pay taxes in one of the two countries. Therefore, we choose to carry over the profits back to China and legally pay taxes at a lower income tax rate in China.

In terms of sales, we have cooperated with the local European channel sales company in the form of supply and marketing, and then established a joint venture company's two-step strategy to minimize risks and maximize revenue.

At the same time, we are well aware that the current domestic manufacturing industry is generally sluggish, and trade activities are difficult to have stable business and profit margins due to the transparency of information. So how do we increase market share and competitiveness in such a market environment?

Our answer is joint research and development. In Belgium, we have advanced technology and R&D environment, excellent R&D talents, and excellent R&D funding. In order to attract foreign investment and encourage research and development, Belgium has introduced a 90% R&D staff salary withholding tax policy that is beneficial to employers. The research and development project investment can receive 50%-60% subsidy from the government; the company cooperates with doctoral talents and invests in it. You can also get a 50%-70% subsidy.

Such preferential policies are even more favorable than putting R&D at home. But most importantly, we know the importance of developing products in Europe. Our products can only be invincible in the European market by continuously developing products with European leading technology and market demand, combined with domestic competitive production and supply chain management capabilities. At the same time, the products developed can also be introduced back to China as European technology and products, and open up the domestic market through the advantages of our domestic sales channels.

The above three case studies are to illustrate the following three practical recommendations:

First, the location of Europe. We recommend that Chinese companies ask themselves when choosing a site: In which countries and markets are our customers mainly at this stage and in the future? In which country do we establish a distribution center to best serve them? At the same time, we recommend choosing a city with a developed logistics port close to Europe. It is best for people in the country to speak a variety of major European languages, as language is often one of the main bottlenecks in opening up the European market.

Second, local staff recruitment. We encourage Chinese companies to recruit local talent. We have seen too many Chinese companies to send employees from outside the headquarters or recruit Chinese in Europe. Such an approach is like Western companies sending foreign general managers in the Chinese market or recruiting foreigners locally. It seems that recruiting people, peace of mind, and convenient communication, but when foreigners actually work in China, most of them are black and black, difficult to advance, and suffer losses.

Young people in Europe know that the Chinese market has great potential in the future, and they have learned Chinese from an early age. Therefore, it is not difficult to find a person who can speak Chinese in Europe. At the same time, such talents have rich resources and experience in the local area and can be quickly started.

When investing in the mid-to-late period of setting up a business in Europe, Chinese-funded enterprises can assign a professional manager who has experience in European life or work as the general manager of the European market, fully manage the European team and maintain communication with the headquarters management. This is a reasonable approach.

Third, continuous innovation. Compared with the domestic market, the European market is not very competitive. The sales channel structure is relatively simple. Consumers are brand-name, quality, and price. Chinese-funded enterprises always have a cost advantage in Europe, so as long as the brand and product quality are good, there will be a market. At the same time, successful companies tend to innovate constantly. Such innovations are mainly reflected in products and business models. Innovative Chinese companies must meet the needs and needs of the European market. The best way is to create and innovate in Europe.

Finally, with regard to the market entry steps in Europe, the previous content has covered the following three links: recruitment, management and innovation. The first step in entering the European market, based on our own experience, is not in-house or inviting third-party companies to do European market research or strategy, but product testing. Because this is the most direct market research method.

Like in China, Europe also has a new model for merchandising centers or flash shops. For example, in the famous cultural center of Europe, the “World Diamond Capital”, the second largest fashion capital in Europe after London, Paris and Milan – Antwerp, Belgium, has a department store with Galeries Lafayette and Harrods in London. The famous shopping center Stadsfeestzaal. In this mall, there are more than 2,000 square meters of two-tier flash shop brand cluster. Chinese-funded enterprises can use short-term or long-term rents to register companies or recruit employees in Europe. They only need to ship small-volume products to the local area, and they can get close to European consumers in the flash shop on the first floor. Test products and get customer feedback. More worthy of the question is that the second floor of the mall is a region where European buyers and brand companies come to purchase, where Chinese companies can obtain orders for company purchases.

This kind of trial sales model can recover the cost and start to make profits in 3-6 months. After a few months, by analyzing the customer feedback information and market competitor information in the test sales process, we can develop a targeted strategy and effectively implement the strategy through local channel resources and human resources accumulated during the trial sales process.

The author of this article is Sun Liang, President of the Belgium International Trade and Sales Service Company. Generate has a local independent sales team in Belgium that specializes in French, German, English and Dutch. They have clients or channels in various industries (logistics, chemicals, medical, automation, outdoor products, interior building materials, etc.) in Europe. , sales resources.

For more information, please visit our company's LinkedIn homepage or visit www.generate.net.cn and subscribe to our European Market Newsletter on the website.

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