By Pavel Khizhnyak, TradeExact Consulting Founder/CEO
With the largest economy in the word by purchasing power parity, biggest community of stock traders, smartphone users, and by some estimates, up to 30% of the OTC retail FX trading volume - its every broker’s dream to make it big in China.
The first FX brokers have been trying to penetrate this market since 2004, yet only a handful of them have truly succeeded. Meanwhile to most others the market remains largely an unattainable dream. So what does it take to really make it in China? And can you do it remotely? In this article we will review the key differentiators between the stunning success stories and epic failures in the Greater China Region.
In essence, it really comes down to just one simple thing – your business needs to be on the ground. You need to have localized products and services, marketing, sales, IT, support staff and key decision makers right there and then. Why so? Let’s review.
1. Face To Face Business Culture
It’s no secret to anyone familiar with sales that the ability to meet a client face to face greatly increases the chances of a successful sale. However, when dealing with any Chinese partners this becomes not just a “nice to have” preference, but rather a “must have” business requirement. Although the first attempts at providing margin FX trading in China date back to mid-1990s, the real first wave of forex market entrants came around 2004. While some were very respectable brands with solid business models, long term market investment plans and some even went as far as registering with the State Administration of Foreign Exchange, unfortunately there were many fly-by-night brokers and quite a few straight up scams, which left many traders locked out of their deposits and IBs were left "holding the empty bags".
Another few points to consider are not-willingness to comply with stringent KYC requirements, desire to be able to fund accounts with any 3rd party PSP systems that support China Union Pay, large leverage preferences and complex rebate&commission structures of local Introducing Brokers and Money Managers made it increasingly difficult for FCA, ASIC and CySEC brokers to directly on-board clients in the region. This lead to a shift towards the offshore based “sister” companies or less stringent regulation destinations (e.g. Labuan, Vanuatu, etc.). Naturally, these regulations don’t provide an easy to use channel of dispute resolution for their brokers’ clients, don't have strict capital adequacy requirements and hardly any enforcement tools.
In absence of such channels, the only viable “guarantor” of the safety of funds for the retail trader and/or Introducing Broker becomes the local sales rep. This local sales rep is physically based in China and can visit the introducing brokers’ office, provide training to the local staff when needed and always be on standby ready to answer questions in the same time zone.
On top of that, there is also a cultural aspect of sealing business deals at the dinner table or KTV after party. The final decisions are often made not based on the objective analysis of the deal structure, but rather subjectively based on whether or not the Chinese counter-party finds the account executive “靠谱”, i.e. reliable and trustworthy. Not surprisingly, during a sales job interview in China it is not uncommon to hear a question “how much can you drink?” or even to see candidate showcase their drinking abilities among top skills in their CVs.
2. Hiring Local Staff
One of the first Chinese words any foreigner learning Chinese would hear about himself is “老外”, which literally means “always foreign”. However, I believe it carries a deeper meaning. It doesn’t’ really matter how great you think you speak the language or know the culture. At the end of the day – you will always remain an outsider. From a business standpoint, the conclusion is simple – although it pays off to have a professional foreign executive who speaks the language to meet with the high profile clients, you should always rely on your local Chinese team to interface with the customers and handle the nitty-gritty daily routine work.
This is the only way to remove cultural barriers and create that critical component of trust, much needed to swing the buying decision in your favor.
3. Renting Permanent Office Space
When having a friendly local person is not enough, the next big decision-making driver is whether or not you have a local office in China. Companies that invest into local offices and especially those who are not afraid to invite their local partners to visit, are considered to be the prime candidates for cooperation. This holds especially true for larger size partnership deals. The reason is simple and quite pragmatic. Renting a permanent office space requires a local company license and 3 to 6 month security deposit. So should any disputes arise, the clients or partners are less likely to go to court, but would much rather prefer to physically occupy your office space and disrupt your office operations until your company can find a resolution suitable for both sides. This is usually accompanies with a large banner stretched across the office corridor with the client's or partner's complaints.
4. Breaking through the Great China Firewall
It can be argued that the actual Great Wall of China was breached by Tatars and Mongols, and therefore, did not serve its purpose when really needed. The Great China Firewall on the other hand is a formidable and very effective obstacle to be reckoned with to this day. And its grip on control of every digital information exchange on public networks inside China is growing day by day.
If you think that simply translating your website into Chinese will be your winning ticket to the local market, you are up for a bitter disappointment. Here are some serious reasons why.
Any website host that is located outside of mainland China is viewed by local ISPs (Internet Service Providers) as foreign and therefore not approved by local authorities, deemed not safe. So why should the ISP bother to provide you with the connectivity to it? You can test it out by simply putting your website URL into one of the Chinese website loading speed tester sites (e.g. http://ping.chinaz.com). Chances are, you will discover that it is very slow or doesn’t open up at all in quite a few provinces.
Same goes for ESPs (email service providers). If your email server is hosted outside of China, most likely, the major ESPs like QQ, Sina and 163.com will see it as spam and your email marketing campaigns will never reach their target or end up in spam folders at best.
Yet, not all is lost. There are 2 ways to make sure you can work “inside the wall”. The best way is to get a local ICP license. The process has gotten more complicated and much more expensive over the last few years. It will also cost you between $10K to $14K USD and may take about 1-2 months to complete. Besides, there is no guarantee that you will actually pass the regulator’s requirements, because the website you are getting an ICP license for must have a license to provide it’s services in China. But if you do get it and ICP, you can officially host your server inside China, which will ensure the maximum loading speeds and email deliverability on par with the local providers.
For those, who can’t obtain the ICP license, a Hong Kong hosting option is still available. It is much cheaper with just a few hundred dollars a month and can be setup in a matter of weeks. Of cause, it will not be as fast as a native ICP hosted server, but will still be within an acceptable range.
However, emails are slowing dying out and if you really need to grab your clients’ attention, you have to go social.
5. Getting Social with WeChat
If you aim to build any serious following in China and build an effective communication channel, WeChat is a way to go. WeChat is like Facebook on steroids. Effectively if you have WeChat with a bank card attached to it, you can do almost anything – chat, video calls with friends, post moments, send/receive money, pay for utilities, order taxi, book air/train tickets, go to movies, go shopping and much more. For those reasons, it is already at 900 million users and growing strong.
There are 2 main ways how companies can utilize WeChat: 1) Corporate Subscription/Service Account and 2) Corporate Developer Account. The Subscription/Service accounts allow you to publish articles, create engaging H5 animated promotions and message your follower clients directly. The Developer Account offers WeChat API, which you can use to make seamless integration with your Member Area or other online portals.
Having your sales and marketing team share your corporate WeChat posts makes it easy for clients and partners to share as well, which makes a much more engaging ecosystem than email marketing.
Needless to say, that for either option you would need to have a local company license in China or work with an agency that can help you with that. However, be mindful that an agency can cancel the contract at any time, which means that you would need to start building your followers from scratch should that happen.
6. Decision-making Speed
Last, but definitely not least, is the decision-making speed. Through my 14+ years in the market I have seen countless examples of lost deals worth millions of dollars, simply because a company failed to respond to a client or partner's request in less than an hour. You have to always remember that no matter what you think about your brand and how much you love your product, to a large Chinese partner you are just another 老外 (“always foreign”) provider, and there are always several hungry local competitors waiting to get a shot at the same deal should you fail to reply in time. As the old saying goes - time is money. In China – the time flies faster. And whoever is the fastest – can usually make the most money.
Therefore, we advise to establish your business processes, design the decision-making and approvals in a way that it could be done within the same time-zone. Only this way you can compete with more established and well entrenched companies with local presence and get a fighting chance at your “Big China Dream”.
Greater China Region is probably one of the toughest markets out there, but with the right dedication and efforts invested – it can certainly become your best market ever. In TradeExact Consulting, we have a highly professional and experienced team on the ground in China who can help you avoid costly mistakes and start your Chinese business in the most efficient way possible.