Are You Ready for China’s Third Tier Cities?
Which third tier cities do you prefer for your business?
Since our business requires us to work with food producers, we spend more time in second, third, and fourth tier cities because this is where the food plants are located – in the remote areas of China. There are several strategically important cities near Wuhan, which is surrounded by the strong agricultural provinces Hunan, Hubei and Henan. Zhengzhou in Henan, for example, is a third tier city that is developing rapidly and has strong strategic advantages.
Another high potential area is Sichuan Province, especially the cities around Chengdu. We recently participated in our first regional exhibition in this area and sold a high value, fully automated packaging line just at our booth! We were expecting to take the machine back to Shanghai so it was a pleasant surprise and shows what high potential these remoter areas offer.
What trends do you see shaping the way business is conducted in these cities?
A positive aspect of doing business in third tier cities in China is that as a foreign company, we still enjoy a special reception, especially as foreigners who speak Chinese. Since we take the trouble to go that far, we usually receive a warm welcome from local customers and authorities. In Beijing or Shanghai this doesn’t happen anymore, while in third tier cities it helps you open doors and is a definite advantage.
Nevertheless, politics are often complicated in these smaller cities. When you go to these cities you immediately feel the influence of the political system on companies that operate there. As a result, the speed of working is very different.
You have been in China for a long time – what changes have you observed in the last 5 years?
That’s a big question, as you can see changes everywhere! From the infrastructure point of view, the central government of China has invested in this unbelievably fast high speed train network, making it so much easier to gain access to a variety of cities. Moreover, due to the advancements in how information travels these days, there is much more exchange in general, facilitating how we do business in more remote areas in China. Cities are developing much faster as a result.
The business culture is changing too: while it is still strongly relationship-driven, we have found that people are looking for good quality products and will consider all their options instead of just going for the nearest local competitor. In addition to this, a very positive change we have observed is that the young people are better educated now and often even speak English. Five years ago you may not have come across this as much, especially in third tier cities.
What are the cultural difference between first tier cities and third tier cities?
How do you bring the necessary level of service to remoter areas?
In terms of spare parts, we are now in the process of setting up a warehouse in the Shanghai Free Trade Zone. There, we will have more stock because we don’t have to pay customs tax on arrival, allowing us to be more flexible in sharing spare parts with other locations like Mongolia or Taiwan and even South East Asia. Without the customs procedure problem, we can extend our range of spare parts and shorten delivery times.
What is your selling strategy to third tier cities?
In the first tier cities, companies tend to build up repeat business. When you go to the third tier cities, you are often new and one of the first regular foreign visitors to a local company. You have to pick your targets carefully. Our strategy is to catch the top 10 of a province in the relevant businesses for us (e.g. beef, pork, and poultry) and we try to establish business with these market leaders. Third tier city companies can often be described as ‘copying models’: if we are successful with one company, the next company is likely to ask for the same machine. In Hubei, we sold a very nice packaging line and immediately we got other requests for a quotation from companies in the same industry. This is very important: people talk to each other and are more open to learn from another player. In Shanghai or Beijing, the customers already know exactly what they want.
What are the challenges or pitfalls of operating in a third tier city?Business is generally done a little differently in third tier cities. Contracts are signed and down payments are made but the significance of this is sometimes reduced in these areas. You have to be more careful when you do business there: as much as the customer does not know you, you also do not know the customer, who might purchase your machine to hand it to a local competitor for example.
We also face a number of HR issues in third tier cities. Recruitment, for one, can be very challenging as it is difficult to find the right talents with relevant experience. There is often a language barrier or our customers face people’s unwillingness to work in a food plant. Retention of employees is also a big problem and risk. The training and supervision of these employees is not easy and since it’s a huge country you don’t get to see your staff as often as you would like to.
Most importantly, depending on the company and the customer, you have to be aware of the political system. We often have to deal with the local government even if according to our western understanding and mindset, the project has nothing to do with them. Some customers want to use our advanced German technology to gain investment or support, for example. In Shanghai or Beijing, this does not tend to happen and business is done without any political impact.
Do you have any tips for people who want to expand into third tier cities?That depends on the company. As a German SME, I’d say take it step by step. Set up your customer base remotely from Beijing or Shanghai first so you are able to sustain your business in the area. Once you are there you are very welcome, especially as a foreign company, but there are also special risks, like paying a little extra on rent, though it is still cheap compared to Shanghai or Beijing.
There are really many opportunities in these cities since there are still very few international players in these places. Focus on sales and service first, establish yourself with a solid base of customers and be open to new ways of doing business and adjusting to local customs and culture. With the right amount of persistence and flexibility, you will be able to take advantage of the many opportunities that third tier cities have to offer.
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