UNDERSTANDING THE CHINESE MARKET
Understanding the Chinese Market
Successful exporters need to take the time to understand the market. China has a large population and the size of the prize can be quite dazzling. Therefore, simply exporting product in the hope that consumers buy it because you think it’s great, is not a successful strategy.
You need to clearly define what your offering is, and who you are targeting. They will have no shortage of choice, regardless of which dairy segment you chase, so you need to take the time to understand them. It goes without saying that knowing what their preferences are for flavour variants and pack sizes is very important, but your thinking needs to go beyond that. They will most likely value food safety and authenticity highly in their purchase decision. How will you convince them that both areas were the biggest considerations for you when you developed, made and shipped the product? This is very important in gaining their confidence.
Understand how they will consume your product. As it may not be the same as how it’s consumed in Australia. Products we consider as being consumed only in the home in Australia may be convenience or snack foods in China. Is the packing suitable for this purpose? Will it provide the flexibility of convenience, and importantly, will it maintain the product integrity and safety if it’s not refrigerated? These are examples only, but the aim is to illustrate you probably can’t just pick up a product you’ve been selling in Australia for years and it will automatically fit with the expectations of a consumer in China. It may, but you can’t assume it will.
Chinese GB Standards and food laws are developed and published in Chinese, and exporters around the world will then translate these into their language of choice. This introduces risk into the process and in some cases, there may not be exact translations from Chinese characters to English text. Standards usually contain technical language and this may not be the skill set of the individual undertaking the translation. So, which one should you use?
It’s important that when reading a translation, you consider what may have been the intent of the regulation when it was drafted. Be extra cautious in your interpretation so that you’re not seen as “bending a regulation” to suit your needs. It’s almost inevitable that this will be a high-risk strategy.
Furthermore, the challenge is that standards will be interpreted by individual officers at the point of entry, and so it’s possible, and likely, that there may be variations in how individuals interpret the same standard. This is where the relationship you have with your importer, and the one they have with the CIQ staff at your entry point, is important. If you’re producing a product that might not obviously fit into a product group, then you need your importer to take the time to explain what it is, and why you think it fits in a category and GB standard. Gain agreement during the product approval process to avoid issues later once your commercial shipments start to flow. Be wary if your business starts to grow and you may want to use an additional port of entry, this process should be repeated as you shouldn’t simply assume that the same interpretation will be applied.
Food Safety has been the single biggest issue that has driven regulatory reform in the Chinese food sector since 2013. Chinese authorities recognised that following several significant and public events involving the sale of foods (not just dairy) that were unfit for human consumption, they had a serious consumer confidence issue, and public health issue that needed to be addressed.
In 2014/15, they released the China Food Safety Law which contains many regulations covering the manufacturing and distribution of food products with a clear focus an food safety. It also defines very clearly the severe financial penalties which would apply if breaches of the law were uncovered; and makes it clear that penalties would not only be financial – individuals would also be held accountable.
This is great for Chinese consumers, but as manufacturers and exporters, you need to understand how food safety is viewed. In Australia, we would typically consider risks to food safety as being either microbial, chemical or physical. The Chinese, however, also view issues around product labelling and traceability as intrinsically linked to food safety. False or misleading information on packaging – intentional or not – has the potential to impact the health of the consumer and is therefore considered a food safety breach. If there is no clear traceability process associated with the product allowing validation of the products’ authenticity at a consumer level, then, in a market under pressure from increasing levels food fraud activity, this too is considered a breach of food safety.
This is important to note, as a breach of food safety is newsworthy and therefore bad publicity. Individuals and the media are encouraged to identify breaches of food safety and publicly call out the offending brands; not only by notifying regulatory agencies, but by talking about them in the press and online public forums. The reputational risk to the individual brand and the flow-on impact to the broader Australian dairy export market is very real and should not be undervalued.
Traceability – Fighting Food Fraud
This is not just about products being substituted by fake items. Food fraud occurs when products are diluted – with water or other substances, when products are labelled incorrectly or misrepresented such as when false claims are made about them. Products might be tampered with, or even substituted with other ingredients.
Exporters should be aware of several emerging technologies that are being developed to combat this growth in fraudulent activity. Do some research on technologies such as block chain, and scientific traceability which develops a unique chemical “fingerprint” of foods which can associate foods to a specific geographic origin. And some older technology, QR codes, which are perhaps more readily understood and used by tech savy Chinese consumers.
Protecting Your Brand
In the excitement of getting your product to China, an area which is often overlooked until too late in the commercial journey, is about how to protect your brand. You can’t afford to forget about securing your intellectual property. If you’ve been trading in the market for a period, then deciding to protect your IP after this time may be too late. You can’t think that your IP registrations, such as trademarks, patents, design registrations etc., which you may have in Australia, will automatically carry weight in China. They won’t. You need to register these in China too. You should also be aware that if you’re looking to export to the greater China region, then you’ll need to register your IP separately in Hong Kong, Taiwan and Macau too.
Some points about trademarks™
First and foremost, you must clearly understand the importance of protecting your intellectual property (IP). For detailed information about IP Protection and the steps required, click the following link to visit IP Australia’s website.
Trademarks need to be distinctive and not just descriptive. You will not be granted a trademark for terms such as ‘fresh milk’ or ‘salty’ of ‘salt flavoured’ crackers, which are generic descriptions. You need to have a distinctive name.
You need to be sure you have freedom to operate. Just because you use a brand name in Australia doesn’t mean you can in China. There may be other companies using a similar name that precludes you from using yours. An example would be where Weet-bix is very commonly used in Australia but can’t be used in China because Weetabix from the UK is already registered in China. Consequently, Australia’s famous Weetbix are branded as Nutri-Brex in China.
Be sure to file your trade mark early. China operates a first to file system and as a result there is an emerging industry for ‘trademark squatters’. They may release the trademark to you but will do so at a negotiated fee and you won’t be the one holding the power in the negotiation!
Consider what you register. As a minimum, register the English name and your logo, but consider registering a Chinese language version too. Filing can be lodged online directly with the China Trademark Office and you should do this yourself. Your trading partner may kindly offer to do this for you, however bear in mind that in any dispute over the trademark in the future, it is the person who filed the trademark registration who will more than likely be ruled as the IP owner.
For a relatively minimal cost you should consider a defensive strategy around your trademark registration. Consider securing variations of your brand and registering your brand in several related classes. For example, you may be making a UHT milk product now, but at some point, in the future you may expand into other dairy categories such as fermented milk products, milk powders and cheeses, where you may wish to leverage off the brand equity you’ve developed from your UHT milk. It may be worth securing your brand name and logo in these other categories at the same time. Consider also securing different spelling variation of your brand name.
The Value of Partnerships
In many cases people become interested in exporting their products to China because someone has approached them to sell their products on their behalf. Whilst this may appear exciting – and it’s usually when the large numbers, both volume and value (not necessarily profit though) – get thrown around. It’s easy to see the attraction, but it’s more important that you see the business progression as your journey to own and manage. Don’t hand it over to someone else who seemingly has a ready-made solution. It will almost certainly be a flawed plan.
Collaborate with a partner who shares your values, business vision and where there is mutual trust. These relationships take time to establish, and will almost be impossible to build without several face-to-face meetings. Get to know each other’s businesses; visit the potential partner in China and their business. Inspect their product storage facilities and what contingency plans they have. Invite them to visit your manufacturing facilities.
Be wary of language differences in both verbal and written communications. Most Chinese business people have a reasonably good grasp of English, though this may not always be immediately apparent as they may lack confidence to use English in public. They may also have a close colleague fluent in English (often a much younger person), but always ensure to address the primary business owner not the interpreter, as the danger is, the relationship will not be centred around the actual decision maker. Both relationships will be important but respect the hierarchy.
Think about the language you use. Australians are renowned for speaking quite quickly and we’re prone to including colloquialisms when we talk, and these will not be understood or, worse, are likely to confuse people.
Make sure you do a thorough due diligence of their business. Seek references from other businesses they may represent. Establish their financial viability. Are you confident in the claims they make around their ability to represent your business? Validate these where possible. Visit retail outlets where products they represent are being sold. Are you happy with how the products are displayed?
Develop a shared business plan and make sure your expectations are aligned with respect to capacity. It’s a big market and if your brand takes off, then you need to understand how you can (jointly) address the growing demand.
Should the partnership grow to a point where you decide you will work together, it needs to be secured around a contract. Never leave it to a verbal agreement. If the partner is offended by the concept of a contract, then ask yourself ‘why?’ Perhaps they’re not the right partner for you. In proposing a contract, consider everything it should cover. Run through a list and elaborate on what some of them are and why they should be included.