1-1-1 Market Support Capability

With a population of nearly 1.3 billion at the end of 2004, China is indeed a huge market. However, for any company, market size alone does not necessarily translate into market potential for its products. The penetrability of the product into the market is also an important consideration.

The availability of basic support facilities in a market often affects the success of a product in penetrating the market. In order to launch the product successfully in a new market, the necessary technology and support system must be available. For instance, WiMAX is a software that is mainly used in a long-distance or high-speed communications environment supporting a transmission radius of more than 2 km. The enhanced version even supports a 50-km radius. In 2004, WiMAX tried to tap the enormous China market by offering its product to fixed line operators and Internet service providers (ISPs). However, at that time no technology was available in the mainland to provide support to this software, and online service operators offering value-added services had yet to emerge. These obstacles have hindered WiMAX's market penetration in China.

The lesson learned from WiMAX's experience is: It is very risky for a company to promote a new product or new technology in a target market without first taking into consideration the support available in that market. The company should also keep track of the developments of related projects in the target market and find out if the technological and peripheral facilities available there can support the new product and provide a favourable business environment.

1-1-2 Culture and Values

Despite the fact that Hong Kong and the Chinese mainland are adjacent to each other geographically, the values of the people in the two places differ significantly due to different cultural backgrounds and socio-economic factors. Hill & Knowlton, a public relations consulting firm, and Sinomonitor International jointly conducted a study on the self perception of young people in China in 2004. The majority of the 1,200 university students aged between 18 and 20 interviewed (male and female each making up half) describe themselves as "honest", "friendly" and "easy going". These perceptions are considered to originate from Confucius teaching. While 26% of the respondents consider themselves "individualistic", 76% think they have an "entrepreneurial spirit", both of which are western concepts. Over 40% of the respondents consider "individualism" and "innovativeness" the dominating trends and therefore have a preference for brands that highlight individuality. The study has found that the three most trendy brands are Nike (25.2%), Adidas (12.6%) and Sony (9.2%). Li Ning (4.2%) is the only Chinese brand among the top 10 trendy brands. As Hong Kong is known for its "east meets west" culture, when Hong Kong companies venture into the mainland market they can highlight the "Hong Kong brand". They can promote their new products leveraging on the positive attributes of Hong Kong such as excellent service, fashion consciousness and international exposure.

Hong Kong manufacturers have found it difficult to break into the mainland home electrical appliances market because in the low-end market domestic brands have cost advantage and offer low prices, while in the higher-end market foreign brands are preferred to Hong Kong brands. Despite this, Hong Kong company Goodway has successfully used the "Hong Kong brand" to secure a share of the mainland market.

Hong Kong is a modern city with a sophisticated consumer market where consumers often look for attributes such as design and product image other than the practical uses of a product when they make a purchase. The middle class in major mainland cities are also increasingly moving towards this direction. By comparison, practical considerations remain the biggest concern of consumers in China's rural areas.

It is worth noting that where cultural differences are concerned, the sense of nationalism among mainlanders is strong, especially when compared to that of young people in Hong Kong. For example, some mainland consumers buy the Li Ning brand sportswear not just for the sake of its brand image and product quality, but also out of their support for the homegrown sports star, which is a sign of their patriotism.

Due to the differences in culture and values between Hong Kong and the mainland, before venturing into the mainland market, Hong Kong companies should first study the characteristics of their target customers and devise custom-made advertising and marketing campaigns for them. Simply replicating Hong Kong advertisements in the mainland without any adaptation is not likely to produce the best results.

1-1-3 Language

Although Putonghua is the major medium of communication, English and other foreign languages are becoming increasingly important in China today as exchanges with foreign countries continue to expand. In view of this, companies venturing into the mainland should prepare their corporate materials and company websites in simplified and traditional Chinese as well as in English. Meanwhile, advertisements should be produced in Cantonese, English and Putonghua. It should also be noted that with the exception of Guangdong, TV and radio broadcasts in China must be in Putonghua. Although the use of local dialect will likely appeal more to the local people and increase the effectiveness of promotion campaigns, companies should pay attention to the stipulations in the Regulations on the Administration of Advertising to avoid breaking the rules. For instance, it is against the rules for radio stations to broadcast advertisements in local dialects in Henan and Xinjiang.

Product trademark and slogan play an important part in the promotion, sales and image building of a company's products. Given the changing times, the use of both Chinese and English trademarks can help bring out the practical and interesting features of the two versions and bring together the people, objects and concepts related to the product effectively.

1-1-4 Demographic Distribution

According to 2004 statistics, China had a population of close to 1.3 billion with a growth rate of 0.6%. The female-male ratio stood at 1:1.04. The urban population accounted for 40% of the total population, and this percentage has been growing. During the same year, Hong Kong had a population of 7 million with a 0.2% growth rate. The female-male ratio stood at 1:0.93. Below are population charts of Chinese mainland and Hong Kong by age.

According to the two charts, the population of children aged under 14 in the mainland is 20% versus 15% in Hong Kong. This, coupled with China's one-child policy, has led parents and the elders to focus their attention and love on the only child of the family. The best resources and massive sums of money are often spent on these children. As a result, all kinds of children's products have enormous market potential in the mainland. In view of this, many companies formulate their marketing strategies by targeting children. For instance, many restaurants offer children's set menu or hand out small gifts to junior customers. Their strategy is to attract children, who will in turn patronise the restaurant with the whole family. SMEs can consider adopting this strategy by introducing new products related to children or target children in their promotions.

1-1-5 Standard of Living

The standard of living of the Chinese people has improved substantially in recent years. In 2004, the average disposable income of urban residents in China was Rmb9,422 while the per capita GDP of the country stood at Rmb10,561. The two figures represent increases of 11.2% and 15.9% over 2003 respectively, underlining the continuous rise in the people's standard of living. Meanwhile, Hong Kong's per capita GDP stood at HK$186,267 in 2004. Hong Kong companies wishing to promote their brands in the mainland should pay special attention to this big income gap when setting their prices. Even the income gaps among different mainland cities can be very significant. Hence, companies must have a clear idea of the purchasing power of their target customers. The two tables below compare the average household expenditures of Hong Kong and the mainland, and the consumer durables ownership rates between China's rural and urban households.

Comparison of Household Expenditures
in China's Rural and Urban Areas and Hong Kong

Average Ownership Rates of Consumer Durables
Per 100 Rural and Urban Households in China

The ownership rates of consumer goods in the rural areas are much lower than those in urban areas. Rural residents have relatively lower incomes and price is often the key consideration when they make a purchase. By comparison, urban residents are more seasoned consumers and tend to be more demanding in terms of product quality. Suppliers have to offer more value-added such as packaging and after-sales service to attract consumers.

1-1-6 Regulations on Advertising

In December 1987, the State Council implemented the Regulations on the Administration of Advertising under which advertisements are subject to a certain degree of supervision in China. These requirements include:

• Article 3: The content of an advertisement must be true, healthy, clear and easy to understand and must not cheat users and consumers in any way.

In the mainland, many law-breaking medical and healthcare advertisements mislead consumers by exaggerating the efficacy of the product and hiding the truth. Such act violates the advertising regulations.

• Article 7: The content of an advertisement to be published, broadcasted or posted shall be kept within the advertiser's business scope or the scope permitted by the state.

The control over drug advertisements differs from place to place within the country in terms of requirements and criteria. Even the same drug advertisement may not be permitted to be broadcasted in different places on the mainland. In the case of advertisements for pharmaceuticals, the advertiser should seek prior approval from the local health or other relevant departments at each of the places where the advertisement is intended to be broadcast in order to comply with the local advertising regulations.

• Article 8: An advertisement that contains content of the following nature may not be published, broadcasted or posted: (1) violating the laws and regulations of the state; (2) impairing the national dignity of the state; (3) involving designs of the national flag, national emblem or national anthem, or the music of the national anthem of China; (4) reactionary, obscene, superstitious or absurd; (5) fraudulent; (6) degrading products of the same kind.

There is a significant difference in the advertising techniques used in Hong Kong and the mainland in that political figures are sometimes featured in a sarcastic or humorous way in ads in Hong Kong whereas political elements in ads are strictly banned in the mainland where politics are still a sensitive issue. Companies generally avoid politics in their publicity campaigns.

• Article 18: Advertisers or advertising operators who violate the Regulations shall be subject to the following penalties by the industry and commerce administration department according to the seriousness of the case: (1) banning the placement of the advertisement; (2) ordering public corrections; (3) circulating a notice of criticism; (4) confiscating the illegal gains; (5) fines; (6) suspending business for rectification; (7) revocation of the business licence or advertising operation licence. In cases where violation of the Regulations is so serious as to constitute crimes, judicial organs shall seek criminal responsibilities according to law.

1-1-7 Intermediary Organisations

Nowadays companies are placing greater emphasis on marketing and brand promotion, fuelling strong growth of the mainland advertising market. In 2003, over 66,000 advertising companies were in operation in China, while another 13,000 companies also provided advertising service as a sideline business. Both figures represented a 17% increase over 2002. Today, a large number of experienced intermediaries are operating in the mainland market. However, their standards of service and prices vary significantly. Companies should therefore carefully evaluate the reputation and service quality of the intermediaries when selecting their service. The functions and choice of intermediaries are discussed in detail in Chapter 4.