Business West’s Market Specialist for China, Jonny Smith, discusses the distinction between China’s myriad of cities and which you should consider when forming your market entry plan.
China has over 600 cities, of which more than 140 have a population over 1 million people and more than 20 have over 5 million. The level of urbanisation in China passed 50% in 2011 and is set to reach 60% by 2020. China’s increasing urbanisation is driving growth, which creates endless opportunities for companies looking to sell to China.
However, all cities are not created equal and companies need to think carefully about what cities to target for the greatest chance of success. Chinese cities are categorised into tiers, ranging from 1 to 5. These unofficial classifications are open to debate, especially the further down the tier rankings you go.
1. First tier cities
These are usually seen as China’s largest and most developed urban metropolises, including Beijing, Shanghai, Guangzhou and Shenzhen. They are also known as China’s four ‘capitals’: Beijing (politics); Shanghai (finance); Guangzhou (trade); and Shenzhen (innovation).
2. Second tier cities
Second tier cities include the major provincial capitals and other large, fast growing cities with sophisticated consumers and major strengths in specific sectors.
3. Third, fourth and fifth tier cities (the rest)
These are smaller and less developed, although often growing fast. They are potentially of interest for companies looking at investing, but of minimal value to most exporters.
Exporting SMEs will generally only consider targeting first and second tier cities, as China’s most sophisticated markets these abound with opportunities in multiple sectors. The demand for foreign goods and services is high and ease of doing business is best. The major disadvantage of first tier cities is competition; the market is crowded with foreign products, making it harder for each new entrant to stand out.
Second tier cities are far from second class destinations for market entry. These cities will typically have a population of over 5 million that are often not far behind their first tier counterparts in level of consumer sophistication and demand for foreign products. Their lack of saturation is evident in from the high growth in the consumer sector in these cities.
Beyond selling direct to consumers, many second tier cities have strengths in particular industries that make them well worth considering as a market entry point either alone or in combination with relevant first tier cities. For example, the aerospace sector is particularly strong in Xi’an, Chengdu and Shenyang and so these cities are certainly worth exploring for companies in this sector.
While there are certainly opportunities for new market entrants in second tier cities, the challenges of doing business here are often greater than in the first tier. Even large multinationals often get their ‘China legs’ in the first tier cities before expanding to the second tier. However, it would be an error to disregard second tier cities completely, but be prepared for the extra challenges these places can throw up.
Jonny Smith is a market specialist in our Extend Your Global Reach programme, set up to help South West businesses secure new international business in the high-growth markets of Latin America, South East Asia, China and India through intensive commercial and strategic assistance. Meet the rest of the Extend Your Global Reach team here.