China’s 2nd and 3rd tier cities offer both domestic and foreign companies a relatively untapped potential to increase their market shares. However, many foreign companies underestimate the vast regional differences in China or are unaware of the opportunities found outside of first-tier cities. This article provides an insight into China’s growing second- and third-tier cities and explains which factors to consider when initiating sales there.
What is a tier 1, 2 or 3 city?
You read all about it in the news, but what really is a tier 1, 2 or 3 city in China?
Although there is no strict definition or set of criteria to abide to, cities are generally divided by measuring their respective GDP, population size, economic growth and historical significance.
Cities such as Shanghai, Beijing and Guangzhou are categorised as tier-one cities. That’s thanks not only to their large size but also to the fact that they have the highest income per capita in the country.
Hangzhou, Ningbo, Chengdu and Dalian are considered second-tier cities. And there are countless third-tier cities such as Shantou that each boosts a population of over 1 million people. It is in these areas where most of China’s future growth will take place, as we are already witnessing now. Key enablers of the rapid growth of those regions include improved transportation services (e.g. bullet trains) and better infrastructure (e.g. highways and industrial hubs).
|A non-official list of first-,second- and third-tier cities in China|
|Tier 1||Tier 2||Tier 3|
Please note that this list is not exhaustive.
Consumers and businesses in first-tier cities have more money to spend and are therefore a popular target for foreign companies entering the market. Increasingly more companies are now also eyeing second and third-tier cities because of their growing wealth.
Regional differences and sales strategies
The first realization that foreign companies need to make is that China is in no way a uniform and homogenous market. Although China is unified in the geo-political sense, socially and economically the picture is much more disparate and fragmented. Some regions are poor, some are rich, some like rice, others prefer potatoes. As such, it is important to consider China as a collection of individual sub-markets instead of one single, unified market.
“China is as wide as its peripheries. Few can represent the thoughts and feelings of 1.4 billion people and 56 ethnicities fairly in one statement.” –Bob Tan
A simple example: most buildings in the south of China have no heating, as opposed to the North of China where central heating systems are installed in almost all homes and buildings. The lack of a central heating system in the South is not due to the region’s high temperatures (it was snowing in Shanghai last year), but rather due to government restrictions. Companies in the heating appliances market will therefore find the need to develop different products for the Southern and Northern regions.
Another example would be to compare eating habits between the North and the South; in the South people mainly enjoy rice as opposed to the North where people tend to enjoy wheat-based foods e.g. noodles more.
The best way to approach sales in China is therefore by recognizing the regional differences and to take those differences into account when you develop your marketing and sales strategies.
Although foreign companies in the B2C sector are mainly drawn to China’s richer coastal cities, B2B businesses are generally more scattered across the country. This is partially due to China’s industrial clusters in specific regions and cities throughout the country e.g. Beijing focuses on IT and electronics, Guangzhou on automobiles and Jiangsu on Biomedicine, just to name a few. In many cases B2B companies therefore find more opportunities in second- and third-tier cities. Often times more remote regions also offer attractive incentives to attract local and foreign businesses.
While smaller cities show much potential, they also demand a different strategy. Don’t be surprised if your marketing and sales strategies in first-tier cities don’t work in third and fourth-tier cities.
Why only working with distributors is not enough
The majority of companies initially start working with one or two Chinese distributors to test market demand. After all, it’s a cost-efficient, low-risk and easy method to test the waters. But unless you are actively supporting your distributors and visiting clients together in China, you will not get a clear picture of the market. You simply cannot leave it up to your distributors to build your brand in the market. T achieve success in China, you need to be in China.
This does not mean you need to setup sales offices all over China. But it would help to appoint a business development manager that finds, manages and supports your distributors and clients in China. Take a look at our article about how to enter the Chinese market to understand which method works best for you.
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