As the world’s most populous country and with an economy that has grown at exponential speeds to reach the second largest globally, China has turned into a superpower on the world stage seemingly overnight.

During its transition into the factory for the world, China’s manufacturing and resource-based industries exploded with growth rates in the double digits. Today, however, these industries are slowing, and China is in the process of undergoing a dramatic shift away from its aforementioned traditional sectors and positioning itself higher on the value chain.

In order to do this, China is having to somewhat re-invent itself by fostering knowledge and service-centric economy primarily driven by technology.

In China, as with most things, change begins with the government, and this case is no exception.

In recent years, the Chinese government has been very proactive in shifting government priorities and policies to match this new direction. In practice, this takes many forms, but some of the more notable examples include initiatives like One-Belt-One-Road and the opening up of Hainan.

These projects are also a good example that China knows it cannot continue this journey entirely by itself, it needs support from the rest of the world. Bold new technologies, business models, innovators and investors from outside of China are required to continue to fuel this shift with forwarding momentum.

When you couple this with the increasing amount of investments, relaxation of foreign-entry policies and a massive untapped talent pool, the market of China is an extremely lucrative playing field of increasing strategic importance for startups and scaleups.

Market size

It wouldn’t be an article about China without citing how big the market is. Hopefully, by now we’re long past the days where people looked at China through gold-tinted glasses with misguided aspirations of capturing a sizeable chunk of the Chinese market within their first or second year of operations.

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Truth is, China is a tough market to crack and requires a proper investment of time and resources to achieve results. It is definitely not a market that should be approached with the idea of walking away with quick, easy wins.

Nevertheless, the market is big and their opportunities for smart foreign firms that can carve out a competitive advantage for themselves here.

The total population of China stands at 1.4 billion people, among which the urban population stands at 856 million (2019). According to a study conducted by McKinsey, the projected growth of private consumption in upper-middle-income class is still projected to be very strong with the CAGR between 2012-2022 projected at an average of approximately 22.4 per cent.

Perhaps more interesting still, is the shift that is being seen in consumer behaviour between generations, in particular, the younger consumers being dubbed “Generation 2”. This is a group of people mainly in their 20s who are born in the late 90s and raised in a period of relative abundance.

They were born in the era of China’s reform and opening to the rest of the world. This group is the most westernized group in terms of ideology, independence and confidence which are reflected in both mindset and consumption habits.

They are driving an entirely new wave of consumption and growth across many sectors as well as fuelling rapid innovations on many fronts. In many ways, they are representative of what we can expect to see in the future of China.

Strong foundations

China is well-known for being the world’s factory. A huge amount of goods and products are made, in part or fully in China and the Made-In-China imprint has become so ubiquitous that you’d be hard-pressed to imagine a world without a manufacturing base in China.

The well-oiled manufacturing sector of the Chinese economy has also led to a formidable logistics industry as well as an unrivalled road/rail transportation infrastructure and industry.

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In the mobile and e-commerce sectors, the flagship companies of BAT (Baidu, Alibaba, Tencent) have continuously rolled out increasingly startup-friendly services and applications in its ecosystem.

Coupled with the massive increase in mobile phone penetration and adoption rates, this provides an opportunity for firms, both local and foreign to compete on an increasingly level playing field.

Essentially this means that China has laid the necessary groundwork for tech companies to flourish. Additionally, the startup movement is already well underway in China although it may still be in a fledgeling or development stage in some areas outside of Tier 1 cities.

The market has now become available for people from outside to easily tap into, but make no mistake, there are still many challenges to overcome for businesses.

Continued growth opportunities

Tier 1 in China refers to the wealthier and more affluent cities in terms of GDP. These are usually highly visible cities for those who are outside of China. The geographical centre of middle-income growth is shifting heavily towards these Tier 1 cities.

In the near future, however, the concentration of middle-income classes will be slowly shifting towards Tier 2 and Tier 3 cities due to the nature of increased affluence also appearing in these cities as well.

The untapped market potential and opportunities for foreign firms in those markets cannot be understated. Though, as quite well articulated by Mark Tanner from China Skinny, such markets should not be underestimated in their complexity either. Understanding the local cultural context and sophistication is critical.

Furthermore, with a large part of the future policy for the Eurasia region now being dictated from within China, it also presents increasing strategic importance for businesses to engage with China earlier in their journeys to start building relationships, networks and partnerships.

Talent pool

The education system in China has produced the highest number of STEM (Science, Technology, Engineering, and Mathematics) graduates every year in the world with approximately 4.7 million in 2016 alone, nearly 10x the number that is graduating in the U.S. annually.

Fresh out of college, these graduates are a talent pool with knowledge, skills and are also eager to work. And working for startups is becoming an increasingly popular path for many of these graduates.

Also Read: What you need to know about data privacy in China

Recently, China has seen a surge in the number of returnees (Chinese nationals that studied or worked abroad and return to China). Exposed to the market outside of China and armed with the ability to speak more than one language, returnees are often ideal candidates for foreign companies seeking to expand in China.

While the job market is by no means easy for foreign companies to access, the quality of the talent emerging from and available in China at the moment cannot be ignored.

To summarize

In the midst of shifting economic trends, China has proven it remains a competitive and potentially lucrative market for technology firms.

There remain many challenges to overcome in this market; challenges that should not be taken lightly nor underestimated.

Despite this, smart founders with relevant products and services for the market that can differentiate themselves strongly will find many opportunities for their businesses here.

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Image Credit: Adi Constantin

Why China Should Be the XNode Team initially wrote the Next Market for Your Startup or Scaleup (Jasper Gill) and adaptable for e27