The secret world of the hidden channels – A market worth attempting?

With China coming in second on the world index of GDP, the market is quickly becoming a market to penetrate in recent years. With a growth rate of 6.9% and a GDP of $14.72 trillion it’s a country that is set to overtake the US in the early 2030’s.

The US is sat at $20.94 trillion dollars with a growth rate of 2.27%.

Now is a better time than ever to enter the Chinese market but how does it work?

China is essentially cut off from the world by the great Chinese firewall that prevents a lot of traffic entering China from public data centres hosted outside of China.

There are three ways to enter China.

• Setup a local subsidiary (which in many cases needs to have part Chinese ownership)
• Work through an agent / distributor
• Host on a Chinese based data centre

Hosting outside of China for cloud solutions and selling them into China doesn’t typically work, especially in the cybersecurity sector due to the stringent requirements of product vetting.

Local subsidiary offices have to be part owned by someone within China or a Chinese company. This has been done many times before but there has to be a trust there and it’s a lengthy and expensive process. There are entities called WFOE (Wholly foreign owned enterprises) which can be opened in certain regions throughout China.

Working through a distributor / agent is the typical way to proceed with the distributor acting as a true extension of the vendor. If you think there are a lot of distributors in Europe, wait until you know how many there are in China. There are over 85,000 distributors in China in varying industries depending on the type of product you are working with. These distributors have reach into resale and retail through China.

Software can be sold into the Chinese market but is typically on-premise solutions that are perpetually licenced. We have sold licences into China before that are not perpetual but instead on-premise subscription licences.

Methods of entering China involve hosting on Chinese owned data centres such as Huawei or Alibaba cloud if you are a cloud hosted solution.

Microsoft have recently entered the Chinese market with 5 data centres provided by the 3rd party Vianet. They plan on opening another 4 data centres on the mainland which again, will have to be supported by Vianet.

The same situation happened in Germany a few years ago when the Microsoft services were being provided by Telekom in Germany but marketed as Microsoft owned. Since then, Microsoft has entered Germany with its own data centers but this will not be the case in China.

The data requirements of hosting in China have to be overlooked and managed by a Chinese partner on the ground.

The same applies to selling into China. Business is conducted through agents, distributors or resellers on the ground.

Who are the Chinese distributors in the software world?

As mentioned earlier in the article, there are over 65,000 distributors in the Chinese market for all sorts of different products. Some of the software distributors that we know are below:

Logon Software Group Asia who are based in Hong Kong but have reach into most of South East Asia also have access to the Chinese market via agents on the ground there. Personally our favorite distributor in the region as they have reach into areas outside of China including the Middle East as well as Malaysia, Singapore etc.

There are many more options for selling into China via a distributor but these are the ones that we are personally familiar with.

Do I need a distributor for China?

The short answer is yes. You need someone to be able to bridge the gap between the west and China in order to succeed on the ground there.

Hosting something in a Chinese data centre and hoping for the market to build itself is a long shot. There is generally a necessity for having those feet on the ground who speak the local language and can manage the transaction side of the business.

Software can be accessed in China via the use of a VPN but it slows the connection down and the usability decreases.

We have had meetings with China on Teams calls which have had to be conducted via VPN and the quality doesn’t maintain well.

The distributors that you work with on the ground in China often don’t have English speakers at their disposal so if you are going to attempt to enter the Chinese market, you are best having a Chinese speaker in your team. We have been lucky in the past by having bilingual English and Mandarin speakers.

Many distributors in China are doing the complete job of the vendor. We have previously had funded heads in place in China to purely manage the renewals side of the business as the entire process is managed by the distributor in this instance.

Our software isn’t translated into Chinese, does this matter?

Solutions that we have sold into China previously were never translated into Chinese and were still able to be sold there. The types of solutions we could sell into China were the ones that are integrated into workflows and not typically used on a day to day basis by the users.

Translating the solution opens the market to further afield than China such as Hong Kong, Taiwan, Macau etc but it’s not a 100% requirement depending on the type of software.

Having your distributor trained to the same level as you, the vendor, is the key to success as they support and maintain the customers within China. Train the distributor and you are set for success.

The distributors have access to many products don’t forget. They have not only got the software made outside of China but also the software produced in China that we don’t even know exists. The market is very competitive but if you can win over the Chinese market, you are creating a huge revenue stream that would be inaccessible otherwise.

Agreements with distributors in China

The distribution contract is the same as what you would use for your distributors around the globe but with different targets. You should make sure to have non disclosure agreements in place to ensure you are protected just as you would do for any of your distributors outside of China. We have sold into China with previous companies and never had any issues and only thrived in the market, but you always have to protect yourself.

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