Beyond Beijing: Selling Across China

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Beyond the differentials in advertising costs between first- and second-tier cities, a deeper problem exists. Advertising space is so saturated in big, developed cities that gaining actual reach through advertising is a difficult proposition as consumers are literally bombarded by ads all day long from companies such as Focus Media, and have learned to ignore them. Advertising in second-tier cities is not only cheaper, but likely much more effective in terms of capturing the attention of coveted shoppers.

At the end of the day, too many foreign firms feel as if they have to be in Beijing or Shanghai because everyone else is and because of pressure from boards and investors who do not understand why their companies do not have a China play in the most famous cities. But smart executives will ignore the pressure and herd mentality and will locate where their biggest potential return on investment is.

Labor Problems

Although China's first-tier cities have large worker populations, labor costs are not as low as many as multinationals expect. Everyone from white-collar workers at foreign multinationals to waiters and sales clerks in the service industry rotate through jobs with frightening frequency, seeking the next best opportunity.

Second-tier cities offer a much better opportunity for companies seeking to acquire employees with relevant skills that stay with companies for the longer term. In first-tier cities, workers see too many 'grass is greener' scenarios as they hear rumors of acquaintances leaving jobs to start their own businesses and becoming millionaires or getting poached by other companies that dole out 25% salary increases.

In surveys that my company, China Market Research Group (CMR), has conducted, the first criterion workers in Shanghai or Beijing look at when choosing a job is a balanced lifestyle. Salary was the answer to that question five years ago. However, workers in second- and third-tier cities still choose salary as the most important consideration when looking for a job—followed by job security.

Consumer Choices

Consumers in China's first-tier cities have been bombarded by choice over the last three years from hyper-marts such as Carrefour (CRERF). Accustomed to a plethora of product choices from Sony (SNE) to Nike (NKE), consumers in these cities are incredibly fickle. Consumers in second-tier cities have less to spend and want a variety of goods to choose from.

These secondary cities will be a boon for forward-thinking companies as China's economy become more integrated with international norms. And they will not have to deal with the problems that plagued their operations when then they first set up in Shanghai and Beijing— such as a lack of transparency in regulations and weak infrastructures.

A bigger chunk of China's 1.3 billion consumers could be within reach for multinationals willing to shift their strategy to less know urban centers.

Shaun Rein is the managing director of the China Market Research Group (CMR), www.researchcmr.com, a firm headquartered in Shanghai that helps U.S. and European companies get the market intelligence they need to make smarter decisions in China. Rein previously was chief of research for leading venture capital firm Inter-Asia Venture Management. He received his graduate degree focused on China's economy from Harvard University and previously sat on the Advisory Committee for Shareholder Responsibility to the Harvard Corporation. He can be reached at shaunrein@researchcmr.com.