Foreign Giants failing to strike Gold in China

As Golden week celebrations have just concluded, we thought it would be a nice opportunity for our readers to sit back and delve into a topic that impacts every business and industry in Chinese economy. In this article, we focus on exploring one of the most mysterious questions pertaining to Chinese mark et- Why many foreign enterprises have been unsuccessful in finding glory in this goldmine of opportunities?

 

With over a billion potential consumers, it has been impossible for any major international business to ignore China in their strategic business plans. As a result, we have seen a number of major foreign brands venture in to the Chinese market in hopes of heavily increasing their global revenue. Though difficult to believe, we have also witnessed, despite millions of dollars being pumped in to business development and marketing, dreams of many of these entrants shatter to pieces. According to estimates, around 48% of foreign businesses fail in China within 2 years of entering the market, an astoundingly high figure. We believe these failures of global businesses are not a cause for despair but rather a source of some valuable insights for organizations aspiring to make a mark in this complex market.

 

Interestingly, as we realized through our research, the commonly perceived issues like government control, local laws, corruption etc are not the major reasons behind most foreign failures in China. Very often, foreign businesses have stumbled due to lack of understanding of local culture, social norms, and most importantly consumer preferences. Home Depot failed to make an impact in China, whereas IKEA with a similar business model took the market by storm. Both companies rely on ‘Do it yourself’ philosophy, however, IKEA went a step further in designing its outlets. IKEA’s western style showrooms provide guidelines for young Chinese consumers on modeling their bedrooms, dining areas, and family rooms. On the other hand, Home Depot only provides tools for improvement whose practical applications local consumers struggle to grasp. 

 

Best Buy, a US electronics retail giant, closed its operations in China in 2011.  With booming electronics industry, to many analysts, China appeared to be a natural progression for Best Buy’s business growth model. Best Buy, in China, tried to duplicate ‘large store retail’ strategy that worked quite well for it in United Stated. It opened a giant flagship store in the bustling city centre, Downtown Shanghai. High rentals exaggerated Best Buy’s costs and local competitors like Suning and Gome set up shops adjacent to it, concentrating on high frequency and high margin items only. Best Buy offered a wide variety of items (most of them being in low demand) and failed to maintain sustainable margins. Media Markt, a German electronics retailer, faced the same fate as Best Buy, earlier this year, caused by pursuance of a similar strategy.  

 

eBay’s demise in China could also be traced back to lack of understanding of cultural norms and local market dynamics. Its local competitor Ali Baba waived off sign up fees, and provided opportunity of direct communication between customers and suppliers helping the two parties to build personal relationships- something that’s critical for Chinese in business. Interesting as it may sound, eBay’s business model based on auctions- where the price of products keeps rising- also seemed alien to Chinese customers. Any keen observer of local market dynamics would know that the habit of bargaining, even for everyday transactions, is ingrained in Chinese culture. In contrast, users could bargain with suppliers on Ali Baba to bring the price down. eBay’s adventure in Chinese market ended in 2006 with the company announcing its retreat. 

 

The globally renowned doll brand ‘Barbie’ is another example of a foreign giant that stumbled in China. Barbie’s American parent Mattel, world’s largest toy manufacturer, announced the closure of the brand’s first flagship store, the House of Barbie, in 2011- only two years after its opening. The six-story building had the world’s largest collection of Barbie dolls and featured a fashion runway, a design studio, and a dazzling spiral staircase decorated with more than 800 Barbie dolls. The global industry leader failed to realize that the concept of femininity in China is quite different from that in America. In China, “feminine” is more about ‘sweet and soft rather than smart and strong’. It would have been easier for young girls to associate with ‘Barbie dolls’ if designs of clothes were more focused on ‘cuteness’ rather than ‘sexiness’.  

 

Despite many global brands struggling to create an impact, fact of the matter is that China remains to be an extremely lucrative market for international firms. Apple’s recent hit with golden covers for the new Iphone 5S during the golden week is a firm testament to that. Apple fans in China even have a nickname for the hit color, “Tu Hao Jin” literally meaning “rich farmers color”.  Even today, many foreign firms are eying the Chinese market for entry. It could be useful for potential newcomers to study the mistakes of their predecessors. According to J.P. Morgan, “Learning from the mistakes of others is less costly than learning from your own.” 

 

It’s easy to be blinded by success in other markets but it is important to realize that very often, especially in China, ‘one size fits all’ strategy could be a recipe for disaster. International businesses shouldn’t approach Chinese market with a rigid mindset. They should be willing to break free from their traditional business models and be more agile in terms of processes, products and services. They should aim to develop a business model that is sustainable in long term rather than looking to milk profits out of a booming market. Strategic application of tools like innovation pipelines, trend forecasting and ethnographic research can help in achieving this goal. The power of local competitors, irrespective of their size, should not be underestimated. Smaller companies have the advantage of being more responsive to changes in consumer preferences- an ability that could prove to be the difference between success and failure in a market like China. Identifying the needs of consumers through market research helps in tailoring the strategy to meet the needs of local market. Even the companies currently struggling to deliver results could turn things around by striving to connect closely with local consumers. Leveraging the capabilities of local research firms could aid foreign firms in understanding the complex dynamics of Chinese culture. As the famous Chinese proverb goes, “He who asks is a fool for five minutes. He who does not ask is a fool forever.”