China is often considered a world unto itself - businesses that do well the world over sometimes mysteriously fail in China, and the regulatory and cultural environment in the country can be a daunting landscape for non-locals to navigate.
Nothing has been as clearly demonstrative of that as some of the high-profile failures that several MNCs have experienced in the recent past.
In 2009, Mattel’s CEO decided to launch Barbie in Shanghai with a big bang. It took a whopping 36,000 square feet store and Chinese Barbie, "Ling" to entice the local market. But low brand awareness and failure to customize a suitable brand approach led to Mattel shutting its doors in 2011.
In 2004, eBay’s chief led the e-commerce site’s expansion into China, but a lack of market knowledge resulted in a string of unprofitable investments.
In two years, eBay withdrew from China’s online auction market completely, while Taobao (an Alibaba website) rose and continues to thrive today
That said, China undoubtedly holds a lot of promise for businesses, with its rising middle class, a taste for consumer goods and a hinterland that's able to create and sustain industries and technologies on its own.
To get a unique cross-border business perspective into what makes China tick, Rahul Joshi, Deputy Editor for Enterprise Innovation
(sister publication to CFO Innovation
) spoke to Lily Hua Fang
, Associate Professor of Finance, INSEAD.
Based in Singapore, Fang teaches at the INSEAD-Tsinghua Executive MBA (TIEMBA), an EMBA in collaboration with Tsinghua University in China; she is a subject matter expert in corporate finance, capital markets, valuation, and private equity finance.
What is it about doing business in China that is fundamentally different from doing business in other parts of the world? How about the differences between China and some of the other big emerging economies in Asia, like India and Indonesia?
There are three areas which are fundamentally different when doing business in China – the ability to adapt your business strategy as rapidly as China’s business landscape changes, the vast cultural difference between the West and the East, and the governing state of China.
China has been growing much faster than the rest of the world in the past 30 years and this has had an impact on everything from rapidly-changing business landscape - hence business strategy - to talent shortage, wages and high turnover rates.
From my teaching experience, in TIEMBA for example, I came to realize that young Chinese executives are tasked with high level duties much earlier than the standard in other regions. To me, this is a reflection of a shortage of qualified talent for managerial-level responsibilities.
It is no secret that the Eastern culture has very different tastes and attitudes as compared to the Westerners. However, even with this knowledge, many businesses have tried and failed to penetrate the Chinese market.
Essentially, leaders must be properly equipped to truly understand the Chinese consumers so as to take full advantage of the opportunities that they present.
One of the elements that makes doing business in China a tad trickier than any other markets is the state involvement. Key sectors and resources are still controlled by the Chinese government.
Business leaders need to understand the motivations and driving forces behind Chinese policies and policy makers in order to have a good grasp of the country’s long-term development trends and business opportunities.
The main difference between China and other emerging markets, such as India and Indonesia, is the efficiency of the government.
The Chinese government has been proven to be highly efficient; as a result of government’s commitment to opening up and economic reform, it has lifted 800 million people out of poverty in the last 30 years. No other emerging countries can make such a claim.
If India and Indonesia can borrow some of these efficiencies, they will be in much better shape. India and Indonesia however have their own advantages; India has the advantage of the English language and the common law system and a young and entrepreneurial workforce.
Indonesia, on the other hand, has rich resources and now, even cheaper labour than China.
From a policy perspective, what do businesses have to bear in mind when they set-up shop in China? How does the legal and compliance landscape impact on recruitment, procurement, operations and finance, among other aspects?
One of the things companies need to bear in mind is that China as a developing economy — and a fast growing one at that — has an incomplete soft infrastructure. This includes legal framework, enforcement, and regulations.
As such, companies will find that policies often change, and there is a certain degree of arbitrariness. For example, foreign investors require government approvals when they plan to invest in a Chinese firm or asset.
In some industries such as media/internet and banking, rules often change in terms of what firms can or cannot do. And, of course there is also the issue of the government's protectionist agenda, like elsewhere in the world.
It is important for firms to note these changes as they can present both challenges and potential opportunities for different parties, which in some instances can be advantageous for some businesses.
For instance, when Google withdrew from China
due to the government’s censorship, it created opportunities for local internet firms.
What advice would you give Western multinationals setting up branches to be aware of and focus on? What are the "3 success factors of doing business in the Chinese and other emerging markets"?
It is important to keep in mind that what worked in the US or even Singapore may not exactly work in China. Thus, a good understanding of Chinese culture and taste, hiring the right people, staying flexible and maintaining a high degree of adaptability are important.
The three success factors are as follows:
- Adapt a proven model to local culture and reality
— few business ideas are started from scratch. For global MNCs, they are typically entering the Chinese market with an existing business model/idea/concept.
It is important to have a proof of concept first, to make sure that the same business model/ideal/concept will be accepted in China. As seen with Mattel and eBay, had they both understood the Chinese tastes better, their costly mistakes could have been avoided, or at least made less costly.
- Attract and retain talent with local knowledge — because cultural sensitivity is key to doing business in China, it is important to attract and retain staff that has deep local knowledge, even if they are not local.
The most sought-after type of employees are those who have sophisticated business sense from experience, an updated skillset, and who also has a deep cultural understanding of China.
- Stay nimble and flexible — China and emerging markets change rapidly. To succeed, one has to learn quickly and adapt. New ideas and business models constantly spring up; Chinese entrepreneurs are particularly good at refining an idea and adapting to the Chinese reality.
For example, while E-bay was the incumbent in C2C retail, Alibaba can quickly take the wind out of its sail
by modifying the business model to better suit the Chinese reality.
Learning quickly and remaining adaptable may mean starting small and keeping options open — even the option of withdrawing from the market.
How do you see the Chinese business technology landscape being disrupted/changed in the coming years? For example, industry pundits are saying that 3D Printing will disrupt the manufacturing industry and may result in China losing its stronghold on that sector. Your thoughts?
Contrary to popular belief, 3D printing may be more of an opportunity than threat to China. China’s labour cost is rising rapidly, and in some sectors is already higher than cost in a number of other nearby countries such as Indonesia, Vietnam and India.
For instance, some big firms such as Ikea are already moving manufacturing out of China and into Vietnam, Indonesia.
For China to succeed in the next phase of its development, it needs to increase productivity to justify its higher costs. In other words, Chinese firms need to go up on the value chain.
3D printing is a technology that enhances productivity. For example, shoe manufacturers can use the technology to prototype much faster than in the past.
I think Chinese firms should embrace and utilize the technology rather than resist and see it as a threat.
What sort of companies and business models do you see thriving in the new Chinese economy? Is it possible for Western companies to compete on fair grounds with home-grown enterprises there?
As I have said before, a large swath of the Chinese economy is still controlled by the government. The Chinese government charts out the country’s economic development in Five-Year Plans.
In the most recent 12th Five-Year Plan by the Chinese government, we can see that the government is highly aware of the unfairness and imbalance in the system. They are resolute about changing that as well as the economic structure of the country.
To know what type of businesses will succeed and will have a more even playing field, it is useful to take note of the industries/sectors that the government has singled out in the Plan as “key” development areas.
I have observed that most of these key development areas are in the high tech, environment/clean energy sector, and consumer sectors.
As the Chinese government looks to attract investments in these areas, I expect MNCs in these industries (that have a competitive advantage, most importantly) to do exceedingly well. So much so that they may even receive favorable tax and hiring treatment compared to local firms.
On the other hand, low-end manufacturing, low-value added businesses, and businesses that directly compete with Chinese state-owned firms, but have nothing to bring to the table (like better technology, for example) will have a hard time.
What do you think are some of the main causes of failure for Mattel and eBay? How could they have been prevented?
The common cause behind both failures is that they did not understand their Chinese customer, in other words, they under-estimated how culture and taste differences between Chinese and Western consumers require adapted business models, rather than a carbon copy of that has been successful elsewhere.
This seems to be a common knowledge gap across industries.
In Mattel’s case, it did not understand what the Chinese girl aspires to be; in eBay’s case, it wasted time and resources doing wrong things such as advertising online rather than on TV, etc.
Both companies tried to push carbon copies of a successful Western business into China and they failed.
Another high profile and great (negative) example is Home Depot. After spectacular success in the US, Home Depot entered in China in a big way, to bet on the rising housing market. But recently, Home Depot completely withdrew from the Chinese market after years of losses.
While DIY is a popular concept in the West, where people view it almost as a hobby and do it with pleasure and pride, it is completely the opposite in China.
Chinese consumers instead, prefer to have other people fix and renovate their homes — these tasks are perceived as menial and should be avoided.
Had these companies understood the importance of cultural differences, these mistakes could have been avoided or at least less costly.
That is why before entering China, it is important to have a proof of concept. Companies should be nimble and remain flexible – which means keep options open and be ready to change and adapt. Also, it is important to have the right people that have the deep cultural understanding.
INSEAD's TIEMBA programme addresses several issues talked about by Professor Fang; Strategic talent management’ shows business leaders how to empower and retain existing employees and attract quality workers into their workforce; the ‘Macroeconomics and the Chinese Economy’ module incorporates key learnings about China’s history, culture and politics); and the ‘Confucius Leadership’ course provides insights into Chinese culture and thinking.
About the Author
Rahul Joshi is Deputy Editor of Enterprise Innovation.
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