SERIES: Connecting Australia and China

Last week we looked at how three big companies tried to establish themselves in the Chinese market only to ultimately fail. This week we’re going to take it a bit further and look at the typical reasons behind why foreign companies fail when expanding to China. eBay, Google, Facebook and Uber are all multinational corporations that have been successful in establishing themselves all over the world, so why was China different?

Not understanding local business culture

As discussed in one of our earlier posts, Chinese business culture is pretty unique. Succeeding in China hinges strongly on understanding the subtleties of Chinese work culture and building a close relationship with your local business partners, as per the concept of ‘guanxi’. It’s very common practice in China to offer gifts in order to show appreciation and curry favour, something Google completely failed to realise when they fired their first Head of Government Relations for giving Google sponsored iPods to Chinese government officials. The decision reflected just how disconnected Google was from local business practices and presaged its ultimate failure to seize the Chinese market.

Overlooking local preferences

As with all markets, Chinese consumers have specific preferences that are unique to them. For example, they dislike huge warehouse stores far from the city centre and they like to purchase food that is freshly harvested or killed right in front of them.

This differs quite strongly from the typical American consumer, something most of the big American brands who expanded to China completely failed to realise. Both Best Buy and Home Depot opened big warehouse stores on the outskirts of town not realising these wouldn’t appeal to Chinese consumers. And Walmart’s Chinese expansion started on the wrong foot when they initially sold dead fish and packaged meat.

Barbie too ended up losing millions of dollars because their massive store in Shanghai did not meet Chinese customer needs. While the doll itself was popular in China, the brand was not. As a result, the huge Barbie themed building with restaurants, cafes and clothing stores did not do well in Shanghai.

Underestimating local competition

China is well-known for taking popular international services provided by multinational corporations and creating their own versions of them for the Chinese market. Having had an insular economy for a large portion of time, the people of China learnt to rely on these versions which quickly developed to meet their needs. After all, who knows what China wants better than a Chinese businessman?

The Chinese consumer is still very much an enigma and so it’s important to be flexible and adaptable when entering the Chinese market, largely because your local competition will be quick to change depending on customer needs and wants. If you aren’t able to keep up with them, you’ll get left behind. Between Baidu, Didi and Sun-Mart, the three companies we looked at last week had their hands full trying to keep their heads above water.

Not understanding the importance of government relations

Government relations play an integral part in business in China, and foreign companies always underestimate the extent of the government’s power. It’s important to establish contact with both the regional and national government in the case of China - knowing someone who works in the government will go far in helping you with this. It’s also fairly common practice to have someone or a team of people specifically assigned to dealing with the Government. Like most other countries’ propensity to promote local businesses, the Chinese government too favours local companies over foreign ones. Given that a lot of local companies are formidable competitors to multinational corporations, this puts foreign companies at a complete disadvantage.

Strained relations can severely affect your business as Google found out. As a result of their strained relationship with the government, the company faced multiple issues regarding their license and compliance to censorship laws. The Government Relations team had their hands full fielding Government demand directives to censor links on the site and could not do much to improve the damaged relationship.

Even the biggest companies can make the most fundamental of mistakes. Before entering a new market it’s important to properly research and understand the market needs, business culture and what competition you will face. Overconfidence can be fatal to your plans.

Did you miss reading ‘Learn From Their Mistakes: Part I’? https://blog.airwallex.com/learn-from-their-mistakes-part-1/

References:
http://europe.newsweek.com/great-wal-mart-china-112177?rm=eu
https://googleblog.blogspot.com.au/2010/01/new-approach-to-china.html
http://www.theatlantic.com/technology/archive/2016/01/why-google-quit-china-and-why-its-heading-back/424482/
http://qz.com/745337/china-finally-made-ride-hailing-legal-in-a-way-that-could-destroy-ubers-business-model/
http://www.pri.org/stories/2013-09-23/why-big-american-businesses-fail-china