Business | Why do some Western companies succeed and others fail in China?

Our Founder & CEO Ting Zhang hosted the 6th session of Crayfish.io’s China - Let’s Talk Business webinar series, which focused on the question ‘why do some Western companies succeed and others fail in China?’. Ting was joined by guest speaker Benjamin Schmittzehe who has over 25 years of experience, and 15 years of consulting experience specifically. Together they discussed some best practices and lessons learnt by other foreign companies operating in China.

 

How can commercial success be defined in China?

There are two ways to look at defining success in the Chinese market. From the most simplistic perspective, however, China should not be treated any different from another market. Ultimately as a business you are trying to achieve certain business objectives, whether it is a certain level of profitability, turn over or return on investment. Where there are some particularities for the Chinese market which you will need to consider is in how you are going to achieve these targets. 

  • Setting realistic business targets

The Chinese market is large and full of exciting opportunities for foreign businesses, and it is therefore easy to get carried away when setting your objectives and expectations for the market. The market is hugely competitive, with other foreign companies seeking fruitful opportunities in the market, as well as very capable Chinese businesses that know the market very well. For this reason, it is vital to set realistic targets with a realistic time frame to be able to see success in this market. 

  • Achieving your business target in uncertainty times

Western companies tend to have a linear approach, following a direct strategy until they achieve their final goal. In developed markets, this approach can be effective but in less developed markets where uncertainty is higher this can be challenging due to the market changing, the competitive dynamic changing or some externalities which influence your strategy. Chinese companies have the upper hand in this sense as they are used to working in a market where there is less certainty, and thus adopt a form of ‘war strategy’, or an ‘option strategy’. Following this strategy will mean you need to invest into a lot of different options, re-evaluate them over time to see which are working well and neglect those which are ineffective. In the long run this will allow you to focus on the options which are working well for you to reach your success. 

 

Is following an ‘option strategy’ feasible for both MNEs and SMEs? 

Whilst MNEs may find it easier to allocate their resources amongst a number of ‘options’, this strategy can work for smaller companies too. You do not necessarily need significant investment in each ‘option’, but it is more about being open-minded and entrepreneurial spirited. In fact, this can be more suited to SMEs which tend to be more opportunistic when seeking growth and are less fixated on long-term goals. With an ‘option strategy’, you must be prepared to learn a lot from the process, building relationships (which at first may not lead to your long-term objectives for success), and seek to widen your knowledge and expertise in the market, thus building opportunities in the long-run. 

  • Case study: A niche skincare brand wanting to break the Chinese market 

The company in question is a niche brand but is popular within their market and the management were questioning the best approach to entering the Chinese market. Initially they found a distributor in China which was selling into retail and pharmacies. Then they discovered there were a lot of their goods already being sold on Taobao. At first this felt like a red flag for them as they were concerned they had a problem with counterfeit products, but through investigations, it was found to be grey imports. A lot of companies would have seen this as an obstacle that they needed to overcome and prevent however, this company instead decided to use this to their advantage by appointing them as their key distributors.   

The skincare brand’s turnover doubled within 12 months, owing to their entrepreneurial and flexible approach, leveraging Chinese eCommerce platforms with very little financial investment. 

  • Case Study: B&Q vs. Ikea 

Both are large companies with global reputations, which entered China around the same time in 1998/99. They were direct competitors of each other in the Chinese market, but their experiences in China could not have been more different. B&Q sold all of their stake in 2014 and then exited, with the Chinese partner moving the business solely online, but Ikea has remained very much present and successful in China. When B&Q left there were around 39 stores, but Ikea had less than half of that at the time. Now Ikea has more than 30. This case study shows an important lesson about success in any market, but mostly China, and that lesson is being ‘Glocal’ – being global and local at the same time: How do you leverage the same capabilities you have everywhere else, whilst also being able to adapt to the Chinese market? 

B&Q were keen to overcome their initial challenges faced in the Chinese market by localising their team, hiring local suppliers and having local products. The costs escalated for them because they had too many independent suppliers, thus lacking economies of scale (EOS). Ikea were stricter, they sold mostly the same products with some local adaptations. Ikea acknowledged that China was an exciting market from a manufacturing perspective, so they localised their manufacturing to China to drive down unit costs so that it becomes more acceptable to a Chinese consumer. Ikea used this manufacturing chain to their global benefit, allowing them to achieve EOS, benefit from having manufacturing close to the Chinese retailer and the ability to learn Chinese consumers’ needs which could then be applied to other parts of the world. They have stayed true to their core values whilst adapting to the local market, whereas B&Q excessively adapted at the cost of their competitive edge. This illustrates that,  localisation is important but you don’t want to overly localise - find the areas which you can and should localise, but leave your capabilities, which will give you your competitive advantage, untouched.  

 

Will a B2B business model follow the same approach as a B2C business model to achieve success in China? 

Fundamentally a lot of things are exactly the same – the approach, the strategy and ensuring that your competitive edge is maintained. EOS, fundamental expertise, and value added are important elements for both B2B and B2C business models. In the B2B space, value added services are of particular importance. Many B2B companies should consider that finding an effective way to compete in the Chinese market is not just the product specifics or the price, but it is also to consider the pre-sale and post-sale experience for consumers as this is highly valued and can give you a much more compelling offering. This is similar for the B2C space; one of the biggest challenges for businesses that launched consumer products in China is that they underestimated the level of enquiry there would be for the product. Chinese consumers are demanding and expect a high level of service. 

When it comes to B2B business models, strategic partnerships are more likely to be needed in order to get a better understanding of the Chinese culture. Due to the importance of these partnerships to your success, it is worth investing to find a partner who is the right fit for both the short and long term. For this reason, you also need to be more aware of corruption that can take place. As the Chinese market is geographically distant, you may rely on distributors and resellers. However, from a global legal regulatory perspective, laws state that if you rely on partners to distribute your product, you are still legally liable if corruption takes place within your supply chain, even if it is a 3rd party. Therefore, a lot of due diligence needs to be put in place when selecting partners, and stringent systems and processes need to be implemented to make sure you and your partners are not caught up in this. 

 

When is a good time to get into China?

NOW is the best time to get into China, or if you are already there, consider accelerating your growth in the Chinese market. China was the first country to be hit by covid, but it is also the first country coming out of covid. Whilst we have been in lockdown in the UK, tourism in China is booming, the economy is at record highs and people are enjoying going out again. Covid means that whilst a lot of the rest of the world is struggling, in Asia, and particularly China, it is a good time to refocus your resources there to exploit the opportunity for growth. In terms of having access to the Chinese customer, the rapid technology development of the country means that in theory, doing business in China has been made easier. Technology provides direct channels to market, for example Wechat for consumers. From a B2B perspective, when you are looking to access specific customers, fluency of English, level of education, and understanding of the global market has changed dramatically over the last few decades and you have many Chinese people who have been abroad that understand English, foreign brands and understand value added services. In addition to the educated demand present in China, a lot of markets which were previously restricted to FDI, like financial services, are now also open. There is no denying that China is a challenging market, but now it is the prime time to go and reap the benefits available there. 
     

 

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