How did some of the world’s most beloved brands like Groupon, Uber, and Google fail in China? Although blame can’t be attributed to any single factor, one of the biggest mistakes US companies make in China is operating with a belief that success can be achieved single-handedly, without the expertise and counsel of local partners. Without a clear understanding of how to do business in China, Foreign companies tend fall into the trap of naïve assuming that with a few adjustments the same market entry methods used to launch in other can also be applied to China. What most fail to grasp is the nature of the Chinese market is fundamentally different in comparison to other countries, especially the United States. Attempting to set up shop without the counsel of a local partner is often a costly lesson that can jeopardize a brand’s entire existence.
As the second part of our two-part blog series on branding in China, here are some of the biggest ways US companies have flopped in the middle kingdom because they either did not partner effectively with a local agent or worse yet, didn’t seek any help at all.
1. No management localization strategy
An unknowingly fatal mistake made by foreign company executives is ignoring the strategic business recommendations and overall market insights of China country heads. Sometimes the slip even comes from foreign executives hiring the wrong country heads in the first place. In a nation with fundamentally different market drivers, Chinese managers are far more attuned to local conditions and their advice should be taken seriously. For example, when eBay entered China a US senior leader naively ignored the advice of local employees to run servers out of China and then switched hosting to America. The result was as soon as the company switched to US servers, traffic dropped 50% due to slow access speeds and the company never recovered.
2. Inability to navigate and manage distribution networks in China
American firms are largely unfamiliar with the nuances of distribution in China. Missteps are commonplace and can cause additional costs or time delays for that don’t effectively partner with local experts. In general, Chinese distribution companies lack the capabilities of world-class logistics and supply chain companies in the United States. Their weakest points appear in the areas inventory management, lead-time planning, distribution network optimization, and demand forecasting.
A common mistake US companies make is assuming that Chinese distribution partners have advanced knowledge of downstream supply chain management, including the ability to forecast accurately. This means foreign companies that sell in China must invest a substantial amount of capital and time to transfer knowledge of product movement requirements and performance strategy expectations to achieve KPI goals.
China has a fractured and inefficient distribution system filled with redundancies. It’s possible for as many as five tiers to exist at a given level of distribution within a single distribution network. As one can imagine, this results in lower profit margins at every level throughout the supply chain – from the manufacturer to the retailer. According to the China Business Review, “Chinese suppliers hold a large amount of inventory and restock only about three times a year on average, compared with suppliers in Europe, Japan, South Korea, and the United States, who tend to restock about 10 times a year.” The result means significantly longer lead times in China compared to countries, with advanced distribution network systems.
3. Products not reaching customers fast enough
Few US businesses seeking market presence in China grasp the depth and vastness of the China’s economic landscape. Most US companies launch in the proven metropolises – Beijing, Shanghai, and Guangzhou. In reality, these major cities represent only a small portion of the entire Chinese population. Opportunities to capture potential customers in rising cities, such as provincial capitals, are not being realized by US businesses. While domestic companies are swiftly advancing towards these key areas of economic development, US businesses are failing to reach the customers of smaller cities fast enough.
Building business alliances through local partnerships in China is the most advantageous way to not only gain an insider’s perspective of China’s business environment, but to also ease navigation through Chinese language, bureaucracy, and sophisticated social structure. Unlike the west, where business partnerships tend to be contractual in nature, In China, all business transactions are based on relationships and trust. Local partners are an indispensable asset and critical component to every foreign business’ success story.