In today’s globalized world, no country represents a bigger opportunity than China. It’s the world’s most populous nation with a middle class roughly the size of the entire US population fueled by a consumption driven society undergoing rapid modernization. According to Fung Business Intelligence, China is set to become the world’s largest retail market by 2018. With so much opportunity, it’s no surprise that US businesses have been eager to reel in profits by diving into the China pond.
However, like a story on repeat, most US brands enter China with optimistic enthusiasm only to fail within a few years from unsustainable profit losses. It often comes as a shocker to most Americans that many of our most beloved brands at home, just can’t seem to succeed in the Middle Kingdom. In recent years domestic giants such as Home Depot, Mattel, and Facebook have all joined the ranks of US brands that have flopped in China. The reason why US companies so often stumble in China can be attributed to a variety of factors including a steep cultural learning curve that most are unprepared and ill-equipped to handle.
As part one of a two-part blog series, here are some of the top reasons why US brands fail in China to serve as a learning guide for small and medium size businesses who aspire to achieve success in expanding their global footprint into the China market.
1. Advertising doesn’t resonate with a Chinese audience
With a fundamentally different set of values, aspirations, and societal influences the Chinese way of advertising is inherently different in comparison to the western nations. In China advertising should be filled messages that share Confucian ideals, aspiring internationalism, and humble ambition. Although some US companies have found success, a common pitfall in Chinese advertising strategy is deploying ads that linguistically make sense, but fail to culturally translate with a Chinese context. A best practice of Chinese market advertising is to have ads reviewed by Chinese locals or a national living stateside that can effectively translate the meaning or emotion behind the words while giving alert to cultural errors.
The diamond company, De Beers is a great example of where strong, emotion-based messaging that had achieved success in the US failed to resonate with Chinese consumers. The slogan, “A diamond is a symbol of commitment,” meant nothing in China where engagement and wedding rings are not the cultural norm. More than half of the diamonds sold in Shanghai are purchased by women buying for themselves and are considered a status symbol, not a message of love and devotion.
2. Government and regulatory hurdles
Unbeknownst to beginners, China is one of the most challenging global markets to operate in and has remained a code yet to be cracked by many. Although the country’s open-door economic policy presents a tremendous amount of opportunity, the Chinese government’s communist undertones remain stronger than ever, billowed with layers of bureaucracy, ambiguous legislative guidelines, and a nationalist propensity to favor domestic brands. Even the most competent and proven of foreign companies become perplexed by the lack of concrete rules in regulatory procedures varying from business registration to dispute resolution. All these factors pose a set of unique challenges for US firms that requires localized intelligence the partnership of an experienced agent.
The issue of intellectual property rights (IPR) protection is the single biggest government related hurdle companies face as they enter the Chinese market. As the number of books published on this topic indicates, IP protection in China is a major headache for global businesses. The good news is that China is evolving in technology and innovation, creating a greater demand for IP protection. A Thomson Reuters research report stated the country’s goal is to transform itself from “made in China’ to “designed in China” and showed that China became the world’s top filer of patents in 2011. As more Chinese firms become patent holders, they too, will have a vested interest in protecting their technology just like their US counterparts. Although this trend will drive the future of IP rights in China, until it becomes more commonplace, US businesses will need to keep a close eye on competitor activity.
It’s a tough learning curve, but global companies that want to thrive in China must learn the nuances of Beijing’s loosely defined laws and autocratic government style while abiding by the rules. Ultimately, this gives companies two options: learn, adapt, and compromise or leave the market.
3. Product localization strategy either not implemented or has failed miserably due to lack of research and cultural understanding
A common thread in the pattern of China market failures is brands not adapting business and product development strategies to fit local market conditions. A typical mistake would be transferring methodologies that have worked in America to China with little effort to localize product offerings. On the other hand, forward-thinking companies that do attempt to localize product offerings, often struggle with cultural and linguistic barriers.
For example, Mattel entered China with the introduction of Barbie. Although the doll itself was somewhat well received, the brand was not. In 2009 Mattel opened the world’s largest “House of Barbie” in Shanghai. The company spent millions of dollars making a six-story paradise to introduce and sell the ‘Barbie Lifestyle’. The store included a hair and nail salon, cocktail bar, spa, and restaurant. Where did Mattel go wrong? They failed to understand the market and what makes Chinese tick. For a brand that was making its’s first introduction into China the shop was over the top and confusing between the mix of Children’s toys and adult pleasures (fancy martinis, bust-enhancement treatments etc.)
4. Underestimation of domestic competition
A common pitfall of many US companies is a tendency to underestimate the domestic competition in China, with a misguided belief that Chinese firms lack strategic ability in organizational management, sales, and marketing. When western companies began leaving a footprint in China almost 30 years ago, this was undoubtedly the case. Time has told another story as Chinese brands have gradually evolved and have built stronger sales and marketing competencies. As China transforms from a manufacturing to services based economy, Chinese businesses are also becoming more competitive on product quality, innovation and branding.
5. Unfamiliarity with China’s E-commerce landscape and how to digitally connect with online shoppers
The growth of China’s e-commerce landscape is breathtaking, growing exponentially year after year. In China, online shopping is more than a trend; it’s a cultural phenomenon. Domestic players such as Alibaba’s Taobao and JD dominate the e-commerce landscape through scale and low-price points. One Chinese Tech Giant in particular, Tencent has found wild success through the fusion of e-commerce, social media, and advanced online payment systems that can manage every facet of one’s financial life within a single platform known as We Chat. Consequently, US companies such as Amazon and eBay lack the diverse functionality of Chinese online platforms and simply don’t measure up for an audience whose daily lives are already tightly interwoven within China’s digital ecosystem. This means US brands must invest the time to gain the competencies required to launch an online presence that’s in sync with the online habits and norms in China.
Once an online marketplace presence is established, culturally adept US companies will take pro-active measures to enhance their pre-sales support channels. Because China is a nation with a rampant supply of counterfeit goods and tainted consumables, a low-trust society has emerged where shoppers seek an additional level of product support. An excellent way to establish the trust of Chinese consumers is to utilize resources such as online chatbots where buyers can build confidence by asking questions before making a purchase.
Countless American brands have ambitiously entered China only to emerge a few years later perplexed, battered, and defeated. Their brimming confidence from previous global successes tends to quickly evaporates in a market where they’re often ill-equipped to enter. To achieve success in China, US firms will need to consciously make an effort to learn from the mistakes of companies who’ve failed in the past while paying attention to the underlying success factors of bands that have prevailed in perhaps the world’s most misunderstood marketplace.
We know China’s learning curve is steep and for that reason have created a second blog to expand on this topic further. In the next blog of this two-part series, we’ll dive into one of the single biggest contributing factors of why US brands struggle in China with insights to propel your China market strategy in the right direction.