How To Succeed In China: Why Some Foreign Firms Boom, And Others Go Home

For those firms looking to cash in on the booming Chinese economy, there are as many recent tales of failure and retreat, as those of runaway success. Certain patterns have begun to emerge, both universal and China-specific lessons to be learned.

The Colonel has hit it big in China (Albert Law)

By Xie Zuxi
经济观察报E.O/Worldcrunch

BEIJING - Two very different trends concerning multinational firms in China have attracted wide attention recently. One is the “strategic retreat” from China of Best Buy, Pepsi, Danone and Nestle; at the same time, General Electric, Philips and Intel have come to regard China as their “second home.”

Though these two storylines may seem contradictory, they in fact reflect the current condition of multinationals operating in the highly competitive Chinese market. Those firms that have been successful in China will continue to invest here, while those whose development has been less than ideal will either get out of this market, or radically adjust their strategy.

What should be emphasized is that in a vast and rapidly developing market such as China, both foreign and Chinese companies will always face pressure in developing -- or just surviving.

China is a new economy. Strictly speaking, the opening up of China started from Deng Xiaoping’s “Southern Tour” in 1992. The country’s vast economic development is thus only 20 years old, a relatively short period. The Chinese government, as well as businesses and customers, are still in the process of learning and exploring what exactly is this “social market economy with Chinese characteristics.”   

The common errors that foreign firms commonly commit are the following:

First, China’s market development is particularly fast and the competition fierce. Numerous foreign firms can’t keep up with the pace of an ever-evolving market. A lot of them simply transplanted their products, services and business models from other parts of the world to China without any deeper understanding of their Chinese customers. Meanwhile China is producing a local business force of tens of thousands of businessmen who are very strong competitors. They know and live closer to the local customers, and they focus on producing cheaper alternative products. They also emphasize marketing and distribution, and they develop new products and innovative sales models that cater much more to the needs of the Chinese.

Second, many foreign firms neglect the huge potential for development in the third and fourth-tier cities. Even though most of them are aware of these markets, they somehow fail to operate effectively in these places. These smaller cities give Chinese enterprises an excellent chance for development and in turn they work upwards to the third and second-tier cities.

Third, the headquarters of these multinationals back in their home country often suffer from unrealistic expectations of their business in China, while their top managers in China often fail to clearly report the real situation back to headquarters. In addition, the frequent replacement of their expatriated managers does not help, while some of their CEOs come to the Chinese market once or twice each year and imagine they know China thoroughly.

Learning from the top performers in China

Mark Norbom, the President and CEO for General Electric, China, likes to say that “China is our second home,” an expression of how important the multinational’s pursuit of the Chinese market is to the company’s overall strategy. 

Danfoss, the Danish global producer of components and solutions for refrigeration and air conditioning, was one of the first foreign firms to designate China as their second base. Since entering the country in 1996, China has become the company’s third-biggest market worldwide, with its second largest employee workforce here and its top overall procurement market.

There are two key strategic considerations these companies make: the integration of the value chain and the transfer of their operations center. The integration of their global and Chinese businesses thus becomes more organic. Meanwhile, the integration of the value chain is reversed. After baptism in such emerging markets as China or India, the products and services are exported to other parts of the world.

And beyond gradually moving their value chain to China, numerous multinationals have also transferred their regional headquarters and some major company departments to China.

The most successful example is IBM. As early as 2006, IBM moved its global procurement division from upstate New York to Shenzhen, China. This helped IBM in strengthening its own supply base as well as its clients supply chain.

IBM subsequently set up its second headquarters in Shanghai to take charge of all the emerging markets: Asia, Latin America, Russia, Eastern Europe, the Middle East and Africa.

IBM rethought its China strategy fundamentally. It no longer considers China as a remote corner of its operations centered on America. Instead, it finds ways to integrate China as a core part of its global operation in a way that can create value.

While foreign companies that encounter bottlenecks in China share common errors,  the successful ones often abide by certain common rules.

First, the leader of the Chinese team is critical. The success of many enterprises is due to the fact that the person at the helm was given enough time to develop the business in China. Some have even become legendary figures. Su Jingshi, the Taiwanese director that expanded Kentucky Fried Chicken’s rapid occupation of the vast Chinese market; Li Hexun, the Hongkongese President of Tetra Pak, the Swedish firm that is the world’s largest food packaging company; and Zhu Xi, the Chinese president for the greater China Region of General Mills.

All these top executives had been rooted in the Chinese market for many years, and understand it profoundly. Hence they were able to set up teams to grasp opportunities in a timely manner to promote their expansion. Top-level and stable leadership enables the accumulation and passing on of business knowledge, which can become the decisive edge in the Chinese market. Meanwhile, they must also be able to communicated successfully with their colleagues back at headquarters to gain support for their strategies.

The second common factor among the successful foreign firms in China is the steadiness and coherence in both projections and operations. The firms that failed tend to be either too optimistic and overly invested, and wind up taking too long to achieve profits. Others were too conservative, entering China with a “testing” state of mind.

Success requires thorough knowledge of the needs and size of the Chinese market, the level of resources required, and a willingness to explore relevant aspects of their services. Multinational giants in China must find the right way to continuously adjust their business models.

In short, multinationals can face risks in China just like they would in other markets. But if foreign companies are capable of developing an in-depth understanding of China’s commercial background, and adopt appropriate strategies, the payoff can be much bigger indeed.

Read the original article in Chinese