Is China Mt. Everest of the world economy? Don’t go just because it’s there.
Expanding into the Chinese market has been a focus for many businesses in recent years. In some industries it’s the largest market in the world and in others it may be soon. It has a growing middle class and an appetite for American brand names. However, with China’s growth have come higher labor costs, higher energy costs, and a growing awareness that not every business entering the Chinese market will succeed. There is a danger in taking a “Mt. Everest” approach to China, expanding into that market “because it’s there.”
Success in China is no sure thing. A recent article in the International Business Journal attributed US companies’ disappointments in the Chinese market to the country’s economic slowdown, the red tape and bureaucracy involved in doing business there, and other factors like Internet censorship and even the smog in many big cities. Nearly 80 percent of the more than 360 U.S. companies surveyed for a new study by the American Chamber of Commerce in China said their China revenues only “increased slightly” or fell over the past year, according to the IBT.
Navigating the political, financial, labor and immigration regulations is complex. Businesses that have been in China for years and learned how to operate there now have a distinct advantage. In fact, competition has made skilled business managers in China extremely valuable, with one firm telling Fortune magazine that each time they bring in an experienced manager, “a competitor offered to hire them away for three times their salary.”
Businesses considering expanding into China should do the same due diligence involved in starting a business in the first place. Is there a market for our product or service? What is the competition like? What realistic share can we hope to achieve? Do we have access to the right talent to succeed?
A recent blog by consultant Francis Bassolino in the Financial Times suggests that companies asking, “In a market that is so large, why can’t we win our share?” might be best served by looking in the mirror for answers. “For example,” he says, “many due diligence missteps result from a lack of rigor in the implementation of standard methodologies, ineffective coordination between team members and the immaturity or lack of ‘China savviness’ on the part of team members.” Bassolino argues that many western companies have underfunded their China strategies, have failed to recognize the implications of the pro-labor laws enacted in 2008, and don’t distinguish sufficiently between their strategies for tier one cities and tier two/three cities.
Josh Green, CEO of Panjiva, echoed these thoughts in an interview in Inc. magazine. “Purpose flows both ways. There needs to be a rationale for why your company wants to go to China, but also a rationale for why customers in China will want to buy from you. There needs to be a reason why you’d have a shot at successfully competing in China because it is a very competitive marketplace.”
The Chinese government has become more assertive over what it sees as regulatory or health issues and is not shy about denouncing foreign companies. In recent months, western companies including Eli Lilly, Apple, and KFC have been denounced by government agencies for not meeting local standards. Whether we westerners think these denunciations are fair or not is beside the point; Chinese consumers take them very seriously and that impacts revenue in China. Last August Abbott Labs and Mead Johnson Nutrition were fined a total of $110 million for what a Chinese government agency called “price-fixing.” According to experts at Wharton Business School, the difficulties the Chinese middle class have in paying for China’s overpriced health care are leading the government to look for scapegoats, and foreign companies make an easy target.
Finally, it is important to consider how existing customers might respond to a company’s entrance into China. In recent years, some companies have faced a backlash from customers and from the general public for doing business in and with a country that is perceived as environmentally destructive, corrupt, and indifferent to privacy and human rights. Without disputing the accuracy of these perceptions, they are real and can negatively impact a business or brand. Brands as big as Apple have felt the heat of this criticism for its reliance on manufacturers with perceived subpar labor conditions.
Expanding into any new international market requires careful planning, and China more so than most. China is a gigantic market that is undergoing rapid change and its government takes an unpredictable and interventionist approach to the economy. Advisors and consultants with experience of this complex, fast-changing market can often add value. At Global Upside, we have years of experience with China. For more information on this topic, read Global Upside’s white paper, “Going Global: Issues to Consider when Expanding Internationally.”