While China’s growing market has become a major profit center for brands like Intel and Nike, an unusually high number of global brands have failed to live up to expectations in the world’s second largest economy.
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Best Buy and Home Depot shut their stores in 2011. Google, eBay and Amazon have been trounced by local competition. Walmart faces dwindling market share. These great firms, which dominate their home markets and are widely successful internationally failed to grab profits in China.
Why? I interviewed dozens of former and current executives in these companies, competitors, suppliers, vendors, and clients over the past year to find out what went wrong. What resulted from the interviews might surprise some. The commonly repeated problems of government protectionism, corruption, or price sensitive clients did not emerge as the major reasons for failure.
Three common themes emerged in my interviews that show hubristic mistakes made by the brands themselves rather than due to market conditions. Their mistakes provide a blue print for what not to do in China.
The first theme that emerged is that these companies did not localize business strategies and models enough to account for local conditions. They too often tried to transplant what worked in America to China with little effort at localization.
In Best Buy's case, they tried to replicate the “big box” or large store retail strategy that succeeded so well for them in America in China as well. But getting reasonably priced large spaces in Shanghai, where Best Buy opened, is difficult because the city has one of the highest population densities in the world.
Best Buy ultimately opened a giant flagship store in downtown Shanghai. The store was selling far too many product lines in a location where consumers literally needed to walk up several stories to reach the entrance.
Seeing the mistake, local competitors like Suning and Gome opened small stores right next to Best Buy on the ground level with convenient access and sold only high demand, high margin products.
Instead of simply replicating their US business model, Best Buy should have opened smaller stores along with a robust e-commerce platform.
In China, revenue and profit per square feet of retail space is too low to justify giant stores selling low margin products. Brands need to think whether their traditional business models fit China and, if not, either skip entering the market or adjust accordingly.
The second theme that emerged was that senior executives sitting in foreign headquarters often ignore what local country heads, who are more attuned to local conditions, have to say. Or they hire the wrong country heads in the first place. One eBay executive, for example, told me that his seniors ignored the advice of local employees to run servers out of China and switched hosting to America.
“The day they switched to the US servers despite our protests, traffic dropped 50 percent because access speeds were too slow. We never recovered. It is a myth that local auction site Taobao won because they don’t charge fees. We lost because headquarters tried to implement what worked in the US, from interface design to customer service help," the executive said.
Businesses need to hire senior executives who understand how to operate under local market conditions and delegate decision-making authority to them.
Finally, the interviews showed that many brands underestimated domestic competition thinking Chinese firms lack marketing and strategic ability. More Chinese firms are winning not by competing just on price but on product quality, innovation and branding. Walmart has seen market share plummet from 8 percent to 5.5 percent over the past three years, according to data compiled by my firm.
Their market share is not being taken by foreign competitors like Carrefour and Tesco but by large domestic chains like Lianhua that are opening small, neighborhood stores that sell key products consumers demand. Walmart is also losing out to specialty fruit and meat stores that sell high margin products to wealthy consumers.
Instead of adjusting to the local competition by shrinking store sizes or selling higher margin products Walmart is doing little to change its business model. As each year passes, it loses more market share.
China has become the must win market, so billions of dollars a year are being invested in the country. The reality is that many companies will end up failing there, or missing expectations, because they don’t localize their business models and management teams enough to compete with fast emerging domestic players.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai.
He is the author ofthe upcoming book “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World”published by John Wiley & Sons in the U.S. He does not own shares in any company mentioned. Follow him on Twitter at @shaunrein.