Menu

Failures of Global Companies in China: Ignorance of the Market Differences in China

ByChao Cheng|China Market Entry 101

May04

In the past decade, we can see so many overseas companies are coming into China with high hopes to develop a market but they failed to live up to their expectations.

It seems interesting, No one expected it to be this way especially for most American cutting-edge technology giants, Yahoo, Ebay, MySpace, Facebook, Twitter, Groupon, etc.

They came here armed with cash, intellectual property and an ability to manage complex networks and introverted workers, however, there is no one who has dominated its field in China, not even close to be the leader.

Even Google, by some measures is the world’s largest Internet market can not avoid the fate. Many experts thought Google would be the first to break the myth.

While each failure has been different, most blamed on the government blocking and censorship.

The truth is, the ignorance of the market differences in China leads to the failures of them.

And these did not only happen in the Internet industry, we can see other examples of failures on Bestbuy, Mattel, McDonald, etc.

Ignorance of Market Differences in China

  • Close Ties with Regulators

Respecting the local law is the basics to operate in a new market, many international brands underestimate this and do not care too much about this, the result is obvious, the internet block leaves no hope for internet companies at tall.

However, local companies, on the other hand, often maintain close ties with regulators, which helps them anticipate new policies.

For small internet companies, many still need to struggle with local company setup, and the web license. Surely big global companies don’t need to worry these things.

however, mandatory ICP license and many other additional business licenses are very high barriers for foreign investers. a typical example is the map license issue with Google.

  • Short-Term Plan in China Market

Unlike other new markets in the world, China is a very huge market requiring much patience. many global companies often prioritize globally based on profitability, or cut-back across all regions during economic downturns.  These stupid moves will not provide any confidence for the Chinese team especially in the very beginning when stable organization and necessary resources shall be invested in the early stage to gain the market share.

  • Poor Protection for Innovation and Intellectual Property

In China, the legal system is not so mature, esp. in the Intellectual property filed.

You would easily find that it’s almost impossible to protect your business models and user interfaces especially in online businesses.

Cloning examples can be really successful in China by local entrepreneurs just because they have done a good job of building web sites that are tailored to the Chinese market.

So-called ‘copy-to-China’ is still the main business model of the China Internet market.

We can see almost all of the similar or the same business models running in China

So it’s your business model is easy to be copied, it would be very difficult for you to beat your local counterparts here.

  • Fragile Local Partnership

In most cases, when a foreign company approaches a local company to set up a joint-venture, the two sides are not seeking for the same thing.

The partnership is fragile and easy to break.The foreign companies are trying to learn how to run the business in China and get a license through the joint venture, and the local partners would want to obtain the transferable skills and learn the technology from their foreign partner.

  • Lack a Team of Chinese Talents

The valuable experience in the global market together with local understanding of the market are essential to start the journey.

The right thing to do to have a chance in China is to form a trully localized team with talents to start a new startup journey.

And they should be have the real power in strategic planning so the HQ will not be blind.

Many global company just hire some senior managers to follow orders, some people treat these companies as the relex place insted of hard work, while real aggressive and capable talents are not attracted.

  • Poor Localized Operation

China is a huge market but very tough to acquire, and you will face a lot of strong competitors. The new entry in the China market is like an adventure. The sucess in the States, Europe or other countries does not guarantee your success in China.

Lack of understanding in the Chinese market always leads slow process of decision making, which will lose the good timing for the market.

Failures of Global Companies in China: Ignorance of the Market Differences in China

at 1933, Shanghai, Photo By Chao

 

Also the wrong choice of local senior manadgement will make the things worse. Global companies prefer to hire overseas MBAs or PhDs who speaks perfect American English, However these people might not be the good choice in the real battle field in China while the China is developing so fast and they might miss a lot when they are abroad.

Opportunities of China Startups

These are the common mistakes by many global companies, which leaves markets for China local startups.

I composed a new blog about some successful China counterparts here:

Same Business, Different Names: Internet startups in the World and their counterparts in China

 

Advices to Be Successful in China

Are you scared after reading so many failures?

Starting a business in China is never easy, but it will be important to learn the true reasons of failures of the big brands.

In order to build a successful business in China, here are some advices.

  • Plan Your business in the beginning: understand the market differences in China by proper initial China market research and analysis to come up with your China market entry strategy.
  • Play by China’s market rules: follow government’s rulels and do not play with them. Get necessary licenses and prevent your site getting blocked.
  • Make a long-term commitment: set up your China company, build a local team, be flexible but keep consistent strategy
  • Understand the Market: understand the various cultures in different parts of China.
  • Build a Website that can sell in China.
  • Localize your business: localize your product to make it trully adapt to the habits of Chinese audience.
  • Trust and Authorize: Develop relationship between foreign and local employees, depend on locals to better localize your products.

You can follow my 7-Step Formula in Ultimate Guide to Finding Your Profitable Niche Market in China to uncover your profitable business opportunities in China.

About the Author

Chao is recommended by Paypal to bring overseas brands into the China market. Now he coaches business owners to start up and grow their business in China. Author of Sell Online To China, How to Build A Right Website That Works In China, and a series of China Business Guides.

Leave a Comment:

(4) comments

[…] However, Culture matters enormously, most of the internet titans failed in China, please check my previous blog: Failures of Global Companies in China: Ignorance of the Market Differences in China […]

Reply
Gary Kearns February 6, 2015

A very interesting and thought provoking article Chao. It is right what you say about patience. Western companies are always talking about growth and profit but only seem to take the short term view and if things don’t seem to be happening the way they want then they just give up and pull out. Also, many companies have to keep their shareholders happy so they have to engage in activities that give a good short-term return; they want to make a quick kill, they don’t want to wait 10-15 years.

How do you get this message across to those companies who may be considering setting up some kind of business in China?

How many companies actually do so? Do you have any statistics?

Regards

Reply
Gary Kearns February 6, 2015

Have any western companies actually succeeded in China?

Reply
    Chao Cheng February 9, 2015

    Actually there are many successful ones,

    KFC, Starbucks, Pepsi, P&G

    It is strange that McDonald did not do the good job as KFC in China,
    We can summarize some key successful factors for KFC.

    1. Great experience for kids, they love the environment and the toys

    2. First Arrival in China

    3. Flexible financial strategy, Franchising is not bad

    4. Better positioning

    Reply
Add Your Reply

Leave a Comment:

Starting a Business in China in a Smart Way!

Let's Start from a Discovery Contract, What is it?