Why do International Companies Fail In China?

In this modern age of globalization, international business and cross-border entrepreneurialism are thriving. There are many opportunities for companies to establish themselves and expand overseas. More and more companies are flocking to China attempting to capitalize on a huge potential market of increasingly affluent, middle-class consumers. Despite this many fail and it is interesting to explore why.

Not understanding and adapting to the market and culture

This is key, China evidently developed historically and culturally in a very different way than western societies. The Chinese consumer is different from a complex set of needs and expectations. Firms need to take the time to understand the consumer and what they want.

Multinational brands often engage in advertising campaigns and marketing strategies that have been successful in the West but find themselves unable to adapt them to the Chinese market. The market dynamics are different and a more localized, Chinese-specific strategy is required. According to research conducted by Forbes, an overwhelming 63% of all international companies said they needed to adapt their product to the Chinese market.

An example of such a strategy was implemented by Kraft’s ‘Oreo cookies’. Chinese consumers did not like the cookies because they thought they were too sweet. In response, Kraft reduced the amount of sweetener in the cookies to cater to the Chinese taste. As a result of their adaption, the company’s sales surged dramatically and Oreo has become the most successful cookie brand in China.

Mistakenly seeing  China as ‘one big market’, rather than focusing on specific regions, demographics and areas

China is essentially a diverse continent exactly like Europe. You would certainly not market a product in the same way all across Europe. China has over 600 cities, 22 provinces and is the third-largest country in the world. Focusing on China as a whole will likely lessen one’s efforts and drain resources. Therefore, segmenting the market and choosing the right segments based on per capita income, region, and consumer behavior are of crucial importance when targeting a country this size.

Not finding the right partners and specialists in the field

To really tap into the Chinese market one must utilize local experts, knowledge, and networks that specialist agencies have. Finding the right partner and forging these business links is key to success but it is important to choose the ‘right kind of partnership that will help, not hinder the business.

The successful British chain ‘Costa Coffee’ partnered with a Chinese firm, the “Yueda Group” based in Jiangsu Province. This partnership has proved successful and helped Costa gain a significant share of the market, it has currently opened 344 sites.

In contrast not finding the right partner can be disastrous. One of the most common issues with local partner companies is that they operate their own services, causing a conflict of interest when it comes to promoting a foreign partner’s Chinese operations. However many firms specialize in helping western firms, thus there is no conflict of interest. It is important to research this prior to engaging with any other business.

Groupon in China exemplified these problems. They partnered with ‘Tencent’ which already owned and operated several similar sites. Partnering with Tencent theoretically offered some advantages with their local knowledge and Chinese staff. However, Groupon failed to take advantage of any of these, hiring Western managers to run its China operations and continuing to conduct its business the ‘American way’ in a market where this strategy was not going to work.

A partnership is only effective if it helps the western firm to adapt, the interests of both parties cannot be conflicting.

Underestimating local competition

A failure to take local consumer needs into consideration is made worse in the context of aggressive competition from domestic brands. Due to the size of the market in China, local brands are able to grow to a larger scale and therefore can increase their chances of competing with established multi-national brands. There may be a high demand for western brands but this does not negate the threat of domestic companies who are often supported by the Chinese state and private equity firms.

The US-based taxi app company ‘Uber’ is in fierce competition with the Chinese company ‘Didi Kuaidi’. Uber has been blocked from the largest social network in China, Tencent’s ‘WeChat’ whilst ‘Didi Kuaidi’ will benefit from accessing the established consumer base built up by ‘Alibaba’ and ‘Tencent’, two of the largest internet giants in China.

Neglecting the rise and popularity of niche branding

The smaller, more elusive, and independent brands often thrive in China. Many upmarket Chinese consumers are increasingly looking for niche and bespoke items. To keep in the loop companies should launch smaller, niche labels that are more unique to meet this demand.

Shaun Rein, the managing director of ‘China Market Research Group’, said; “the name of the game is to get a ‘niche’ brand, and companies need to focus more on marketing catered to the individual. They have to accept that they can’t dominate the market anymore with just one big brand.”

Tailoring a product to the consumer and offering something more specialized will often lead to brand loyalty as consumers can identify strongly with something more unique. In the competitive Chinese market it becomes even more important, consumers will pay a premium for something which sets them apart. The rise of consumer ‘individualism’ in modern China demands a more niche and intelligent style of branding.

Neglecting the smaller, specialist agencies based in China

Western brands in China often prefer working with smaller agencies than larger ones because of the innovative way in which they produce creatives and use digital content in China. The expert Shaun Rein has said; “newer and smaller agencies are where innovation happens – they are a little younger and started by entrepreneurs”.

A smaller, localized, and the specialist agency will keep up to date with emerging trends and provide the in-depth knowledge of the market you need to be successful here. This is something to consider when looking for a suitable agency to partner with.

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