A recent study discovered an interesting detail: Approximately half of the European companies doing business in China have reported discontent with their business in China. The Chinese market is fascinating and challenging yet holds many hidden risks. How does one succeed in the Chinese market?
Up until thirty years ago, as China began opening up to the west, there were almost no international or foreign companies operating in China, and foreigners almost did not do any business in it. In the last thirty years, and especially in the last decade, more and more international companies are trying to infiltrate the Chinese market. A research conducted in 2003 revealed that four hundred out of the five hundred leading Fortune companies were involved, in some form, in Chinese projects or investments.
Nevertheless, in a recently conducted research some astonishing facts have been discovered: Approximately half of the European companies conducting business in China have reported discontent with their businesses. 42% of these companies reported that their investments in China (whether capital, labor or working hours) have created losses, some very serious. A different study notes that 59% of all Joint Ventures in China, in which foreigners and local Chinese are involved, and 47% of the foreign business conducted in China (without any local Chinese involvement) – have barely reached break even point. Many international conglomerates have experienced serious losses while attempting to access the Chinese market.
The Chinese market is indeed fascinating, challenging and interesting, but within are many hidden dangers. In this short article, I will try to briefly specify, based on research conducted within our firm in China, the main reasons for which foreign investors have failed infiltrating the Chinese market, in hopes that from these mistakes many other international companies will learn.
The importance of preliminary information: preliminary information is a necessary tool to set up business in China. The information is important to know in which direction to proceed, what are the mistakes from which one should look out and what is the correct way to start the business.
A very well known European medical company wanted to market its products in China. It contacted with several pharmacies in Beijing and in Shanghai, paid huge sums of money for various bureaucratic approvals and certifications and started an aggressive advertising campaign that cost millions of RMB which it eventually lost because it did not succeed in selling its products. If this company were to do a market research prior to its attempt to enter the Chinese market, it would have learned that the main way of marketing drugs in China is through hospitals and not through pharmacies. The company relied on its experience in other countries and on “hunches” that carried severe losses. The preliminary information in this case can not be overrated. The collection of reports and data is necessary in every business, specifically one that is owned by foreigners trying to penetrate the Chinese market.
Bad strategic decisions about investment volume, location, methodology, etc., are another reason for why foreign companies are having a hard time in China. For example: in 1985, the Peugeot car corporation from France decided to found a car factory in the GuangZhou area, while owning 22% of the joint-factory. Since 1994, the factory started losing money. In 1997, only approximately one thousand Peugeot cars were sold in China, and the factory’s combined losses reached approximately $350 million, many more than the factory’s assets worth. In 1996, Peugeot sold its holdings in the joint project to the local workers union for – 1 French Franc.
In an analysis that had been conducted after the sale, two main conclusions were risen: first, the company’s products were not competitive enough as opposed to other, newer models that were emerging in the Chinese market. Second, Peugeot China did not invest enough money in innovation or in aggressive marketing and was very conservative. The Chinese like newer, improved models with special features that accommodate to their taste. Peugeot did not pre-check or pre-investigate before entering the market, and it relied solely on its reputation and its status in Europe to sell without investing the appropriate amount of money required to market its cars in China. Peugeot relied on its status and its reputation in Europe, assuming, wrongly, that the Chinese have the same “taste” as the Europeans. A simple market research would have proved them wrong.
Lack of Adaptability
The lack of many foreigner’s ability to adapt to the very different Chinese culture is an obstacle to many foreigners. “To get into the Chinese shoes, the foreigner must take off his/her own shoes” – a quote a market research expert coined in one of its articles. This sentence and many others are true for any businessman or businesswoman doing business in a foreign environment, let alone in China where its general culture (hence its business culture) is very different from what we know in the west. Transparency is almost non-existent in China. A foreigner is treated in greater suspiciousness and the way to successfully do business in China is very long. In order to create “Guan Xi” – A close, personal connection and relationship with the Chinese partner, one must be patient. Most of the foreign companies in China do not measure correctly the importance of adapting to the local market, to its culture and, most of all, to the way of marketing which is very different from the way these companies are accustomed to practicing in the west. Foreigners have the tendency to underestimate the ability and will of the Chinese to dare, to compete against them and to succeed.
In 1997, Proctor and Gamble, the Cosmetics and Soap giant, had launched a hair shampoo known as Runyan in China. In the year 2000 the product had become a huge success. In 2003, it was removed from the shelves. Why?
The local Chinese manufacturers realized the product’s potential, created cheaper shampoo replacements with more suitable names for the Chinese market and started an aggressive marketing campaign. Proctor and Gamble were not able to adjust to the Chinese pace and to the Chinese people’s need for innovation. They assumed, wrongly, that the success that they had with the product is long-term. In China, it is not always true. Once again, market research could have shown Proctor and Gamble that things are different in China and perhaps it would have chosen a different path.
The potential in the Chinese market is vast. On one hand, the Chinese market is very difficult to penetrate and to succeed in. But on the other hand, it is very hard to ignore it due to its potential. Therefore, before and throughout the process of marketing and/or selling in China, gathering information is very important. Accurate and reliable information, by nature, saves valuable time on strategic thinking and solves many problems with which foreign companies have to deal when they wish to do business in China.
(The article is based on a book called: China & World Economy / 67-79, Vol. 12, No. 5, 2004)