China is a beckoning land of opportunity for its thriving consumer market and economy. Western businesses know this. This is why many western companies tried to get to China to capture a lion’s share when China opened up foreign investment in the late 1970s.
Yet, the majority of them failed even though the businesses were not incompetent. In fact, most of them were Fortune 500 companies and thrived in the rest of the world and created a legacy, but not in China.
So why did these companies fail and how did the other western companies succeed? Let’s find out.
Not Realizing the Power of Social Connections
In China, social connection or “guanxi” drives deals and contracts. Personal relationships and mutual obligation are the two critical factors to succeed in China.
The companies that failed to realize this had to shut down operations within a short time.
An example is the online auctioning giant, eBay.
The company closed down their portal within just two years of entering the Chinese market. But a local competitor in the same line of business, named Taobo, captured 95% of local market share.
They succeeded because they allowed buyers and sellers to communicate in real-time over instant-messaging. This helped both parties to establish a personal connection, which eBay did not.
Too Much Localization
Every market is different, be it the US, India or China. Thus, it is important for businesses to localize when they enter a new market.
But too much localization can also backfire. This was another major reason why several western companies failed in China.
Chinese people like foreign products, because they see it as unique and luxurious. So, too much localization makes a foreign product a more expensive version of something Chinese companies already have. Therefore, companies should balance localizing and maintaining the company’s original image.
For example, KFC kept a perfect balance by having a good mix of foreign and local dishes.
Not Altering the Product for Chinese Market
Of western companies operating in China, 63% admitted that they needed to customize their product to better suit the Chinese culture and preferences.
For example, Kraft Foods made an alternative Oreo cookie when they discovered that Chinese do not like sweet flavors. It had less sugar and included a green tea flavor which was a local favorite. And those food chains that kept the same beef-filled menu as before failed to make an impact in China.
China’s per capita income is much less than the US, UK or Australia. So, the product pricing should be adjusted so that Chinese consumers can afford it.
Also, the income levels are different between Tier 1, Tier 2, Tier 3 and lower cities. Thus, the companies should also incorporate different price levels across distinct regions.
But, the companies that failed, maintained the same pricing as their home country.
Although the causes vary, one thing is for sure. The western companies that failed were unable to realize the versatility and complexity of the Chinese market… how different and cutthroat it is compared to other markets which led them to go out of the market.
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