Big foreign companies can fail in China, besides law or competition factors, this is mostly because they fail to adapt to the new Chinese e-commerce era.
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1. The Chinese Market is still opening up
Chinese President Xi Jinping gave a passionate speech at the Davos World Economic Forum in early January. He especially wanted to defend globalization and he promised improved market access for foreign companies. That reassured foreign reassured investors and felt like China is still sticking firmly to Deng Xiaoping’s opening policies in the 1980s.
2. But several foreign companies leave China
Several huge companies have recently left Chinese retailing.
Seagate, the world’s biggest maker of hard disk drives, closed its factory in Suzhou near Shanghai in January 2017. It resulted with the loss of 2,000 jobs and has brought back fears that China is becoming increasingly hostile towards foreign firms on the Chinese Market.
Panasonic, stopped all its manufacturing of televisions in the country in 2015 after 37 years of operating in China.
British high-street retailer Marks & Spencer announced it was closing all its China stores amid continuing Chinese losses and we can also add Metro AG, Home Depot, etc. to this trend.
Most of these companies have attributed their failure to the country’s high tax regime, the rising labor costs and the fierce competition from domestic companies.
3. What were their mistakes?
Of course, competition has become harder, Chinese government is tightening financial help, and regulation can be unclear. Like Keith Pogson, a senior partner at Ernst & Young, said: “We are seeing more Chinese companies becoming champions in other countries, and, of course, that adds a lot of pressure on foreign corporates.”
However, last September, Shen Danyang, a spokesperson for China’s Ministry of Commerce declares that some foreign corporates only wanted to make “quick money” and had become too dependent on preferential government policies in China.
The biggest mistake big foreign companies make is thus wanting quick money before acting quick. Some of them also ignore the differences between China and their country and only want to impose their model to the Chinese consumers. If you want to succeed in China, you need to better understand this market.
The most famous example is Best Buy that exited China in 2011. The company had opened 9 stores in the country. Even though electronic devices demand was very high in China, Best Buy failed to adapt its model for several reasons:
– Pricing: Best Buy didn’t consider the extreme price conscious nature of the Chines. Other electronic stores were offering the same products at a cheaper price, the Chinese would thus buy from other retailers.
– Low services: Best Buy employees in China were not trained enough, therefore the stores lacked good services and hence no customer satisfaction. Chinese customers require a high level of service.
– Lack of digital insights: Best Buy didn’t consider the “show rooming” phenomenon. The Chinese would try the products in the stores, would ask for information and simple keep the reference of the product to buy it online. This leads us to our next point.
4. The Solution : Digital is the key in China
• Educated consumers
Chinese consumers are more and more educated. They compare all the prices, they know all the online retailers, they calculate the opportunity costs of buying products in China (on platforms like Taobao or TMall) or enjoying a strong RMB to buy overseas… Foreign companies must always improve to offer great service and content to satisfy these demanding customers.
The Chinese buy brands both because they represent quality and because they let them show off to their friends if they have a great reputation, they also buy brands because of the quality labels they represent.
E-reputation is then a key in China and must be carefully developed through Chinese social media like Weibo and WeChat. The Chinese also spend a long time on forums to gather information on the product they want to purchase.
• Everything Goes Fast
E-commerce is a wildfire in China. Either on social media (WeChat, Weibo…) or on new platforms, the new e-commerce trends shape a future of retailing where being quick is the key. Mobile commerce is a huge thing in China, and it is not slowing down !
Foreign brands need to understand that China is a country where you can sell for 1.2 million RMB’s worth of Givenchy bags in only 12 minutes thanks to WeChat and KOLs.
China is a country where YES, a new e-commerce application, can sell its entire stock even before its opening party ended.
China is a country where in only one week, Mobikes can be seen in the entire Shanghai Central District.
Foreign companies must move fast; it is a necessity. Business in China is partly about speed and ultimately flexibility, it is not the largest fish that survives but the fastest and most adaptable one.
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