American Companies in China - Haven or Nightmare?

AAPL, BBY, HD, SBUX, YUM

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As the second largest economic entity in the world, China looks like a haven for Western companies. American businesses definitely want to take a big bite of that vast consumer market with a population of over 1.35 billion. Since 2006, American consumer-oriented companies have been crazy about the Chinese market. Given that country has entered an era of consumerism and has experienced great enthusiasm for “classic Western” products in particular, American companies with a desire of being global are more inclined to deliver their goods on Chinese turf.

From KFC to iPhone, Chinese people have become a pillar for many American companies, that supply those products, like Yum! Brands ($YUM) and Apple Inc. ($APPL), respectively. The chicken restaurant once was extremely fashionable. For most Chinese people back then, having a meal in KFC seemed like to have a direct connection with America, which was a way of showing off. As of the end of 2012, there were 4,260 KFC restaurants in Chinese mainland. The sales in China take up approximately 36 percent of Yum! Brands’ global revenues. And now it’s Apple’s turn.

Chinese Consumers Prove Tricky for American Companies

However, not all American companies have made success in China. In 2006, Home Depot ($HD) began opening what would eventually be seven storefronts in China, perfectly positioned to capitalize on the country’s budding consumer class. With aisles upon aisles of power tools, building materials, and hardware supplies, its big-box stores were a testimony to the U.S. homeowners’ do-it-yourself ethic. On the surface, it seemed like things might be similar in China. The country had a growing middle class, millions of new homeowners, and a culture of daily ingenuity and thrift. But after six years of struggling, Home Depot closed all seven stores in China and fired 850 workers, finally recognizing that the Chinese did not have a similar DIY kind of customer base.

Best Buy ($BBY) also entered China in 2006, certain its over-the-top style big box electronics stores would be a smash hit with the gadget-hungry market. Well, it wasn’t. In 2012, Best Buy finally shut down its namesake-stores with typical U.S. feel in China. Even the venerable Walmart ($WMT) announced in October 2013 that it was going to close approximately 25 stores in China in the foreseeable future.

All the closures raise one question – How could formulas that work so well in North America lose the magic in China?

Neglect the Power of Localization

One answer to the question above is that most American companies did not properly understand Chinese consumers, who have a remarkably different approach to rationalizing shopping purchase.

Take Walmart asan example. Its American stores are big, well-stocked, with its goods all neatly lined up and categorized from front to back, top to bottom. However, senior Chinese people prefer shopping groceries through bins of semi-random goods, seeing if there’s something in it they’d like. Such environment creates a feeling of freshness for them.

Americans’ favorite coffee house, Starbucks ($SBUX), has realized that it is not always a good thing of being “too Western”. Many of Starbucks’ new stores to be opened in China will be larger stores, some as big as 3800 square feet, with lots of couches. These new stores also feature locally grown tea, as well as lots of palpable local ambiance. As for KFC, fried chicken has no longer been the main dish on the menu. In order to save the market share that had been invaded by McDonald’s ($MCD), the restaurants began to provide traditional Chinese breakfast, such as porridge, and youtiao (pairs of sticks made of flour).

Goods Types Matter 

Different American products have different fate in China. Generally, retailing companies are more likely to survive in the Chinese market. Coca-Cola ($CO) or Procter & Gamble ($PG), as successful global giants, sell products that are necessary in daily life. In other words, the more basic your goods are, the easier they will fit in the Chinese market.

However, it may raise another issue – knockoff. Product infringement and knockoffs have become a subculture in many areas of China. If the goods are daily necessities like shoes, clothes, or mattress, then there’s a great chance for the company to lose money as knockoffs share the market. What’s the worst thing is that since the quality of these knockoffs is questioned, it will eventually destroy the company’s brand value.

Government Is Another Factor of the Failure

If specialty retailing companies struggle in China, how do web companies fare? The answer is also disappointing. Google’s ($GOOG) Chinese defeat is one of the most dramatic, and the most complex. The context is well known. In 2010, Google announced that it had been hacked, and would no longer be censoring at the government’s behest. It moved its servers to Hong Kong, which caused the market share decreased from 30 percent to 3 percent in 2013.

From the very beginning of its China venture, Google was robust. Launched in 2006, Google.cn was a barebones search engine, with no Gmail, blog software, or YouTube. The company refused to keep its server in China for fear of having to turn over user data. In 2008, Beijing demanded that Google more thoroughly censor its auto-fill search suggestions.

In 2009, Google detected a breach of its servers that the company traced to China. The attackers nor only stole corporate secrets, but also pillaged personal accounts of dissidents and activists related to China and Tibet. By 2010, Google’s chiefs decided that they would no loner comply with Beijing’s demands. The lesson from Google’s China fiasco is important. Foreign companies that want to thrive in China have to abide by the government’s rules, which means either compromising with policies you may find uncomfortable, or getting out.

Is it a Sign of Spring?

Things may change, at least for American retailers. Alibaba Group, the largest e-commerce company in China, began its steps towards an initial public offering in early 2014. In the meantime, Alibaba made one deal with Amazon’s rival ShopRunner, helping it to expand in China. It will allow Alibaba to cater to booming Chinese demand for authentic American products in a market flooded with counterfeits. ShopRunner, whose partners include luxury retailers Neiman Marcus and Nine West, will use Alibaba’s domestic logistics infrastructure to launch in the Chinese market.

“The history of US retailers going to China is one that’s fraught with peril. This is a very low-cost way to do it that doesn’t require them to go to China to figure out,” said CSO Fiona Dias in a statement.

In October 2013, Alibaba paid $202 million for a 39 percent stake in ShopRunner, which was launched four years ago. The start-up company, with more than one million members, is still a minnow compared with Amazon or eBay ($EBAY), but the move into China with the help of Alibaba could afford a major boost to its growth.

Only time can test whether decision will work. China, the Far East market, is full of mysteries for American companies. They have to deal with factors coming from consumers, competitors, and even the authorities. The changing market requires American company to be vigilant all the time.


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