China is expected to have some 200 million people in the middle-and upper-income categories by the early 2020s. This is a tenfold increase in people with significant purchasing power in China in the last decade, from only about 17 million people in these income brackets as recently as in 2010. China’s purchasing power for virtually all products and services has strong potential, and foreign companies now strategically try to take advantage of these market opportunities.
What have we learned culturally that can help companies establish themselves in China’s marketplace? What went wrong early on? The experience of well-known companies such as Best Buy and eBay can serve as a learning experience for others. From a retail perspective, the motivation for many foreign companies to enter China some years ago – beyond those companies that have been in China for decades to achieve low-cost production-was the triple growth of the Chinse economy that was seen from 2000 to 2010.
With this growth, China overlook Japan to become the second-largest economy in the world behind only the United States, and its large population makes for an enormous target market. Investment from foreign companies was the largest driver of China’s growth. Many companies also increased their exports to China. The United States, for example, saw its companies increase exports to China by 542 percent from 2000 to 2011 (from about $16.2 billion to $103.9 billion), while total exports to the rest of the world by U.S. companies increased by only 80 percent in the same time period. Exporting to China has become somewhat stagnant in the last few years, now representing about $113 billion.
Interestingly, domestic consumption as a share of the Chinese economy has declined from 46 percent to 33 percent. This consumption decline-coupled with slower growth globally-has raised questions about China’s momentum. Tight now, around 85 percent of mainstream Chinese consumers are living in the top 100 wealthiest cities. By the early 2020s, these advanced and developing cities will have relatively few customers who are lower than the middle-and upper-income brackets by Chinese standards. The expectation is that these consumers will be able to afford a range of developed nations’ products and services, such as flat-screen televisions and overseas travel, making the Chinese customer much more of a target for a wide variety of consumption.
But can the unprecedented Chinese growth really continue, and would it come from increased consumption? The resounding answer is yes, according to McKinsey & Company. McKinsey found that barring another major economic shock similar to what we saw in 2008, China’s gross domestic product (GDP) will continue to grow, albeit not at the historic levels seen between 2000 and 2010, when it grew about 10.4 percent annually. The growth in the 2020s is expected to be about 5.5 percent per year (until 2030), which is still far above the expected growth for the United States (2.8 percent annually), Japan (1.2 percent annually), and Germany (1.7 percent annually). And the key is that consumption will now be the driving force behind the growth in China instead of foreign investment. The consumption forecast opens up opportunities for foreign companies to engage with Chinese consumers who are expected to have more purchasing power and discretionary spending.
But culturally translating market success from one country or even large number of countries to the Chinese marketplace is not necessarily as straightforward as it may seem. Often, a combination of naivete, arrogance, and cultural misunderstanding have led many well-know companies to fail in China. Lack of an understanding of issues such as local demands, buying habits, consumption values, and Chinese customers’ personal beliefs led to struggles for companies that had been very successful elsewhere in the world. And as global as China is becoming, cultural differences still get magnified in the Chinese marketplace. Let’s take a look at Best Buy and eBay as two examples.
Best Buy, the mega-store mainly focused on consumer electronics, was founded in 1966 as an audio specialty store. Best Buy entered China in 2006 by acquiring a majority interest in China’s fourth-largest appliance retailer, Jiangsu Five Star Appliance, for $180 million. But culture shock hit Best Buy’s, best described by Shaun Rein, the founder of China Market Research Group. First, the Chinese will not pay for overly expensive products unless they are a brand like Apple. Second, there is too much piracy in the Chinese market, and this reduces demand for electronics products at competitive market prices. Third, like many Europeans, the Chinese do not want to shop at huge mega-stores. So, these three seemingly easy-to-understand cultural issued created difficulties for Best Buy.
eBay, the popular e-business site focused on consumer-to-consumer purchases, was founded in 1995. The company was one of the true success stories that lived through the dot-com bubble in the 1990s. It is now a multibillion-dollar business with operations in more than 30 countries. But China’s unique culture created problems for eBay. Contrary to the widespread cultural issues that faced Best Buy. One company in particular (Alibaba) and one feature more specifically (built-in instant messaging) shaped a lot of the problems that eBay ran into in China. Some 200 million shoppers are using Alibaba’s Tmall and Taobao platforms to buy products, and the company accounts for almost 80 percent of online transaction value in China.
Uniquely, Taobao’s built-in instant messaging system has been cited as a main reason for its edge over eBay in China. Basically, customers wanted to be able to identify a sellers’ online status and communicate with them directly and easily-a function not seamlessly incorporated into eBay’s China system. Clearly, built-in instant text messaging is a solvable obstacle in doing business in China. It sounds easy now that we know about it, but it may not always be the case when we take into account all the little things that are important in a market. How can a foreign company entering China ensure that it tackles the most important “little” things that end up being huge barriers to success?