Discussion questions

The People’s Republic of China opened up to foreign investments in the late 1970s. Since that

time, numerous companies have tried to establish operations and sell their products to

customers in China. Many more companies will try in the years to come—China is expected to

have some 190 million people in the middle- and upper-income categories by 2020. This is an

increase 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 will seek these market opportunities. What have we learned culturally that

can help Western-based companies in China’s marketplace?

Some background on China can serve as a starting point for better understanding the culture in

China and what some well-known companies such as Best Buy and eBay have done to target the

Chinese marketplace. The motivation for many foreign companies to enter China—beyond those

that have been there for a few decades for reasons of low-cost production—was the triple growth

of the Chinese economy that was seen from 2000 to 2010. China overtook 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 in the decade from 2000 to 2010. However, 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 increased by only 80 percent in the same time period.

Interestingly, while foreign investments grew, domestic consumption as a share of the Chinese

economy declined from 46 percent in 2000 to 33 percent in 2010. This consumption decline—

coupled with slower growth globally and, ultimately, the worldwide economic downturn that

started in 2008—raised questions about China’s momentum. Right now, around 85 percent of

mainstream Chinese consumers are living in the top 100 wealthiest cities. By the year 2020,

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 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. This begs the question, can the unprecedented Chinese growth really continue,

and would it come from increased consumption?

The resounding answer is yes according to research conducted by 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 from 2010 to

2020 is expected to be about 7.9 percent per year, 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)—the three countries among the top four worldwide economies along with

China. And, the key is that consumption will now be the driving force behind the growth 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 a large number of countries

to the Chinese marketplace is not necessarily as straightforward as it may seem. Often, a

combination of naiveté, arrogance, and cultural misunderstanding have led many well-known

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. Let’s take a brief 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, best described by Shaun Rein, the founder of China Market Research Group.

He pointed to a few reasons for this culture shock and lack of success. First, the Chinese will not

pay for Best Buy’s 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 issues created difficulties for

Best Buy. Solving these issues, Best Buy believed that it would have to develop and implement a

different business model for the Chinese market than it has used, for example, in the United

States.

Question #1: How far should a company go outside its normal business model to adhere to

cultural values and beliefs of a new market?

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 multi-billion-dollar business with operations in more than 30 countries.

But China’s unique culture created problems for eBay in that market. Contrary to the

widespread cultural issues that faced Best Buy, one company in particular (TaoBao) 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 TaoBao 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 seller’s 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 when we know about it, but may not always be the case when we take into account all the little things that are important in a market.

Question #2: How can a foreign company entering China ensure that it tackles the most

important “little” things that end up being huge barriers to success as we approach the year

2020 when China is expected to have significantly increased purchasing power among its

middle class?