One of the advantages of our having blogged about China for more than a decade is that we have gone through pretty much every cycle multiple times and so we do not completely buy into any given cycle and we recognize today’s cycle will not be tomorrow’s cycle.
Today’s cycle is to talk about how doing business in China successfully is impossible. But it isn’t. It is more difficult now than let’s say three years ago, but it will likely be easier three years from now than today.
You know you are at the peak of a cycle when articles start appearing that essentially say: if this one company had problems, this shows it is impossible for everyone else. I have been seeing a lot of these articles lately — near as I can tell, all written by people with little to no China business experience. But the one tour readers keep asking me about is one that showed up a couple weeks ago in Forbes, entitled, Why China Consistently Takes Cocky U.S. Tech Companies To School.
The following is the thesis of this article, which uses Uber’s China failures as its starting point:
In fact, with only one or two notable exceptions (Apple being one), there are almost no examples of U.S.-based consumer technology companies that have built profitable, standalone businesses in China. That might make you ask why it’s so hard for an American company to do business there. The unfortunate truth is that as a foreign company, it’s nearly impossible to win in China today. If you’re considering entering the market, here are a few things to keep in mind.
Two of our readers wrote me angry emails, asking me to put this writer in his place for having the nerve to claim it is “nearly impossible to win in China today.” One of those readers even sent statistics showing how foreign companies continue operating very profitably in China.
But here’s the thing. I do not believe this writer is saying it’s nearly impossible for any company to “win in China today.” I think he is saying it is nearly impossible for any foreign tech company to operate in China and to a certain extent he is right as many portions of the tech industry in China are so culturally or legally difficult for foreign companies they cannot succeed.
If you ignore the thesis of this article with the sentence that (inadvertently?) oversteps reality, it is well worth a read for the following basic and accurate China business information:
It’s not as big as it looks. “It’s easy to look at China and only see dollar signs. A billion people! The fastest-growing economy! Huge potential upside!” But when you look more closely at China’s population, the numbers quickly become less impressive. “The average income in China is about $7,800 per year. Contrast that with $34,000 in the EU; $36,000 in Japan; and $55,000 in the U.S. Make it up on volume? 80% of China’s working population lives either in rural areas or are migrant workers, earning between $2,000 and $6,000 per year….The true addressable market for most tech companies is China’s burgeoning middle class, which represents about 20% of the workforce. These 150 million people earn an average of $11,000 per year – a population equivalent to the U.S. workforce, but with 20% of its purchasing power. And while this population has been growing at an enviable pace, China’s current economic slowdown could mean the double-digit growth of China’s middle class is a thing of the past.” These are good numbers and he’s right.
It’s not a level playing field. Of course it isn’t. Anyone who has gone through the grief of forming a China WFOE or even just operating a WFOE in China knows this to be true. As the author notes, the “system is tilted strongly in favor of Chinese companies.” For how this can impact the bottom line for foreign companies, check out Buying A Chinese Company? Why China Deals DON’T Get Done.
Most companies don’t shed the American persona. The author talks about how many “companies assume – naively – that competing in China will be as straightforward as localizing their site or app in Chinese and running it out of the United States; treating operations as you would in any other country.” Yes and no. It is the rare company these days that does not realize that it will need to make some changes to market its product — be it an app or a pair of socks — to the Chinese consumer. The difficulty lies not so much in getting foreign companies to realize the need to localize; the difficulty lies in effectively localizing without relinquishing what it is that differentiates the product globally.
The piece concludes by stating (overstating) that “despite its great allure, U.S. companies are more likely to lose their shirts than make their fortune in China.” This is demonstrably wrong in that the latest AmCham survey shows 64 percent of respondents are operating profitably in China. China is more difficult today than it was 3-5 years ago. Back then I would estimate that 90 percent of our clients doing business in China were succeeding (yes, that term is intentionally vague), whereas today I would put that number at more like 75 percent.
The whole point though is that China is difficult and China has always been difficult and will always be difficult. Going overseas anywhere is difficult. I could line up ten companies who could talk for hours about the learning curve for going into England. Heck, I’ve seen U.S. companies trip up and have to leave Canada for having failed to recognize the differences. But difficult does not equal impossible and what is true for one company may or may not be true for another. Most importantly, what is true for Uber has no relationship to what will be true for most companies looking to do business in China.
Can your company succeed in China? Who knows? But what I do know is that neither a Forbes article nor this post will give you the answer.
What are your thoughts?