China Business

Ten Reasons Chinese Companies Fail in the United States

foreign companies doing business in China

Had a piece published yesterday on the Forbes China Tracker, entitled, Ten Reasons Chinese companies fail in the U.S. I reprise the Forbes article below and then I add to it by discussing a very insightful e-mail exchange I had in response to it.

A couple of years ago, I gave ten reasons why Chinese companies were failing in the United States.

In response to my article, Nina Ying Sun at the Plastics News Blog did her own post entitled Why Chinese Companies Fail the US Market [link no longer exists], explaining, agreeing on and challenging the items on my list.

Chinese companies are still failing in the United States at what I see as an alarming rate–and the reasons I see for that have not changed a bit.

Here is my list, with Ms. Sun’s comments and then my comments on Ms. Sun’s comments:

1. Chinese companies focus on a Chinese consumer, not an American one.

Ms. Sun’s comment: “Chinese companies would like to find out more about their target American consumers, but they mostly rely on personal-level approaches to collect business information, lacking a systematic and scientific market investigation conducted by professional Westerners that understand the market.”

My comment: Very interesting and, I think, accurate observation. Chinese clients have driven me nuts by asking my views on things that I know nothing about, and then completely ignoring my advice when I try to hook them up with real experts. The following are typical conversations:

Chinese client: How much should we pay for that U.S. trademark?

Me: I have absolutely no idea. I just do not know such business well enough to be able to help you at all on this. But, we have worked with a company that does nothing but value IP and I would be happy to give you their name.
Chinese client: But what is your best estimate?


Chinese client: Should we start out selling our product just on the West Coast or should we start out nationally?

Me: Good question. Difficult question. It seems to me the answer to this will hinge greatly on the costs involved and on your ability to set up distribution networks. My firm does not handle questions like this (and even if we did, I do not think it would make sense for you to pay law firm rates for this information) but I would be happy to refer you to top notch business consultants who do.
Chinese client: Should we start out in Los Angeles, Chicago or New York?

2. Chinese companies fail to realize that one reputation-damaging mistake in the United States could doom them forever here.

Ms. Sun’s comment: This one is dead-on. And how come they don’t realize this common sense? Because they get by in China and assume it’s the same in the States.

My comment. Exactly.

3. Chinese companies fail to realize it will take time for them to make an impact in the United States and they are unwilling to spend the time and money necessary to do so.

Ms. Sun’s comment: Chinese people take such pride of the fact that industrialization, urbanization and modernization have happened in China in a much shorter period time than in the West that they believe, if you try hard enough, everything can be done fast and well. Why don’t they invest enough money to lay the ground work for the new market? Well, they look at the exchange rate. The same exchange rate that makes the Chinese production cost in yuan seem so low magnifies the marketing cost in dollars in the States.

My comment: Okay. But see number two above. Haste oftentimes makes waste.

4. Chinese companies focus too much on the end result (making money), and by doing so, they sacrifice the professionalism that would allow them to achieve long- term success.

Ms. Sun’s comment: The Chinese would ideally like long -term success. But the drastic social, economic and political upheavals and changes in the past century have paralyzed Chinese people’s long-term thinking. Fill the pocket as full as possible before the next change hits, be it credit policy, industry standards or consumer interest.

My comment: Absolutely true. Why think long term if there may be no long term? This explains the reason for the problem, but it still needs to be resolved.

5. Chinese companies tell users what they want instead of listening to users.

Ms. Sun’s comment: This obnoxious mentality is a hangover of the old Soviet-Union-style “planned economy” (1949-1978). That period of time featured insufficient supply of necessities and one-sided propaganda. Although it’s hard to question about China running a market, capitalistic economy today, the country skipped some vital steps in the development of the Western countries.

My comment: Same as for number four above.

6. Chinese companies focus too much on making money in the short term, rather than on building the quality necessary to sustain themselves in the long term.

Ms. Sun’s comment: What pops up in my mind includes: vicious and endless price wars, a business environment that has deprived consumers their say, and lack of technology and craftsmanship.

My comment. I agree, but what pops into my mind is that companies must be broad-minded enough to recognize that what makes sense in one country may not make sense in another. Indeed, one might even say this of China’s regions and there are certainly plenty of Chinese companies that have managed to succeed in China as a whole by localizing their product or their marketing by region.

7. Chinese companies fail to understand how beauty and design might distinguish their product from that of their competitors.

Ms. Sun’s comment: Traditionally, domestic consumers simply can’t afford beauty and design. Price is the only distinguishing point. Plus, the companies don’t want to invest much on design, because it’s bound to be copied by competitors right away, thanks to the absence of intellectual property protection in China.

My comment: All true, but see my answers to Number four and number seven above.

8. Chinese companies rely too much on phone calls and face-to-face meetings instead of e-mail.

Ms. Sun’s Comment: This is probably part of the Asian culture, underscoring personal communication instead of machine-generated and less interactive e-mail. I don’t think it’s necessarily a disadvantage though. Japanese companies have done well in the U.S. market, despite their preference for in-person meetings and phone calls rather than e-mail.

My comment. When in Rome….. But, I agree this may not be a disadvantage, so long as the Chinese company has the time and the people for it.

9. Chinese companies fail to use “simple and elegant designs.”

Ms. Sun’s comment: Unfortunately, they are trapped in between complicated traditional styles and a blank page of modern Chinese inspiration. Again, they can’t justify investment on design, because it will be copied by competitors overnight.

My comment: See my comment to number seven above.

10. Chinese companies fail to realize their need to hire MBAs and those with local knowledge.

Ms. Sun’s Comment: Call them cheap or arrogant. They don’t trust MBAs or Western veterans unless foreseeable return is guaranteed. They also want everything under their control, not threats and risk brought by language barrier and different business values.

My comment: I don’t know what to call this but I know it is not wise.

This morning, I received an e-mail from David Ho, a self-described Chinese American techie who did an excellent job flushing out some of the reasons for why Chinese companies are so reluctant to engage real experts to assist them in their United States market entry:

Really liked your article on the 10 reasons Chinese companies fail. Liked it so much that I felt compelled to give you my own personal feedback on #10 in which you claim Chinese companies fail to realize their need to hire MBAs and those with local knowledge.

I used to work for … [a Chinese company] and from my first-hand observations, there are two reasons for this (failing to hire MBAs and those with local knowledge).

1. Many Chinese companies seem to place a high value on technical knowledge, smarts and ability. These company owners (or high level company managers) naturally continue to reinforce the value of technical, engineering or R&D and minimize the value of marketing, advertising (and other such “soft skills”).

2. When they do try to hire local market experts, Ms. Sun is absolutely correct that they simply do not trust the (often inflated) claims they hear from local business consultants. Due to either a language barrier or cultural barrier, they simply cannot evaluate who can provide results vs. who is selling snake oil. Invariably, they hire someone disreputable (but they don’t know it) and get burned by this experience which only reinforces their distrust of local market consultants.

Tied in with my observation #1, since there is no way to quantitatively evaluate the effectiveness of local market and business consultants, it just discourages them from even trying to hire those MBAs and local consultants you talk about and just focus on what they do understand and can accurately measure.

I agree with you when you say “I don’t know what to call this but I know it is not wise”, but until you can show your Chinese clients (in some kind of quantitative way) how to evaluate these local business and market consultants (so they know who is for real and who is just blowing smoke), it will be difficult to overcome the reluctance to hire local consultants.

I responded to Mr. Ho by telling him that I thought he was dead on and requesting I be able to cite him. He responded with the following:

Glad you liked the insight! I’m not one of those MBAs or marketing consultants you’re referring to (I’m an IT consultant, actually, so I’m squarely on the technical side of things), but I’ve had this issue come up several times when talking to various people (sometimes my own clients) why Chinese companies can’t do a better job at _branding_ themselves in foreign (i.e. non-Chinese) markets. When I saw your article talking about the exact same issue, I couldn’t help but chime in!

When I was at … [Chinese company], their “role model” company which they strove to emulate was SONY. Here, they felt was an Asian company that somehow was able to create a globally recognized and admired brand. They understood that SONY had invested plenty of money into local marketing (and product design), but they ultimately felt that it was still product innovation and superior technical ability that allowed SONY to succeed.

So, really, what’s next for Chinese companies trying to break into the U.S. market? Will they remain locked in the catch-22 of being unwilling to spring for high level assistance in the United States and thereby remain locked into being third-tier brands in the United States? Or will more of them break out (a few already have) and become legitimate international companies? What is it going to take?  What, if anything will be the catalyst for change?

What do you think?

26 responses to “Ten Reasons Chinese Companies Fail in the United States”

  1. True, but some Chinese Companies like Haier and lenovo did okay in the US. I think that if other Chinese companies want to do well in the US, they have to be more vested here in the US and be more vested in marketing and customer support here in the US.

  2. Very insightful. I have been working with Chinese companies for 20 years and these descriptions of how they think are quite accurate. If you look around, you see that very few Japanese and Korean companies have succeeded in the United States and I think the same thing will end up being true of Chinese companies. Maybe our expectations are too high.

  3. On the whole, Chinese companies are not terribly good or experienced at business in China either and the things you describe here are true in China as well. So perhaps the question we should be asking here is when will Chinese companies start doing business like companies in the West. The answer to that is when those businesses begin to be run by well educated and well trained Chinese businesspeople and not by party hacks.

  4. Perhaps it isn’t that they fail in the US, but fail in China as well.
    There seems to be a prerequisite to starting a company in China that any form of research or a desire to do a good job is absent (have to pass a special test?). The overall approach is one of taking short-cuts and ignoring common-sense. This doesn’t work very well in China, and probably even less in places like the US or Europe, where there’s no special friends to help you out of a pickle.
    For example, on bar-street here in town, bars are closed and sold every two or three months. Nobody asks themselves why did those places close. Of course not because they lost tons of money since there are already more bars than customers. No, it must have been that the previous owner made so much money that his bank was full, so he had to stop. Of course! Next, all the interior is ripped out and a fortune is spent on redecorating the bar. Instead of wasting money on an architect, the ‘design’ is done by the unqualified migrant workers who are hired to do the work for low pay. Baskets of flowers are placed by the door and another small fortune is spent on fireworks, but any advertising (paper, TV, radio, flyers) is carefully avoided lest anybody finds out the place exists. Since all the cash has already been spent, the bar doesn’t employ pretty girls, serve quality booze or offer free snacks and widescreen-ESPN. But hey, who needs any of that? Three months later a handwritten note appears on the door, offering the bar up for sale and promising untold riches to the new owner. Then, the whole process repeats.
    In this evolutionary process, if you try often enough, someone might open the right store in the right place at the right time, by accident, like a random DNA-mutation. Alternatively, the police forces the entire competition to close for a few weeks due to ‘regulations’ and they all go out of business. Eventually, somebody makes a killing, probably selling real-estate, and decides that more money can be made overseas.
    True to the spirit of short-cuts, product design and marketing is handled not by knowledgeable professionals, but by Broose Lee (misspelling intentional?) who is the son of the local party chief and who has spent two years drinking beer at kappa-beta-tau of Alabama Junior College of Horticulture.
    So, the company’s carcinogen-riddled sun-block (a natural progression from real-estate, right?) is introduced in the trial market of Alaska (where Broose’s cousin runs a restaurant), under the name of “Royal Pain In The Neck”. This name was chosen (rather than “Auspicious Donkey Poop”, which was already trade-marked) because it sounds very English and relates to the fact that you should rub the cream on your skin to avoid pain/burning (further instructions on contents, benefits and application were left out to keep the cost down). Six months after the introduction, the two customers who bought the product are pressing a lawsuit, but the owner cannot be found and the company funds have all disappeared. Broose left some time earlier to take up a post as senior-VP of marketing at a fortune-500 company that opened a JV in his dad’s city.
    Now, tell me I’m wrong…
    Really, please tell me that what I observe in China every day is not like this at all… Please?

  5. What I find fascinating about Chinese companies going overseas is that they engage in so little observation of what the companies in the countries they are going into have done to succeed. They simply do what they have done in China, without it ever occurring to them that the rest of the world isn’t exactly like China.

  6. Great post… many of these come down to reasons why so many US firms fail in China — failure to find the right people and having a clear purpose for being there.
    For many Chinese firms, moving to the USA makes perfect business sense. Under current models, goods are exported to the USA at cheap and cheerful prices and the overwhelming majority of possible margins are extracted by USA distributors and retailors. All clear. Any business wants to increase its margins and share of the final retail price.
    Obviously USA distributors and retailors have invested much over many years in building sales networks and retail partnerships or operations. Chinese enterprises have done the same as they spread their business over the vast China market, dealing with complex market conditions and local regulatory requirements along the way (ie most Chinese companies will need to register and operate legal entities in every province in China in which they operate). The USA is simple in comparison.
    Many Chinese companies fail because they see the potential margins but not the huge investment required in people, distribution, marketing and customer service required to achieve coverage in the USA.

  7. Nice and interesting post.
    I think it’s worth mentioning mentioning generational differences. Obviously the bigger SOE are run by members of the old school, or by those who don’t dare upset the old school, but as they move on and are replaced by younger Chinese – some overseas educated but I think mainly locally educated and employed – these things will change. Perhaps as westerners we expect China to penetrate western markets at the same rapid rate they’ve gone through some of the other processes/developments mentioned in the OP, but that rapid clip cannot be maintained across all industries and growths. My question is, is the failure rate, despite being high, out of line for a nation trying to enter a completely new market? Aren’t many of these companies going abroad relatively young themselves? Of course these are in addition to the excellent points made in the OP.
    I see this with my former classmates and coworkers in Shanghai, who are butting heads with the old guard as they try to carve out new niches not just for themselves but for where Chinese industry is headed.
    For the poster who said few Japanese and Korean companies have succeeded in the west, ummm… Samsung (high end well respected electronics, a model company) Hyundai, iRiver, Kia… I won’t go into Japan.
    Look at the failures American companies have had, some spectacular, when going abroad. It wasn’t just that successive generations understood the markets better, but these generations are markedly different in outlook and culture.
    I am reminded of several of CLB’s previous posts mentioning gains that Russian and Korean firms have made as they have matured.

  8. Three more reasons, all three based on lack of international experience.
    1. No concept of customer service demands in the West whatsoever. It’s about product and profit only. “If we have a cool product, we’ll make millions!” There is no long term customer retention plan because there aren’t any Chinese companies that have been in any foreign market (for even 20 years) to know about the concept of customer retention!
    2. Won’t pay for professional services. Market research, supply chain and other types of professional consulting and services are VERY immature industries in China (for Chinese companies) so not only are they something that’s completely foreign to most Chinese business people, they are VERY expensive in the West and are not something that you get a physical/tangible ROI from (at least not in the their eyes).
    3. Do not understand the complex and mature nature of US markets. They don’t know what they don’t know–namely that Shanghai, Beijing and Shenzhen, as developed and “new” (meaning “good/great/best” as Chinese use the term) as they are nowhere near the level of market complexity that New York, Chicago, LA or even Denver, SLC and Portland are.

  9. There are many similarities here to Japanese and Korean companies expanding into the US market in the early stages. When Japanese auto manufacturers first enter the US Market, their cars where regarded as cheap and inferior. I recall Korean brands such as Samsung and Hyundai (among others) having known for low quality branding and products in the late 80’s and early 90’s. It seems to me there are always growing pains in expanding into a new market and great companies use their time, experience, adaptation, and perseverance wisely to succeed.

  10. True, but some Chinese Companies like Haier and lenovo did okay in the US. For example, on bar-street here in town, bars are closed and sold every two or three months. Nobody asks themselves why did those places close. Of course not because they lost tons of money since there are already more bars than customers. No, it must have been that the previous owner made so much money that his bank was full, so he had to stop. Of course!

  11. I think the real question here is when will these companies change and what is going to cause them to change. I think the answer is the same to both questions: a lack of profits.

  12. I’m not familiar with the reasons for Haier’s success abroad (maybe their products are just simply much better at lower cost than say, Maytag’s, their competitor), but it seems to me Lenovo was successful, because it was first able to piggyback on the established and well-deserved reputation of IBM’s former Thinkpad line, in effect providing a leapfrog in goodwill. I’m curious to see if in the next decade, BYD will be able to breakout organically with its electric cars. HTC, albeit Taiwanese, has managed to do well (despite these boring acronymic names) partly in thanks to its use of Android, but probably mostly to do with its now-iconic GUI (presumably the result of R&D, market research).
    Many local products (instant noodle empires and local white-brand phones) also don’t transfer well to global markets and tastes. American kids probably didn’t know of the brand, much less start buying Li-Ning bball shoes, until it signed with Baron Davis (or maybe only Clippers fans).
    As for understanding the US market, I think most Chinese are blinded culturally, especially since Chinese ie Han society and culture has largely been quite homogeneous, almost monolithic (relatively speaking), they seem to perceive other societies the same way expecting that American culture is just one culture instead of the many local communities and cultures and niche groups that exist even within one city e.g. LA. Of course, a lot of this has to do with lack of knowledge of US cultural history (which should be a lesson to those coming to Chinese markets).
    Ultimately, it appears Chinese companies simply have to put up the cash for branding – bringing us back to investment for long-term goals, bringing in the right people (with relevant expertise in local markets, etc.), paying (or getting really lucky) with a brand that’s not a twelve-syllable hanyu pinyin mouthful (please, the words “limited liability company” should really NOT be a part of your brandname).

  13. Can someone name three or four examples of Chinese companies that have “failed” in the United States? With all of this talk about Chinese companies failing in the US, it seems interesting to me that no one thus far in the conversation has mentioned any specific examples of business failures. What seems to be the case is that most Chinese companies look at the huge expense of setting up a business in the US, and decide that it’s not even worth trying. Once someone goes through the costs and effort of doing business in the United States, I think the typical reaction is going to be “forget about it.” That’s hardly a example of failure.
    Also, it is the situation that Chinese OEM’s make a small margin and have the distributors in the US make most of the margin, but unless you are willing and able to set up your own distribution and marketing chain in the US (and most Chinese OEM’s simply have nowhere near the cash to be able to do this) then having a brand is not going to help.
    The other thing is that I think that Chinese business people understand the US a *LOT* better than people on this list give them credit for, and it’s precisely *because* there is a generally good understanding of the US market that makes Chinese businesses generally reluctant to enter in the US market.
    Again, if someone can provide three or four example of Chinese companies that tried to enter the US market and failed spectacularly. However, the two major examples of large Chinese companies entering the US has generally been pretty successful.
    And then we have the question of why a successful Chinese company would want to enter the US market. It’s not like China wants to take over the world or anything.

  14. Yes we’d love a few examples out here.
    @ TwoFish – I would love to agree with you on the Chinese undertakings that know the US market very well, but I have to refrain when I think of the logic of being a modern merchant: you own a business with capital to go abroad with, you see a more or less healthy market, you take the chance and settle in it.
    You just don’t stay out from the US market. The US is by far (probably the EU market is getting there at unprecedented growth rates) the most interesting exporting market where one can see if it’s own company is fit for the bigger (world) picture. Stepping back just because “you know this market” doesn’t make sense. It would, if you’d substitute the US market here with (no offense to anyone) a much smaller or most probably a neighboring country’s market.

  15. All true, but unlike you, I honestly do not expect this to ever change for most Chinese companies. I say this because I think those companies that fail in the U.S. are just going to blame the U.S. rather than get introspective about it and figure out what it is they need to do different.

  16. I have, through my wife, been working to try to help Chinese companies go overseas for nearly a decade now and there is actually one reason Chinese companies have been so unsuccessful. They just find it impossible to believe that things can be so different here. They hire us to help them and then they don’t listen as they always insist their way has to be the best way because it has worked for them in China.

  17. All true. I do work for Chinese companies in China that hire me for my expertise in Western design. I tell them what they need to do and then they ignore me and go their own way. I used to ask them why they had hired me and I would threaten to walk away from the job if they didn’t start listening to me, but then they would say that they would listen and then they never did so I now just charge them for my services, tell them what to do and then watch them ignore me. I don’t understand why they pay me other than so that they can act as though they are doing things the Western way even when they are not. It’s a joke and it kind of reminds me of the old days of Communism where the saying was that “we pretend to work and they pretend to pay us.”
    As you can tell, I cannot wait to get the hell out of here and actually start working on projects where I can make a difference.

  18. I work for the U.S. arm of a huge and hugely successful Chinese firm. That is to say, they’re huge and successful in China. Every single point made in this article applies to what we’re going through here in the U.S. office. Numbers 1, 2, 3, 4, 7, and 10 hit the bulls-eye in terms of my experiences at the company.
    And to “abt”: I agree 100%. Your statement:
    “They just find it impossible to believe that things can be so different here.
    They hire us to help them and then they don’t listen as they always insist
    their way has to be the best way because it has worked for them in China”
    That is so incredibly true that it hurts.

  19. Dan, something you once said has stuck with me and that is how difficult it is for those who succeed to change. Chinese companies that are going to the United States have succeeded in China by doing one thing and once they go to the United States they have every reason to believe that success is based on continuing to do what allowed them to succeed in the first place, even though in the United States, success requires very different things. I think it is going to take many years of abject failure before Chinese companies realize they need to change and even then only a select few will get it.

  20. @siegfried,
    I think I work with you! I am thinking that there is a way to make the PARENT company see the errors of thier ways. Basic Psycology? Really basic?

  21. I am in the process of looking for an opportunity with Chinese companies who seriously thinking about long term success in the US. I left China in 1989, and experienced the “western” life and am working for big American and Canadian companies. I see the difference in how “western” companies conducting successful business. I firmly belive that if Chinese company(ies) is willing to adapt “western” way of runnig a successful company, coupled with Asian moral and ethics, it will be a huge success in the US.
    I can’t wait to find a Chinese company leaser bears the same belief as me, and I so want to help my own countrymen to succeed in the US, or any part of the West for that matter.
    For Chinese company leaders: if you are interested in expanding your business to the west, and sustain here for a long time, I would like to help. My western life/work experiences and Chinese language skills are plus for your goals.

  22. Chinese, Japanese, Korean, needless to name what nationality…
    The major reason of these companies’ failure in the US market is –
    1. Lack of understanding of US consumer market and its behaviors
    2. Operate like as though they were home
    3. Hire those may speak the language (does not necessarily mean from their own ethnics)… those have NO true understanding of the market or business… shall I say with language skills, but NOT business skills – no hands on experience…
    so to speak, these are just few common denominators for all companies including American companies’ failure in America…
    People must understand… business school teaches you theory but NOT hands on experience… it is hard to come by, but those with experience – too expensive to hire…
    Give me a break! Hire one good one will make a lot of difference to the company!
    Done. Thank you.

  23. I ditto all the comments referenced above, but would like to add one additional insight, and that is the “Silver Back” issue.  In China, a successful entrepreneur is someone, for better or for worst, managed to come up with innovation or identified a need and the business went viral, perhaps inspite of  himself.  When that happens, culturally most Chinese are very sensitive and fiercely competitive (when was the last time a Chinese person openly revealed to you where he sourced a product?), and thus, he tends to hire the number two at the factory/business who is far from Number One in quantity, quality, intelligence or otherwise – the yes boss mentality so as to avoid any risk of competition.  So the big boss – the Silver Back, continues his marching, unchecked, ego unfettered, until he runs into a foreign country with new variables where he should have support, but his desire for absolute control gets in his way.  So he is not going to hire anyone to help him, because he has already been successful and why would it be any different.  Overly confident?  Too self assured?  or the Silver Back Theory – I am the boss and I can do it without any help.  As mentioned, invariably he gravitates towards the age old adage:  If it is too good to be true, it is.  Well, unfortunately, many of these bosses became successful not by application of any economic metrics learned at Harvard, but by sheer instinct and gut.  Such method of analysis doesn’t bode well in a Western world where service, brand, dependability, and management play a major role in a business’ success.  In the end, they all will fail as the “connection” with the consumer will never be established and confidence in the brand is the number one reason for success.  PCP

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