Foreign Owned Companies in China, Why is it so Difficult to Succeed?

23 Apr

Foreign Owned Companies in China, Why is it so Difficult to Succeed?

 McDonalds

Many large multi-nationals, such as Coca Cola and Nike see the huge potential for profit in the Chinese market. In 1979 there were 100 foreign owned businesses in China, nine years later this number grew to 280,000 (Facts and Details, 2008). So there is a potential for growth into China to seek possible fortunes, consider that there are 1.4 billion people in China therefore the opportunity is enormous. But, many see it as suicide of a successful organisation, with Pepsi and Nestle amongst others retreating soon after expansion. I will try to assess why the market is different in China, what the challenges are and how companies who expand into China can be successful.

Culture is fundamental to business and that is why global expansion is dangerous, but these difficulties are exacerbated in China. One of the main reasons why the market is so different is because of their nationalist views. Chinese citizens want Chinese people to make money in their country, they do not want American and British companies to immigrate and earn their money. Family and social relationships are important all over the world but no more so than in China and for this they are protective, as are we, of foreigners taking their jobs.

The cultural differences between the East and the West are the major source of failure. Not only is there more than 5000 miles between London and Beijing, but there are smaller more in depth cultural differences. The Chinese respect their elders more, suing their children if they do not provide for them, they spend at least 30% of their income on education and they even write their address in the opposite order to the UK. These differences make foreign businesses stand out like a red London bus in the middle of Beijing.

Another huge difference between foreign companies and the Chinese is that we applaud and even recruit workers on their ability to take their own initiative when working. If a subordinate consistently asks ‘what next’ in the UK, managers would feel they are incompetent and may feel the urge to dismiss the worker. Whereas, in China they are taught from a very young age to follow orders. Therefore this narrates to the workforce, subordinates are exactly that and are told exactly what to do for every single task. Small HR differences can have big implications.

“When doing business in a foreign country, eighty percent of what you do is still the same as anywhere else—but you better understand how that other twenty percent is different.” (Forbes, 2012). All of these differences mean that to be successful when expanding into China like Apple or Motorola the companies business model needs to be adapted to synchronise the differences into similarities between the countries and therefore adjust to the barriers of market entry (IHRSA, 2011). The local businesses in the Chinese economy know their customers better; they know what they want and how they want it. Therefore companies who want to expand into China cannot transfer their products and services without adaptation, they need to understand the new consumer and personalise the product to them.

To increase the probability of success, companies need to conduct and analyse research to help with their expansion, such as:

Figure 1 – Favoured communication with Chinese Clients

Graph

(http://www.b2binternational.com/publications/white-papers/chinese-marketing-selling/)

With the above data we now know that to communicate with Chinese Clients companies should use conferences and exhibitions that is not favoured in western countries.

In conclusion the global expansion into China is dangerous like any other economy but if the market if understood and the business is adapted to suit those needs then companies can unlock the potential of China.

References

Ambler, T., Witzel, M., and Xi, C., (2009). Doing Business in China. 3rd ed. Oxon: Routledge.

Bernstein, J. (2011). China, Where Foreign Owned Companies Go to Die. Available: http://www.theinsightfultrader.com/china-where-foreign-owned-companies-go-to-die/. Last accessed 23/04/13.

Carter, J.. (2012). Plenty to consider when thinking of expanding internationally. Available: http://www.ihrsa.org/home/2012/6/25/plenty-to-consider-when-thinking-of-expanding-internationall.html. Last accessed 23/04/13.

Collins, R., and Block, C., (2007). Doing Business in China For Dummies. New Jersey: Wiley Publishing Inc. p7-55.

Goh, A., and Sullivan, M., (n.a.). Five Biggest Challenges Businesses Face When They Expand to China. Available: http://www.chinatoday.com/china.topics/doing_business_china/five_biggest_challenges_businesses_face_when_they_expand_to-china.htm. Last accessed 23/04/13.

Hays, J. (2008). Foreign Companies and Foreign Investment in China. Available: http://factsanddetails.com/china.php?itemid=349. Last accessed 23/04/13.

Mariotti, J. (2012). The Secret Of Success In China. Available: http://www.forbes.com/sites/prospernow/2012/07/09/same-but-different-true-then-true-now/. Last accessed 23/04/13.

Zuxi, X. (2012). How TO Succeed In China: Why Some Foreign Firm Boom, And Others Go Home. Available: http://worldcrunch.com/how-succeed-china-why-some-foreign-firms-boom-and-others-go-home/business-finance/how-to-succeed-in-china-why-some-foreign-firms-boom-and-others-go-home/c2s4910/#.UXZ-yr8VhUQ. Last accessed 23/04/13.

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2 Responses to “Foreign Owned Companies in China, Why is it so Difficult to Succeed?”

  1. iyh1g10 April 23, 2013 at 10:04 pm #

    Following the tragic earthquake that struck southwest China’s Sichuan province, Apple and Samsung, both foreign companies have pledged to donate $8 million and $9.63 million respectively. Charity work and financial support should of course be applauded, and perhaps this could be seen as an opportunity for the foreign companies to cultivate a more positive general public image.

    Sources:
    Foreign firms at the forefront of China quake donations. http://timesofindia.indiatimes.com/world/china/Foreign-firms-at-the-forefront-of-China-quake-donations/articleshow/19688258.cms

  2. pw9g10 April 24, 2013 at 9:21 am #

    The companies that seek to enter Chinese markets will undoubtedly be huge international companies. Therefore, to some extent those companies have already adapted to different markets, understood who they are selling too and altered their approach accordingly. It is understandable to view China as a very different market to any other on the planet but the ‘opening up’ of China is essentially an invitation to foreign companies. Also, the rapid growth of foreign companies in China that you mention (100 to 280,000) highlights that multi-national corporations can adapt and make a profit in China otherwise they would not be there.

    I think culture will only go so far in limiting the success of foreign owned companies in China as the majority of positions within the Chinese branch of such a company are likely to be held by Chinese nationals. This may also limit the degree to which HR differences would pose a threat. Whilst still making a profit for a foreign owned company to what extent does an investing company provide employment for locals and subsequent wealth creation?

    Overall, the difference between operating in China and in a western country is large. However, I believe that the world’s largest companies will be able to successfully adapt especially when the opportunity to make vast profits exist. Considering the profit hungry nature of these large countries they certainly cannot be underestimated.

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