Why Western Tech Firms Fail in China

How many times have you heard the following recipe for success in China?

  • Understand and adapt to the local market;
  • Design products and services for Chinese consumers;
  • Localize and empower your management team in China; and
  • Make decisions locally.

If you’re like me, you’ve heard it a lot and have probably passed along similar advice to others. That’s what I essentially tell anyone who asks about doing business in China and the advice I give in my book. In fact, the above statements seem so obvious, that they almost fall into the category of cliché.

If this blueprint is so obvious, why is it then that so many companies seem to make the same mistakes over and over again in China, failing to put these basic principles into practice? I believe there are several reasons; the first being that it is easy to say, but very difficult to actually do. Finding and developing a professional local management team is not easy in China. The country simply does not have a long legacy of treating management as a science, so the pool of local professional managers is not deep. And, if your company’s primary base is in a country other than China, it takes a long time for the folks back at headquarters to develop the level of trust required to turn over decision making to an untested Chinese staff.

I believe there is also a second important reason, and that is that many companies simply don’t have to pay as much attention to purely local factors– at least not for the time being. In many industries, the technology gap between China and the rest of the world is still so great that a company with superior technology may be somewhat insulated from true market forces. In automotive components, for example, a supplier that is making parts for Buicks in the United States has a big advantage in getting business from Shanghai GM for the Buicks made here, particularly in parts that employ higher technology. There may simply be no other suppliers in China today that are capable of making those parts. In cases like this, it is a great deal easier to run China as an extension of the U.S. operations, than it is to do the hard work of recruiting, developing and empowering a local management team.

Of course, China constantly changes and things never stay quite the same. Ultimately, the technology gap will close as more and more local companies climb the technology ladder and local car companies increase their share of market from the 30 percent they occupy today. That’s why I was particularly interested in an article I saw in a recent issue of China International Business entitled “Why Western Tech Firms fail in China” The examples provided by the author, Jonathan Haagen, illustrate what happens when Western firms run head on into competition with well funded local players that have access to similar levels of technology.

In the article, Haagen, cites the following examples to make his point:

eBay: The world’s largest online marketplace site, eBay bought Eachnet, China’s largest e-commerce Web site in 2003, giving it an 84% share of the Chinese market. However, within two years, Eachnet had been overtaken by Chinese rival Taobao.com, which had secured more than two-thirds of the market. By summer of 2007, its market share had slumped to 7.2%.

Yahoo!: Despite a large amount of investment, and an equally large amount of fanfare, Yahoo! failed to offer a significant challenge to homegrown rivals Sina.com and Sohu.com in China, and in 2005, sold its Chinese operations to local internet giant Alibaba.com.

IAC/Interactive: It was thought that IAC/Interactive, owner of Ask.com and Match.com, was onto a winner when it bought a controlling interest in Chinese travel Web site eLong.com in 2005. The site was the leading travel booking site in China and analysts were predicting rapid growth in the sector as China’s domestic tourism industry developed. However, just a year after the takeover, eLong was overtaken by rival travel site Ctrip.com, and has lagged behind ever since, reporting a full-year net loss of RMB 22.2 million in 2007.

Google: Google may reign supreme over the search engine market globally, but not so in China. Local search engine Baidu.com increased its market share to 60% during the fourth quarter of 2007; Google held 26%. This however marked an improvement from 2006, when Google also trailed behind Yahoo! search, a bit-part player in global search terms. Nevertheless, Google China chief executive Li Kaifu still maintains that the search engine intends to be the market leader in China within the next five years.

I encourage you to read the entire article to fully understand Haagen’s arguments, but essentially, he gives the following reasons why these firms have not achieved success in China:

  1. Market Understanding: Each of them failed to make enough effort to understand Chinese consumers, and to effectively tailor their services to a Chinese audience.
  2. Local Inflexibility: Local operations that have been set up in China by Western corporations also must cope with the fact that they often have very little freedom to make decisions on their own. The result: slow and unresponsive decision making.
  3. Strong Local Competition: Because the Internet and China have been such hot investment topics, many well funded local competitors have sprung up right from the start. Given the difficulties of buying state-owned enterprises and finding large local companies in traditional industries in which to invest, Chinese versions of Google, eBay, Yahoo! and other technology companies have been fertile ground for venture capitalists and private equity firms interested in China.

Haagen’s last point to me is the most interesting, because it describes what happens when you have a truly level playing field and Western companies run into head to head competition with local firms. Unless the Westerners have followed the recipe for success provided at the beginning, thereby avoiding Mistakes #1 and #2, they inevitably lose. Unlike the example of my components supplier from the U.S. that is better funded and has a higher level of technology than its Chinese competitors, the barriers to entry in many of these internet fields are much lower. Haagen draws a quote from Gong Wenxiang, an Internet marketing specialist, to make this point:

“But, only a few years ago, Yahoo! tried to make a portal with one billion bucks, dozens of MBAs and returnee elites from Hong Kong and Taiwan, and they were pathetically defeated by a junior high graduate from Guangdong, who single-handedly created and maintained hao123.com with zero marketing expense.”

The experience of eBay, Google, Yahoo! and IAC in China should serve as fair warning to Western companies in other industries. If you are among those companies fortunate enough to be insulated from local market forces by your technology or funding, enjoy it while you can. But, you would be wise to learn from the experience of others and prepare for the day when your local competitors have all of your advantages—plus an in depth knowledge of the China market.

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