A Tough Nut to Crack: The Chinese Market

Overview

With continued growth and a rising level of disposable income among citizens, large profits can be made. However, naivety and inexperience has stopped many over-arrogant multinational entities from solving the puzzle.

Article Highlights

  • Exiting the Chinese market is not uncommon for international companies.
  • Western firms in particular initially had a technological advantage over their Chinese rivals. However, the Chinese government ruthlessly protected the domestic industries.
  • One in four US companies are supposedly in the process of leaving China.

Early January news emerged global fast food giant had agreed a deal to sell off thousands of its Chinese restaurants. In a deal struck between the fast food corp and a Chinese state-owned conglomerate.

Initially, the news is surprising. Since entering the market in 1990, McDonalds saw rapid growth in China. With over 2000 stores currently open, there is still room for further growth. However, the fast food giant has decided to sell a 52 percent stake to Citic Capital Holdings, and 28% to US-based Carlyle Group. The remaining 20% will remain in the company’s control.

Exiting the Chinese market is not uncommon for international companies. China is a tough nut to crack. Vast cultural differences meanings a winning Western formula doesn’t translate effectively. Tough competition more in line with Chinese tastes also make the business environment difficult. Negative press attention on obesity in China is also seeing consumers turn their backs on Mcdonald’s.

Fast food chains aren’t the only Western industry leaving China. Many, from manufacturers, automobiles and energy are slowly withdrawing. Despite China being home to over 1 billion consumers, the market is not necessarily the most profitable. Western firms in particular initially had a technological advantage over their Chinese rivals. However, the Chinese government ruthlessly protected the domestic industries, helping create a level playing field. Trade barriers, regulations and restrictions have all stopped multinational corporations from making China a success.

Another famous brand is Uber, the smartphone taxi service. Acquired by their Chinese rival Chuxing in 2016. As a result, the company’s app was severely changed to suit local market tastes. Multinational corporation struggles are highlighted in these high profile cases, but the real change is happening away from headlines.

According to a report from the American Chamber of Commerce in China, one in four US companies are in the process of leaving China. Rising labour costs, regulatory challenges, vague inconsistent laws and on-going protectionism concern many responders of the survey.

China’s Intentions

Undoubtedly, what attracted foreign firms initially was the cheap manufacturing on offer. Now, many Asian countries are just as accessible and can provide cheaper products. As China loses more international firms, Asia as a whole will benefit.

The wider picture may show a different outlook. China recognizes cheap manufacturing is not sustainable over the long term. Chinese companies have caught up technologically to many international firms. Foreign investment is starting to become increasingly encouraged.

The tide may have started to turn towards other countries, but the future may see a reversal.  Deregulation appears to be on the agenda for the Chinese government. With stagnating growth, one way to restart the economy may be through attracting foreign investment. Industries that have previously been restricted to foreign firms, may incentivize future involvement.

Notorious news emerged this month that Apple will switch iPhone manufacturing to India. The attractive aspects of China may no longer be in manufacturing for foreign firms. The countries greatest benefit will be the advanced services of the market, not the low-cost on offer. Cheap products will continue to exist, but price sensitive firms will seek out the bottom barrel goods elsewhere. Specialized manufacturing, fuelled by China’s investment into research and development should attract a higher class of companies.

McDonalds struggles can also be learnt from. To effectively tackle the Chinese market, you need to know your demographic. McDonalds has also benefited from franchising the majority of their stores. Therefore, hearing news they are selling off many stores (but still retaining a sizable stake) is similar in nature to their current business model worldwide.

Success is subjective. Experts could call one project a failure, while the company itself could be happy with the results. Experience and knowledge can all be gained from a profitless venture which could be worth more than money itself. China should be seen as a difficult market. However, the greater the risk the higher the reward.

With continued growth and a rising level of disposable income among citizens, large profits can be made. Naivety and inexperience has stopped many over-arrogant multinational entities from solving the puzzle. As China continues to deregulate industries, and encourage foreign investment, the ease of access will continue to increase.  In the past, many thought China could provide a risk-free market for profit. In reality, there is no instant success to be found. With a savvy business acumen and the right product for the right market, anyone can successfully enter the Chinese market.

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