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We all know that China is the largest consumer market in the world as well as the fastest-growing of the major markets. And companies readily concede that they cannot become truly global unless they have a China strategy. Why is it, then, that the head offices of many companies seem so China-adverse?
The China results might seem weaker than original plans. The folks back home don’t want to talk about it. They don’t want to think through any China initiatives. And whatever you do, do not pitch for extra resources for China. There is simply no appetite at the head office. The China country manager gets no love.
Let me explain this apparent contradiction in China’s importance to the company and its role in corporate planning, and offer some solutions as well.
The China Contradiction
1. A mismatch between macro expectations and micro results.
At a macro level, China is indeed a land of superlatives: biggest this, largest that, fastest-growing something else. This whets our appetite and implies that somehow 1.4 billion Chinese will each purchase one item from us. However the micro results can be very different from expectations. It is not unusual to find a $500 million U.S. apparel company with $1-2 million of sales in China. Instead of seeing this as a nice toe in the water, the head office will frequently view these numbers with a groan.
2. China is … different.
Not necessarily worse, but just by being different the company is required to go through a process of learning and adapting that it might not be good at. Particularly for companies that have only done business in Western markets, coming to terms with different procedures for shipping, labeling, testing, etc. can be a headache. And this extra heartburn combined with the micro mismatch above can quickly sour a company on the market. The cost-benefit curve moves the wrong way. Whose idea was this, anyhow?
3. The CNN effect.
Global digital news brings the world to us in ways that can be disconcerting. Almost by definition, bad news travels faster than good. And with 20% of the world’s population, China has at least 20% of the world’s problems. Not a day goes by that we do not hear about some sort of potential disruption in the market, be it an economic slowdown, foreign policy issues, corruption or intellectual property problems. This is not to argue that these are not serious issues, but it is to argue that regardless of their importance they tend to have little to no impact on the consumer market. After all, the greatest political shocks in the world last year were the Brexit vote in the UK and the presidential election in the U.S., neither of which had material impact on consumer activity. Nonetheless, the CNN effect means that at some point this year, your head office will be hearing about something amiss in China, and questioning whether that will impact their China plans.
Three Solutions
1. Maybe the problem is not China, it is you.
If your company is evaluating China as it evaluates developed markets, it is bound to fixate on the macro-micro mismatch. Companies need to develop a different set of metrics for developing markets and calibrate that approach as well. For example, if sales in China are only 10% of sales in Canada, can the company put together a structure so that the resource allocation for China is commensurate? Companies that can calibrate activity proportionate to the market will be happy in China (and in other markets). Companies that are cookie-cutters will be disappointed. Remember, some 80-90% of the revenue for most MNCs takes place in the developed world. China is the outlier. When a company says it has a China problem, it frequently means it has a developing-market problem or a non-Western problem.
2. View adjustments as CAPEX.
You are building a new team with new procedures. These are CAPEX requirements that you will not find in other markets, at least not in the same way. You won’t have the same numbers in China, or the same ratios. You need a greater advertising spend in China than in your home market for equivalent results? No surprise there as you are newer to market. You need some capacity for new market experimentation. In other words, China is not just a big Ohio. Alibaba President Michael Evans mentioned a similar sentiment when we discussed the challenges in dealing with corporate decision-making regarding China: “You are battling for mindshare, battling pre-conceived notions of China,” Evans told me.
3. E-commerce does not augment the strategy; it is the strategy.
Nothing gets you in the market with lower cost and lower risk than e-commerce. The cost of opening an on-line store might easily be one-tenth the cost of a physical store. So if you want to calibrate resources to market opportunity, e-commerce is your best bet.
The bottom line: In the long-run China e-commerce is an upside model, but in the short-run it is a downside model. In other words, the long-run benefit of e-commerce is that it allows you greater revenue but the short-run benefit of e-commerce is that it limits your costs and exposure. Even those folks at the head office might go for it.
