3 Reasons U.S. Firms Fail In China

3 Reasons U.S. Firms Fail In China

Many of the world’s largest tech firms have conquered markets across the world, but few have been able to crack the largest market of them all: China.

Dec. 30, 2019

It is the largest market population in the world, the second-largest power by nominal GDP, and despite recent slowdowns in spending, it is still amongst the world’s largest spenders. 

It is no surprise then that China is the golden goose for U.S. firms that want to make the most of this lucrative market; but why has it been so difficult to crack? There is a wide myriad of reasons for this, but we will focus on the big three below. 

1. Lack of Understanding 

Understanding a country’s culture is the key to success in any market, but few Western firms have been able to crack the China code. Much of this misunderstanding comes from the fact that China’s internet culture is vastly different from Western countries. 

One of the most well-documented examples of this problem comes from eBay Inc’s (NASDAQ: EBAY) attempts to conquer the Chinese market. The e-commerce company simply carbon-copied its American model and planted it in China. It was swiftly wiped away by Alibaba (NYSE: BABA) owned Taobao. 

Taobao understood that in China, shopping is a very social event, and created a forum-like system that allowed consumers to chat with one another and merchants, creating a personalized space. 

Sticking with e-commerce, Amazon is a massive failure story in China, having secured less than 1% of the market share there in the past 15 years. Much of this failure comes with the fact that China is a rapidly changing marketplace, constantly growing and accelerating, with convenience, mobile access and speed trumping other factors such as price. 

Starbucks (NASDAQ: SBUX) is another popular U.S. brand that is coming under pressure to adapt to China’s fast-paced expectations. Local Chinese competition such as Luckin Coffee (NASDAQ: LK) has adopted the Dunkin Brands (NASDAQ: DNKN) approach of ‘get-and-go’ takeaway coffee. In contrast, Starbucks has stuck to its strategy of comfortable coffee shops and settling with fewer, but larger locations. This strategy has seen Starbucks’ become a popular brand in China, but there is no denying that the threats to its dominance are mounting.

2. Poorly Chosen Partners

It can be next to impossible to enter the Chinese market alone, so most foreign companies need a local partner to help guide the way. Needless to say, this has not always worked out…

The main two problems with this strategy are that local partners can often be competitors, as well as the foreign firms failing to make the most of their partner’s resources.

Groupon (NASDAQ: GRPN) China is a great example of both of those problems. The American daily-deals site made a litany of mistakes on its ill-fated China venture, but among the biggest was its selection of Tencent as a local partner and its subsequent failure to use Tencent’s resources.

Tencent already had a sizeable number of its own competitors to Groupon, meaning the U.S. firm was unlikely to be a priority. Groupon failed to take advantage of Tencent’s resources, instead, bringing in Western managers and doing things the ‘American way’. Had Groupon asked Tencent for more help, it could likely have gotten better recommendations and staffed its offices with knowledgeable local talent.

Back in 2016, streaming giant Netflix (NASDAQ: NFLX) partnered with Chinese streaming service iQiyi and began sharing original content the following year. According to iQiyi CEO Gong Yu, this deal has now ended. His reasoning was that “because of the verification system and users’ tastes, the effect wasn’t that great, so we didn’t continue the partnership anymore.” Netflix currently holds no plans for a launch in the world’s second-largest economy. 

3. The Chinese Government

The Chinese government has not made life easy for U.S. firms that come into China, with the exception of Tesla Motors (NASDAQ: TSLA), which China recently allowed to build a Gigafactory and exempt from proposed auto-tariffs in the ongoing U.S.-China trade war.

Almost everyone has heard about the NBA fiasco back in October when the Houston Rocket’s sports franchise was blacklisted over its manager Daryl Morey tweeting support for pro-democracy protesters in Hong Kong. The entire NBA brand — which is worth $4 billion in China — has suffered a serious backlash, and has even seen partners such as Nike (NASDAQ: NKE) pull its brand from stores. 

Another recent example of government hindrance comes in the form of Microsoft’s (NASDAQ: MSFT) decline in the far East. In early December, China’s Communist Party ordered businesses in the country to remove foreign tech by 2022, including Microsoft. This move comes at a bad time for Microsoft in China, as its main rival there — Beijing based Kingsoft Corp — grows at a rapid rate. 

The move comes as a direct result of Chinese retaliation to sanctions in the U.S. which have targeted Chinese tech firms. 

Facebook (NASDAQ: FB) is another company that simply cannot get it right in China — or in any country it seems lately. Mark Zuckerberg learned Mandarin Chinese in order to endear himself to Chinese officials in a bid to make it in the giant country, but to no avail. Facebook is easily substituted in China by the likes of WeChat, and on top of this, it is opposed by almost the entire government. 

With so many regulations and Facebook’s policy of allowing almost all news to be displayed on its site, a censorship-favoring Chinese government was never going to back ‘The Social Network’s’ expansion in the East. Zuckerberg’s social platform is just not right for China, or its government and the same can be said for other social-media companies, including Twitter (NYSE: TWTR).

There are of course numerous other examples of the Chinese government hampering progress for U.S. firms, and that list could grow much larger the longer the trade war continues to rage.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.