There are myriad examples of highly prominent non-Chinese companies who have attempted to do business in China, only to be forced to retreat later with their tails between their legs. Uber, Google, Asos … The list goes on.
Challenges companies face when doing business in China
Executive director of Global Rev Gen, Rob Brown, began his presentation at the Access China Summit 2017 with this quote from former Chinese leader, Deng Xiaoping:
“Black cat, white cat – it doesn’t matter … As long as it catches the mouse.”
In other words, non-Chinese companies are not necessarily doomed to failure in China. But in order to catch the mouse – in this case, the Chinese consumer – they have to let go of many pre-conceived notions they may have had about how to operate in this landscape. As Brown says, “If you are playing in the Chinese arena, it’s all about catching that mouse and, as many of us know, a Western mousetrap doesn't always work in China.”
Non-Chinese companies are not necessarily doomed to failure in China.
So what were the underlying reasons that non-Chinese companies failed in China, and what lessons can be learned from their mistakes?
According to Rob Brown, the reasons non-Chinese companies come undone can be broadly classified under three categories: red dragons, red ink and red envelopes. In today’s post, the first part of a three-part series, we’ll look at the first of these categories: red dragons.
Red dragons: power and control
In China, the dragon is a symbol of power and control over the natural elements, and in particular water, rainfall, typhoons and floods. As such, it is an apt metaphor for the Chinese business landscape, over which power is wielded, not just by local competitors, but also the Chinese government, in unprecedented ways. It is a power so potent that, when faced with it, some of the biggest companies in the world have crumbled.
In his presentation, Brown focused on three of the biggest businesses to come undone by Chinese mechanisms of power and control, known as China internet filtering.
Uber is one of the latest casualties of the Chinese market, with Uber China being bought out by rival Didi Chuxing, China’s most popular ride-hailing service, in August 2016.
Uber had assumed the market was perfectly poised for Uber: the population was dense, car ownership was low, their tech was superior to existing apps, and they thought the lessons they had learned in other markets, like India, could be applied to China.
But they severely underestimated the power of their competitors. In December 2015, Lyft forged a coalition between GrabTaxi, Ola and Didi Kuaidi, three of the largest ride-hailing companies in Asia, in order to compete with Uber, and in June 2016, Didi Chuxing announced it had brought in $7.3 billion in its latest round of fund-raising, which included Apple and Alibaba as investors. In the end, Uber had to concede it was too expensive for them to compete in price wars in China.
Uber also vastly underestimated the importance of being on the most widely used platform in China, WeChat, in which Didi Kuaidi was embedded. As Brown succinctly put it, “No WeChat marketing, no way.”
While most people assume Baidu was simply a Chinese imitation of Google, what many don’t know is they actually both emerged around the same time in 1998. In fact, Google was one of Baidu’s early investors. At the time, investing in their main competitor seemed like a “safe bet” to Google, but it was not enough to ward off Baidu’s advances.
Google had some initial success – by 2002, it boasted an estimated 25 per cent of search traffic in China. But by September of that year, the site had vanished – Google had been blocked by the Chinese government. This forced Google to host their site within the “Great Firewall”, making them more subject to the Chinese government’s stringent censorship laws, which caused massive slowdowns and data jams on the site.
Google had assumed “soft censorship” would be enough to appease the authorities, but this turned out not to be the case. There were also rumours that Baidu may have been at least partially responsible for instigating the block, and had themselves benefited from “covert government intervention”. Google also maintains they had been hacked by government-sponsored hackers.
In the end, Google was forced to withdraw, with co-founder Sergey Brin saying China was simply not a market that matched Google’s philosophical values.
Like Google, Facebook faced an uphill battle against China’s censorship laws, a battle that was finally lost when activists used Facebook as a means of communication to organise the July 2009 Ürümqi riots, causing the government to block the site altogether.
The reality is, says Brown, if you can’t censor your content, you can’t play in China, and the government has the power to shut down your site at any time, without warning. Brown recounts this happening to his former company, Navitas; it took a month for them to get the website back online in China.
In this environment, it’s very difficult to compete against local competitors, like RenRen, in the case of Facebook, who are perhaps less heavily scrutinised and penalised.
There’s some indication that Facebook CEO Mark Zuckerberg hasn’t given up just yet. He’s been learning Mandarin and visiting the country regularly, and recently it has been reported that Facebook are creating tools to censor content on its site. If Facebook do succeed in getting the site unblocked in China, there will be a tough road ahead as they try to play catch-up with local Chinese social media.
How to succeed in the China market?
As Brown says, issues like this occur because people misunderstand or underestimate the political climate and the local regulations, and the profound effects these can have when one is doing business in China. A lot of the time, this is because they don’t have local partners on the ground who have a barometer on the current political and business mood – indeed, Google’s site was hosted out of California before it was forced to move to China.
There are signs Facebook may have learned their lesson – reports this month say that Facebook are quietly scouting for office spaces in Shanghai, indicating they may soon be establishing an office there despite still being banned.
To succeed in the China market, it is important to do your own research to understand the Chinese business culture. The digital platforms and social media landscape are vastly different to the Western world, and it is fundamental to adapt and tailor your market entry approach accordingly to appeal to the Chinese digital consumer.