Ed. Note-today we have a guest post from Michael Short who is the CEO of Pacific Strategies and Assessments (PSA). Mike reports on some of the current issues facing western companies doing business in China.
China has long been a highly complex market. Fraught with a myriad of business risks, foreign companies consider potential access to China’s 1.3 billion consumers as too enticing to ignore. For many multinational firms, the prospect of long term gains outweigh entrenched risks such as corporate fraud, intellectual property theft, regulatory uncertainty, an increasingly nationalistic consumer market, and conforming to anti-bribery legislation.
As the Chinese market matures, change in consumer preferences, regulatory oversight, and media scrutiny will present renewed challenges for foreign corporations. Most notably:
1) China’s growth is moderating. Real GDP growth slowed to 7.7% in 2013 from its breakneck double-digit growth that peaked at a whopping 14.2% in 2007.
2) Costs are rising. It was inevitable that China would reach a tipping point whereby labor costs would rise with the expanding middle class and improving standards of living.
3) Intensifying Competition from Chinese firms, which are offering comparable products to their foreign competitors, but often at cheaper prices.
4) Increasing hostility to foreign brands. The social media savvy Chinese consumer and local media, often at the behest of the government, are becoming increasingly hostile and critical of foreign companies.
Enter the Dragon
It used to be that Chinese consumers associated foreign brands with quality and prefered them over the Chinese brand equivalents (or imitations), but now many Chinese brands have become trusted household names in their own right and are sold at a cheaper price – giving their foreign competitors a run for their money. Chinese consumers often prefer to buy Li-Ning instead of Nike and Xiaomi and ZTE smartphones instead of Apple’s iPhone.
The growing relevance of Chinese brands has changed the competitive landscape. Furthermore, this strenthened position of Chinese products in their market, combined with an often hostile attitude to foreign companies, is now giving rise to a “we don’t need you anymore” message to foreign companies.
Recently, foreign enterprises have found that they are facing increasing antagonism in the Chinese market. It is becoming increasingly common for state-run media organizations, such as CCTV or Xinhua, to conduct publicized “investigations” of foreign companies, usually portraying their targets as trying to cheat or take advantage of the Chinese consumer.
The attacks are often unfounded. Starbucks, which has done a remarkable job building a brand in China, came under intense media fire in 2013 for pricing its beverage products higher in China than in other markets. While the coffee-shop chain had a reasonable defense of its pricing policy, including the high shipping costs and tariffs China imposes on coffee bean imports, netizens and the media reproached Starbucks for charging a premium. Starbucks also came under attack for using a chemical in their baked goods, despite the fact that the additive is legal and widely used across China.
These media rants at times seem awkwardly targeted or retaliatory. On International Consumers Day in 2013, Apple found itself the target of a Chinese state-run media exposé on its product warranty policies. According to reports, its one-year warranty on consumer electronics components was in violation of Chinese law that requires a minimum two-year warranty. Additionally, it was stated that Apple’s policies seemed more generous in markets outside of China. Apple had operated in this unenforced legal grey area for years, so why had it suddenly come under attack? Some attributed it to Apple’s market-share growing too fast at the expense of Chinese brands, while others saw it as retaliation for US President Barack Obama’s accusations of China’s involvement in corporate espionage.
Foreign companies often relent under pressure in an attempt to calm the consumer backlash. Apple apologized to the Chinese consumer and changed its warranty policies to be consistent with Chinese law and its other global policies.
The China Market – Changing Times for Foreigners
In December 2013, car makers Jaguar Land-Rover, Subaru and Audi were accused by state broadcaster CCTV of charging ‘unfair prices’ for spare parts. These companies denied the accusations, but are now faced with defending themselves in the ‘court of public opinion’.
Chinese media also relishes in any case involving foreign firms having similar problems as its own domestic firms. New Zealand dairy giant, Fonterra, had to recall its milk powder exports to China for food safety issues. This had resonance in the market due to the widely publicized milk-powder scandal involving large Chinese companies who were caught adding illegal additives to milk supplies with official connivance; resulting in a number of infant fatalities, market panic and the state-ordered executions of several industry executives.
A recent survey released by the US-China Business Council found that fewer US businesses were viewing China as a top priority. This is mainly due to rising costs, heightened competition with local brands and difficulties obtaining business approvals from local regulators. Most respondents believed that Chinese state owned enterprises received favorable treatment when compared to foreign firms.
The Party is still not over – but gatecrashers beware!
While these factors are indeed game-changers, and do point to a significant change of attitude within the Chinese market to foreign firms, they are not by any means signs that the party is coming to end. China is the world’s second largest economy and therefore is a market that cannot be ignored. While growth is slowing, even the most conservative estimates for China’s growth in 2014 are in the range of 7%.
The Chinese government is implementing market reforms to boost consumption and increase reliance on market forces over state-control. If implemented correctly, market opportunity will increase while market policies should be more balanced. China’s stated policy is now to relax market entry requirements for foreign firms in the areas of finance, medical care and education; although this is seemingly currently at odds with events on the ground.
Foreign companies like Starbucks, Apple, and Audi will always be able to operate in China – but they are now aware that the market is changing and they know they will have to become more attuned to ‘local’ attitudes and perceptions to fit in.
The government is also keen to promote Chinese companies in the domestic market. Once proven successful in China, they are encouraged to proceed to the global stage. This will enable the market to evolve from an investment led model to one that is consumer-led.
China’s current Five-Year Plan (12th Five Year Plan, 2011-2015) provides some insight into the areas of the economy that the Government seeks to champion. The current plan is largely focused on gearing China’s economy away from low-cost, high volume manufacturing to high-technology research and development projects. China plans to invest heavily in promoting innovation, in areas such as IT, biotechnology, high-end equipment, new energy, environmental technologies and clean vehicles.
These are areas of opportunity for foreign brands but there are obvious risks to foreign companies operating in such cutting edge sectors in China. Thus, finding the right balance between the advantages of selling advanced technology and expertise in China and protecting one’s intellectual property, brand and reputation is imperative.
Michael Short is based in Hong Kong and is the CEO of Pacific Strategies and Assessments (PSA). PSA is the premier Asian business risk consultancy with offices across China and Asia-Pacific. PSA are privately owned and therefore truly independent and free of conflicts of interest. Clients hire PSA with confidence. PSA provides comprehensive and integrated solutions to manage the business risks our clients face in Asia. Specifically we provide Market Entry and Intelligence, Enhanced Due Diligence, Security and Crisis Management and Corruption and Fraud Prevention Services – enabling our clients to make informed decisions about their business. We are recognized across the region as the leading provider of timely, accurate and business-focused risk solutions. Our clients include global financial institutions, oil, gas and extractive companies, manufacturers, power and energy providers, retail and professional service firms. PSA helps clients minimize the risks and maximize the benefits of doing business in markets that are complicated by political and economic uncertainty, endemic corruption, terrorism and lax rule of law. For further information please contact us at firstname.lastname@example.org .