Having just returned from a trip in China, where shots of “bai jiu” (literal translation “white wine/alcohol”) were forced down my throat in great volume over lunch (mind that I usually don’t drink alcohol!), I started to dig into a stack of articles I had saved for later reading. I vaguely remembered that a few months ago, the Financial Times reported on Chinese manufacturers wanting to make that vile liquid a global export success. And indeed, there it was: according to the March 19/20 weekend issue of the FT, Chinese consumers drink between 10 and 17 billion liters of the hard liquor made of fermented grains every year. Wondering how many of those liters were involuntarily consumed by foreigners who went through seemingly endless toasting rituals, I find this an ambitious undertaking. Apparently, Chinese manufacturers of bai jiu are hoping to replicate the global success of scotch, tequila, or Bailey’s, but I am almost certain that it won’t work. In addition to its Western-palate-challenging taste, a whopping 50-60 percent alcohol content also might be a bit of a turn-off. I seriously think that the Financial Times’ suggestion that it takes (only) 300 shots to stop disliking bai jiu is setting the bar to low. There may also be a cultural component to the high bai jiu consumption in China that will be a barrier to success abroad. Most of the time, bai jiu is consumed in a social setting – business partners around a round lunch or dinner table, regulated by invisible rules. At my recent trip, our host pointed out that there are four major insults in Chinese social settings – first, not accepting the invitation to a lunch or dinner; second, showing up, but not eating a lot; third, showing up and eating, but not talking; and forth, showing up, eating and talking, but not drinking (lots). And the drinking itself often follows a ritual that is indicative of both the paternalistic and collectivistic culture of China – the host directing his community of guests when to drink, with whom to toast, and how much to consume. It’s easy to see how through group pressure and by virtue of the host’s status, up to 17 billion liters of bai jiu are consumed each year. Based on tastes, but also because of the lack of the cultural context, I have serious doubts over the delight that bai jiu will bring to customers worldwide. Therefore, don’t expect to hear a lot of shouts of “Gan Bei” emanating from the West….
Archive for the ‘International Business’ Category
Western multinationals have dominated the global economy for the longest time, but the past decade has brought some change. So-called emerging market multinationals have stepped onto the global scene. Except for a few notable exceptions, they have still gone unnoticed in core Western markets, but have had considerable success and visibility in other emerging markets. One of those companies is Chinese electronics / smartphone company Xiaomi. The company, which was only founded in 2011, has around 10,000 employees globally, and is selling tens of millions of smartphones that are considerably cheaper than their competitors’. Often, new models, which are usually produced in batches of only 200,000 to 300,000 before a new iteration is launched, sell out within minutes, if not seconds. At a valuation of $46 billion, Xiaomi’s rise to success that is built on strong customer relations, innovativeness and agility has become a symbol of national pride, particularly among the younger population in China. In the last years, Xiaomi has proven that it can be successful in other emerging markets, including India and Malaysia, but there are questions whether its success can be replicated globally. Just one year ago, in July 2015, both Forbes and Bloomberg Technology hailed Xiaomi’s big splash in Brazil. A year later, things have changed for Xiaomi in Brazil, its first emerging market outside of Asia. Xiaomi is only selling around 10,000 units per month – in a market where a total of 47 million was sold in 2015. As a result, Foxconn’s production of Xiaomi phones is on hold (all phones will be imported), key employees (mostly in marketing and social media) will be returning to Beijing headquarters, the distribution strategy will be changed, and no new phones will be launched in Brazil. Only two models, the Redmi and the Redmi Pro will be available to Brazilian consumers for now.
So, what has happened? Why didn’t Xiaomi’s recipe for success transfer into the Brazilian market? Probably, because it was too much of a recipe – a recipe that didn’t respect the idiosyncrasies of the market. In Asia, Xiaomi was able to create huge buzz before phone launches and to build strong communities with their customers. Consumers were driven to Xiaomi’s own web platform where phones quickly sold out. In Brazil, Xiaomi not only failed to create the buzz, but also ignored the fact that Brazilian customers have different shopping preferences. In addition, differences in a – constantly shifting – regulatory environment also made it impossible for Xiaomi to sell certain accessories online. After having failed with their boilerplate strategy, Xiaomi is now moving away from online flash sales via its own platform, and moving towards sales through e-commerce partners and traditional retail. These also cater to Brazilian consumers’ preferences to pay for electronics via installment plans. Of course, the challenges in the general economic environment of Brazil in the recent past didn’t help either. Nor did the competitive environment as Samsung and Motorola have a very strong grip on the market.
What remains to hope is that Xiaomi doesn’t consider the Brazilian experience just a failure that they need to forget quickly. The experiences in Brazil could be a great learning experience for Xiaomi that will help them in other markets outside of Asia. If Xiaomi is as smart as their quick success suggests, they will understand that differences still exist, and that success doesn’t come easy in foreign lands.
Disney, or Di-Si-Ni as it is called in Chinese, might be up for another Disneyland Paris experience. At least, that is what Mr. Jianlin Wang seems to think. Last Sunday, Mr. Wang, who also happens to be China’s wealthiest businessman, gave an hour-long interview on CCTV, China’s state television. Criticizing Disney’s outdated intellectual property, the lack of a cultural fit, changing consumer preferences, and high prices, Mr. Wang lashed out pretty strongly. Of course, his opinions may be tainted by the fact that he is trying to break into the theme park business with 15-20 new locations over the next few years himself. Nonetheless, he made some interesting points in his interview. First, he poked fun at Disney’s poor choice of location. Shanghai is a huge metropolis with millions of visitors and a coastal population that has been exposed to Western tastes and lifestyles over a long period of time. However, so Mr. Wang, Shanghai is too cold in the winter and too humid in the summer to be an attractive destination for theme park visitors. For those who have followed the story of Disneyland Paris, the dangers of choosing a less than ideal location may sound all too familiar. When Disneyland Paris (then “Europdisney”) first opened, they seemed to have focused too much on the upside of market opportunities – predictions of a stable, growing economy, the upcoming opening of the channel between England and France, as well as Paris being the most popular tourist destination in Europe. What had been overlooked, if not deliberately ignored was the often nasty climate in the Paris area, as well as looming changes in the European economy and in global tourism. Mr. Wang also argues that Disney’s offering is not China-specific enough and presents a poor cultural fit with Chinese consumers’ demands. One might argue that Chinese consumers, just like consumers anywhere else worldwide, continue to be in love with everything from Mickey Mouse to Jungle Book to Frozen. True, but the Disney experience is about more than just characters and intellectual property. It is also about an entire experience and a service delivered – such as food that fits Chinese preferences, merchandise that is affordable, and friendly employees who make the happiest place in the world seem – well – happy. Again, the Paris experience should have taught Disney that all of these things do matter – from European’s distaste of overpriced fast food to labor relations and employee management that follows fundamentally different principles. Shanghai Di-Si-Ni will open to the public only mid June and the verdict therefore is still out. But it is an interesting – and expensive – experiment that we should continue to watch.
In a recent article, Fortune magazine questions Uber’s approach to global markets. Apparently, Uber has recently announced that it is loosing more than $ 1 billion in China annually, which is not a small sum to loose even for a unicorn valued more than $60 billion. One could easily attribute the losses to the fact that Uber is still engaged in a battle over market share with local competitor Didi Kuaidi. However, as the Fortune article correctly points out, local competition may just be one factor. There are also regulatory hurdles, friction with taxi drivers and unions, and challenges with consumer adoption – in China, and in other markets from “Rio to Rome“, as the Voice of America recently remarked. Similar troubles are reported in a recent online article by TechCrunch, which reports of Uber’s trouble with “aggression, legislation and government opposition” in Colombia. On the one hand, Uber has been remarkably sensitive to local conditions. For instance, they added motorbike service in India and auto-rickshaw serve in Pakistan, which is a smart way to localize its service offering. On the other hand, it seems as if Uber has often ignored the basics of international business that every student worldwide learns from standard textbooks. These basics include the necessity of a sound analysis of the external environment in foreign target markets. There is an abundance of simple analytical tools such as the PEST framework, the CAGE model or Porter’s Five Forces that can assist in these matters. Such analyses would probably have revealed to Uber that next to economic conditions (such as local competition) there are also political-administrative factors such as the regulatory environment, or socio-cultural factors (such as the importance of networks) that would pose serious questions for their market entry strategies. When it comes to regulation, rather than its aggressive John Wayne-style approach of shooting first and asking later, asking for permission first may have been better in some countries. For the same countries, a longer-term approach of building relationships first before executing on a strategy might also have been advisable. Then again, Uber is successful in many markets, and ignoring local conditions for the sake of a more or less standardized model may have been part of a deliberate strategy. There is, however, also the option that Uber is still a young company that will learn and get better overtime. Sometimes, learning from mistakes is the best way to learn.
American fast food holding company Yum Brands announced that it would restructure its China business. Normally, there’s nothing wrong with finding a better approach to deal with the local market environment (quite to the contrary, actually), but this case seems to be different. Yum’s major brands KFC and Pizza Hut have been struggling in the Chinese market in recent years (see other posts on this blog). First, in 2012, antibiotics and growth hormones were found in KFC chicken, then Pizza Hut made some bad calls with regards to their menu and pricing, and most recently competition from Chinese fast food chains got rather intense. Yum brands had lost their appeal and started to loose money. This led to Yum headquarters making a bold move by cutting the Chinese market loose from global operations. Had it only been in order to give local operations more control over decisions on their China strategy, this might have been a good move, but it’s been reported that it is largely an attempt to shield US operations from risk. That could mean even tighter controls and a narrower look on the financials, and it could also result in a complete lack of support. Potentially, even damage to the global brands could emanate from the Chinese market.
Whad’ya know? Wal-Mart is not only the company that had failed internationally before – readers of this blog know about the retail giant’s epic blunders in Germany or South Korea – it is also a company that seems to be able to learn from experience after all. Wal-Mart had long eyed the Indian market as it had seemed to offer great opportunities – a very fragmented retail sector and a huge number of current and emerging consumers. It was for that reason that Wal-Mart had entered a partnership with Bharti, and Indian conglomerate a number of years ago. In 2013, however, the marriage of the giants broke apart among allegations of bribery and a legal environment that was very unfavorable for foreign retailers. Rather than to pull out, Wal-Mart has learned its lessons and changed course. In August 2015, Wal-Mart will open its first new Best Price Modern Wholesale store – not a retail store for consumers but a wholesale store for retailers. There are no legal restrictions for foreign companies to operate wholesale stores, and there seem to be other benefits as well – Wal-Mart is being a good corporate citizen by not competing with small, independent retailers. Quite to the contrary, as the Los Angeles Times recently reported, Wal-Mart is actually making the lives of these stores easier by providing them with a one-stop-shop opportunity for all their sourcing needs. Wal-Mart has learned, and it believes that it can open around 50 of the new wholesale stores within the next five years in India. Well done, Wal-Mart!
Most of my inspiration for specific blog topics comes from current news items. And often, I discover those when traveling on long haul flights– one of the few times when my addiction to all things in print and some quiet downtime without interruptions intersect perfectly. June 17 was such an occasion. Two different papers ran a total of three stories with similar content. The Financial Times reports that European carmakers fear that the “China cash cow is dying”. Mercedes, BMW and their peers had such high hopes to be milking that cow for years to come, but recent developments have triggered a change of perspective. A slowing economy, rising global and domestic competition and limits of car ownership have led to anything from revised growth predictions for some to actual year-on-year declines in car sales for others. With similar declines in Brazil and Russia, this could end not so pretty for the automotive industry. Which leads me to an article the Wall Street Journal ran on the same day. Real estate developers, retailers, and consumer goods manufacturers alike have long predicted a gold rush in India – a market with a growing middle class. Or so, they thought. Over the last decade approximately 250 new shopping malls have been developed and it seems that many of them are struggling with weak sales. By now, so the paper, India’s middle class should have grown to approximately 400 million, but recent estimates by McKinsey count it at a meager 10 million. And, finally, the Financial Times also reports on Swiss food giant Nestlé’s recent decision to cut their African workforce in 21 different African countries by 15 %. At first glance, the reasons seem similar. Only four years ago, in 2011, the African Development Bank had estimated the African middle class at 330 million. A 2014 survey by Standard Bank, however, concluded that the middle was only approximately 15 million across 11 of Africa’s most important countries. On the other hand, however, that may not be the full story as the continued growth in Africa of retailers such as Wal-Mart or Carrefour suggests. Nestlé may simply have misjudged the demand for its highly standardized product offerings and it may have underestimated the challenges coming from poor logistics infrastructure. The truth probably lies in the middle, and that leaves us with a generally bad aftertaste: the promise that the BRIC countries held just a few years ago seems to be fading quickly. And if not even emerging markets hold any more promise, what does?
KFC has been in China for almost 30 years. The first of Yum Brands’ restaurants to move into China has reported sharp profit and revenue declines for their first quarter China business recently. Some media outlets such as the WSJ argue that, with competition increasing, the novelty character of brands such as KFC simply seems to wear off, while others such as Reuters reason that recent food scandals have hurt consumer perceptions of the brand. Yum Brands actually seemed to have done a decent job to cater to Chinese tastes by enriching their offering beyond the usual staples by offering localized variations and entirely new menu items, including coffee drinks. For a company that runs more than 6,000 stores, these are not trivial changes. Reality, however, is that the Chinese market is complex and adaptations to the market strategy have to be made constantly. The Chinese market has many moving pieces from being hyper-competitive to low brand loyalty to being very prone to ever-changing fads. Another cultural trait, the relatively distinct status orientation of Chinese culture makes Yum’s latest move an interesting one – the addition of high-priced Italian restaurants to its portfolio. Viewed from the rabbit hole of international marketing, the question seems to be how much of this development is rooted in the many idiosyncrasies of China and how much is just the normal maturity of a brand along the product life cycle?
According to a variety of news outlets, California-based restaurant chain Johnny Rockets is planning for a major expansion in China. The 1950s themed chain currently has more than 300 corporate- and franchise-owned restaurants, about a third of which are in international locations. For the expansion, the company already entered into a joint venture agreement with its operator and franchise partner in Malaysia and a Malaysian owner-operator of department stores (that will also serve as locations in China). Beginning in 2016, Johnny Rockets will put approximately 100 stores into various locations throughout China. China definitely has an appetite for foreign fast food, especially if it is tied to a unique experience, but the road may be bumpy. The chain is following the likes of McDonald’s, KFC and Burger King, which have all had to manage steep, painful and expensive learning curves. It is to be hoped that Johnny Rockets will learn from their competitors’ mistakes, and make important adaptations to their business model and their menus. This author is not so sure if the chili cheese fries will catch on in China. Maybe we’ll read about Johnny Rockets again in the not too distant future…