In the past few months, U.S. federal prosecutors have cracked down on shipments of high end cars to China. Dozens of luxury vehicles at U.S. ports and millions of dollars in U.S. bank accounts have been seized. What had happened? Are U.S. car manufacturers no longer interested in the Chinese market? Not at all! The seized cars were mostly BMWs that were purchased by straw men and their “employers”in the U.S. for resale on the grey market in China. With a sticker price for a BMW X5 xDrive 35i of around $56,000 in the U.S. and around $153,000 in China - almost three times as much – there’s a huge potential for profitable wheeling and dealing between the two countries. Driven by their need for status and prestige, Chinese consumers are willing to pay the price for a foreign luxury car, and BMW and other manufacturers naturally want it all for themselves, and so they have taken legal action. All legal aspects aside, what’s interesting is that this is a perfect case of global price discrimination / differentiation – volume positioning in the U.S. and premium positioning in China. Based on the cultural conditions in the local environment, global companies are leveraging these price differentials to their advantage and – as has been shown in this case – are trying to protect this advantage as long as possible.
Posts Tagged ‘China’
In the past, H&M may not always have met analyst’s expectations, it may have taken some heat over the use of Photoshop in some ads, it has been criticized over unfair labor practices, but from this blog’s angle, the Swedish multinational seems to be doing things right in international markets. Considering high profile retail failures such as The Gap’s in Germany, Fresh & Easy’s in the U.S. or WalMart’s in Korea, H&M has been navigating foreign waters without major blunders so far. One of the markets where H&M is very active and expanding is China – a market in which many foreign entrants fail. While H&M did have some run-ins with authorities in China over product quality – excessive PH levels, weak crack resistance, and lower fiber content than claimed, it has all been very contained and hasn’t hurt them. In September 2013, after a year of rapid growth and expansion, H&M opened it’s 3,000th store globally in China where it currently has 170 stores. While this puts H&M behind Inditex’s Zara’s 400 plus stores in China, H&M has ambitious plans for future expansion in the Middle Kingdom. Analysts say that H&M is filling a mid-range gap between sports apparel and high-end luxury clothes in China. By bringing affordable clothes to the market they are catering to the needs of younger Chinese consumers who want Western style shopping experiences and clothes that provide some degree of status that an established global brand conveys.
People who follow foreign companies in China are well aware of the challenges that Danone has had in that market over the last few years. We’ll never quite know why Danone’s joint venture relationship went sour (not good for a company dealing in dairy products…) but it may not be completely unfair to assume that it often takes two to make and two to break a relationship. The simplistic and official story is that Wahaha reneged on a deal to let Danone buy the majority stake in the joint venture, after which Danone filed for arbitration and then took legal action. It probably was right there when the real trouble started. In China, you don’t sue your partner before a court of law, you chit-chat it out. But there was definitely more to it, including the fact that the Chairman of Wahaha, Mr. Zong Qinghou didn’t exactly appreciate the tight shackles that Danone placed on him in all business decisions – not recognizing that China is a market that often calls for entrepreneurial approaches rather than the central control that French companies are known for.
But these are things past. More importantly, Danone seems to be in the middle of its next quagmire. Granted, it was unfounded allegations of contamination that caused their Dumex baby food division to recall baby formula on a large scale, but the allegations of price fixing in the same product market were very real and ended in a fine ordered by Chinese courts (a total of $ 110 mio including five other companies) and more negative press by the media which is just waiting for Danone to get more scrambled egg on its face.
Then, as the Wall Street Journal reported last week, Danone’s Nutrica unit, a division which specializes in medical nutrition, had to deal with allegations that it bribed more than 100 doctors at more than a dozen hospitals in Beijing. How much more does Danone want to work on the image of the ugly, imperialist company? If that’s their goal, they can stop, because they have succeeded! If not, they can stop, too, because it is time to embark on a focused campaign to restore their own image and that of Western companies in China in general. And if they don’t care about image (let alone about being a good corporate citizen), maybe Danone should simply look at their challenges in China from a bottom line perspective as sales are already declining.
As the English edition of the Chinese newspaper Renminbao (People’s Daily) reports, fourth quarter sales at Yum! Brands, the parent company of Kentucky Fried Chicken (KFC) and Pizza Hut have significantly declined. What has happened in the Middle Kingdom that not only has a huge love for chicken dishes, but also for foreign brands, a market that has been promising nothing but growth for the fast food giant? It all started out with a media report on China’s national TV station CCTV in December 2012. The broadcast alleged that some poultry farms, among them suppliers to KFC, ignored regulations by using hormones and antibiotics, and triggered unfavorable media attention and social media activity. An investigation by authorities in Shanghai only resulted in some vague recommendations concerning a strengthening of KFC’s supply chain, but no fine was assessed and no further action was taken. Unfortunately, as is often the case in such circumstances, the good news got much less media coverage than the original bad news. And so the Chicken scare started to nest in the minds of the Chinese consumers. As the Economist reports in its February 9th issue, KFC’s January sales in China fell by a dramatic 41 %. What makes this even worse is the fact that Yum! doesn’t operate under the usual franchise system in China, but owns most of its stores. With currently approximately 5000 restaurants in 800 Chinese cities, this is a costly development to digest – probably worse than eating a big bucket of deep fried poultry. KFC’s example just shows how tricky it can be to operate in far-away markets. Cultural, geographical and legal distance make it very difficult to first perceive and interpret the early warning signals correctly and then to react quickly and appropriately. Often in such cases, foreign companies quickly pick up the stigma of being an imperialist monster that has no respect for the local environment and whose only interest is exploitation of the local market. Or, in this case in the words of the Economist, to be the “Yucky Kentucky”!
Not too long before US-based DIY giant Home Depot announced it’s almost complete withdrawal from China, similar news emerged about Europe’s largest home improvement retailer, Kingfisher PLC. Kingfisher, founded in 1969, which owns the B&Q and Castorama brands, operates close to 1,000 stores in eight countries including Britain, Ireland, France, Poland, Spain, Turkey, Russia and China. Kingfisher has been struggling in most countries, but it’s China troubles seem to be of a different magnitude. Ever since it first entered China in 1999, it has been uphill for Kingfisher in the Middle Kingdom. When losses hit more than $ 80 million, B&Q decided to cut the number of stores by 22 in 2009. Realizing that the “big box concept” is not very appealing to the Chinese market, it also downsized operations for its remaining 40 stores. As has become apparent in the recent Home Depot case, B&Q may be struggling with exactly the same difficulties – the fact that for cultural and economic reasons, the entire DIY concept is too foreign to most Chinese consumers. And for those who like the idea of tiling their own bathrooms and flooring their own living rooms, there is a plethora of local alternatives in a highly fragmented market. After all, brand is not as important in the DIY segment as it is in more visible FMCG categories. All in all, another case of the difficulties associated with the internationalization of retail businesses.
Late last week, US-based home improvement giant Home Depot announced that it would take a $ 160 million after-tax charge and close seven of its big-box home improvement stores. Home Depot entered China with high hopes in 2006 when it acquired 12 stores across China. Over the years it had reduced the number of stores to the seven it is now closing. Home Depot, which of course also sources heavily from China, does have plans to keep two speciality stores in the city of Tianjin and also to be active in online retail, but for now the dreams of making it big in a market of more than a billion consumers are over. While it is true that many retailers in China are currently struggling as slow economic growth is curbing consumer spending, the roots of Home Depot’s failure may be somewhere else.
The first reason may be that China is not so much a Do-it-Yourself (DIY) culture, but more of a HIDBO (Have-it-done-by-others) culture. Cheap labor is abundant, but even more importantly for a culture that values status and prestige, tiling your own bathroom or painting your own window frames is not necessarily a desired activity for the masses. You may ask why it then is that IKEA is hugely successful in China – a company that also makes you assemble your own furniture. The answer leads us to the second reason behind Home Depot’s failure. Chinese are looking for guidance in acquiring Western lifestyles. IKEA provides this guidance by showing their customers how to decorate their homes in a Western fashion. The fact that you have to assemble your own furniture is a little more appealing when you know what the final product is supposed to look like. Besides, there’s always someone to assemble your IKEA furniture for you. Home Depot, however, leaves consumers largely alone and guessing about the final look and feel. Also, most Chinese live in small apartments and don’t have the room to keep tools or work on DIY projects. And ultimately, Home Depot is selling commodities – nails, screws and paints aren’t necessarily the same cultural icons like IKEA, McDonalds or KFC that so many Chinese middle class families are looking for. There may also be a third reason. Generally, as has also been featured in this blog, retail somehow doesn’t travel easily across international borders. But that’s for another time.
Who would have ever thought? Not only is Volvo in Chinese hands, now Saab is, too! Zhejiang Youngman Lotus Automobile Co. and Pang Da Automobile Trade Co. of China have announced that they will purchase insolvent Saab for approximately 100 million Euros. What remains to be seen are two things – first, if the Chinese will really be able to pull off the deal. Not too long ago, another Chinese carmaker’s plans to take acquire Hummer from General Motors have been barred by Chinese authorities. Second, if the deal comes through, will Swedish and Chinese cultures be compatible with each other?
Interesting piece in the McKinseyQuarterly about metrics for Chinese exports. Very much in line with my recent postings, this contributes a bit to the debunking of the China myth. Don’t be afraid! All will be good!
Not too long ago, at the end of the 1980s (although I acknowledge that for some of the followers of this blog this equals a lifetime), Japanese investment in the United States peaked at about US$ 20 billion. By then, management scholars had long begun to study the Japanese miracle. Based on a general fear that Japanese companies would completely control the US economy, US authors such as Bill Ouchi (in his 1981 book ‘Theory Z: How American Management Can Meet the Japanese Challenge) introduced new ideas, and US companies implemented new processes such as the Toyota system of manufacturing. Everybody was up in arms about the Japanese threat. As always, history seems to repeat itself.
In the context of Chinese president Hu Jintao’s recent visit to the US, there have been nervous reports about Chinese companies taking over US businesses. And indeed, there have been some well-publicized cases – Chinese consumer electronics producer Haier’s early Greenfield investment in 2002, or the more recent Beijing Automotive Industry Company’s (BAIC) acquisition of General Motors’ Saab division, Beijing West Industries’ purchase of Michigan-based automotive supplier Delphi Corporation, or numerous smaller investments in US companies by China Investment Corporation (CIC). Obviously there’s enough activity to make The Economist cry out that China’s buying the world and to ask the question what it is like to be ‘eaten by the dragon’ (The Economist, November 13th, 2010). Relax, knowledge of foreign languages is always a good thing, but it isn’t time yet that we all learn Mandarin. Why? Let’s take a closer look at the data: Out of the total book value of foreign direct investors’ equity in US companies in 2009 (it’ll take a while until we have 2010 data) of US$ 2,319.6 billion, China’s share is still insignificant. The largest investing countries are still based in the Western Hemisphere – the United Kingdom (19.6%), the Netherlands (10.3%), Canada (9.7%), Germany (9.4%), Switzerland (8.2%), and France (8.2%). The only exception, of course, is Japan which holds about 11.4 % of the total foreign direct investment in the United States. In a July 2010 report by the Bureau of Economic Analysis (BEA), China isn’t even mentioned – and that’s for a good reason: China’s total assets in the US are about a 300 times smaller than those of Japan. Even small countries’ foreign direct investments in the United States such as Austria or Panama are larger than China’s. Of course, there’s no question that Chinese investment in the US is growing fast and may soon outgrow the “Other” category on the BEA pie charts, but it’s still to early to panic. And even if China held a lot more assets in the United States, it probably would not mean the end of the world just like Japanese investment in the United States hasn’t. The world is flat, and an increased involvement of China in US companies may be a source of (desperately needed) capital, (desparately needed) new energy and motivation, learning, and global stability.
News agency Reuters reported on Friday that Disney and Shanghai Shendi Group have signed an agreement on the establishment of a Disneyland theme park in Shanghai. On an area of about four square kilometers, a total investment of approximately $3.75 billion will bring Mickey & Co. to Middle Kingdom.This should have really been big news, but it wasn’t. The media didn’t jump on it, and even the stock markets didn’t seem to notice (yet). Why not? One possible explanation could be that no one is really certain yet what the expansion into Mainland China will do for Disney. Disney’s Hong Kong theme park hasn’t really attracted as many visitors as it has hoped so far, and has reported a loss last year. Then again, it doesn’t seem to be as big a blunder as Eurodisney has been for the longest time. So, nobody really knew if the Shanghai theme park will be a source of revenue or a source of ridicule for Disney.
Another explanation is that the news is really old news. As of now, the plans are to open the Shanghai Theme Park in 2014. Considering that the negotiations have been going on for about a decade, and given that even one year ago there have already been announcements about an agreement, why should anybody bother to look up from their cup of green tea now? Approval from China’s central government is still pending, and it’s almost certain that there will be more hurdles and milestones after that.
Everyone familiar with the story of Disney’s resort in Paris can only hope that this time Disney will look beyond the mere potential of a huge market. If Disney wants to be successful from the outset, it needs to focus on the cultural differences that stand between their business model and Chinese visitors.