international business: Case 2: Will China Continue to Be a Growth Marketplace?

Case 2: Will China Continue to Be a Growth Marketplace?
Will China Continue to Be a Growth Marketplace? China is expected to have some 200 million people in
the middle- and upper-income categories by the early 2020s. This is a tenfold increase in people with
significant purchasing power in China in the last decade, from only about 17 million people in these
income brackets as recently as in 2010. China’s purchasing power for virtually all products and services
has strong potential, and foreign companies now strategically try to take advantage of these market
opportunities.
What have we learned culturally that can help companies establish themselves in China’s marketplace?
What went wrong early on? The experience of well-known companies such as Best Buy and eBay can serve
as a learning experience for others. From a retail perspective, the motivation for many foreign companies
to enter China some years ago—beyond those companies that have been in China for decades to achieve
low-cost production—was the triple growth of the Chinese economy that was seen from 2000 to 2010.
With this growth, China overtook Japan to become the second-largest economy in the world behind only
the United States, and its large population makes for an enormous target market. Investment from foreign
companies was the largest driver of China’s growth. Many companies also increased their exports to
China. The United States, for example, saw its companies increase exports to China by 542 percent from
2000 to 2011 (from about $16.2 billion to $103.9 billion), while total exports to the rest of the world by
U.S. companies increased by only 80 percent in the same time period. Exporting to China has become
somewhat stagnant in the last few years, now representing about $113 billion.
Interestingly, domestic consumption as a share of the Chinese economy has declined from 46 percent to
33 percent. This consumption decline—coupled with slower growth globally—has raised questions about
China’s momentum. Right now, around 85 percent of mainstream Chinese consumers are living in the top
100 wealthiest cities. By the early 2020s, these advanced and developing cities will have relatively few
customers who are lower than the middle- and upper-income brackets by Chinese standards. The
expectation is that these consumers will be able to afford a range of developed nations’ products and
services, such as flat-screen televisions and overseas travel, making the Chinese customer much more of
a target for a wide variety of consumption.
But can the unprecedented Chinese growth really continue, and would it come from increased
consumption? The resounding answer is yes, according to McKinsey & Company. McKinsey found that
barring another major economic shock similar to what we saw in 2008, China’s gross domestic product
(GDP) will continue to grow, albeit not at the historic levels seen between 2000 and 2010, when it grew
about 10.4 percent annually. The growth in the 2020s is expected to be about 5.5 percent per year (until
2030), which is still far above the expected growth for the United States (2.8 percent annually), Japan (1.2
percent annually), and Germany (1.7 percent annually). And the key is that consumption will now be the
driving force behind the growth in China instead of foreign investment. The consumption forecast opens
up opportunities for foreign companies to engage with Chinese consumers who are expected to have
more purchasing power and discretionary spending.
But culturally translating market success from one country or even a large number of countries to the
Chinese marketplace is not necessarily as straightforward as it may seem. Often, a combination of naiveté,
arrogance, and cultural misunderstanding have led many well-known companies to fail in China. Lack of
an understanding of issues such as local demands, buying habits, consumption values, and Chinese
customers’ personal beliefs led to struggles for companies that had been very successful elsewhere in the
world. And as global as China is becoming, cultural differences still get magnified in the Chinese
marketplace. Let’s take a look at Best Buy and eBay as two examples.
Best Buy, the mega-store mainly focused on consumer electronics, was founded in 1966 as an audio
specialty store. Best Buy entered China in 2006 by acquiring a majority interest in China’s fourth-largest
appliance retailer, Jiangsu Five Star Appliance, for $180 million. But culture shock hit Best Buy, best
described by Shaun Rein, the founder of China Market Research Group. First, the Chinese will not pay for
Best Buy’s overly expensive products unless they are a brand like Apple. Second, there is too much piracy
in the Chinese market, and this reduces demand for electronics products at competitive market prices.
Third, like many Europeans, the Chinese do not want to shop at huge mega-stores. So, these three
seemingly easy-to-understand cultural issues created difficulties for Best Buy.
eBay, the popular e-business site focused on consumer-to-consumer purchases, was founded in 1995. The
company was one of the true success stories that lived through the dot-com bubble in the 1990s. It is now
a multibillion-dollar business with operations in more than 30 countries. But China’s unique culture
created problems for eBay. Contrary to the widespread cultural issues that faced Best Buy, one company
in particular (Alibaba) and one feature more specifically (built-in instant messaging) shaped a lot of the
problems that eBay ran into in China. Some 200 million shoppers are using Alibaba’s Tmall and Taobao
platforms to buy products, and the company accounts for almost 80 percent of online transaction value
in China. Uniquely, Taobao’s built-in instant messaging system has been cited as a main reason for its
edge over eBay in China. Basically, customers wanted to be able to identify a seller’s online status and
communicate with them directly and easily—a function not seamlessly incorporated into eBay’s China
system. Clearly, built-in instant text messaging is a solvable obstacle in doing business in China. It sounds
easy now that we know about it, but it may not always be the case when we take into account all the little
things that are important in a market. How can a foreign company entering China ensure that it tackles
the most important “little” things that end up being huge barriers to success?
Case Discussion Questions
1. Will China maintain its strong economic growth in the years to come? Some suggest it will until
2050. What do you think?
2. If China will go from 17 million to 200 million middle- and upper-income people by the early 2020s,
would the scenario presented by Best Buy not be applicable anymore? Would newly rich Chinese
customers engage in this purchasing in the 2020s?
3. With Alibaba’s ownership of the very popular Tmall and Taobao online shopping systems (similar
to eBay and Amazon) and its spread across the world, will a Western-based online shopping
culture ultimately infiltrate China?

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