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Why American Companies Fail in China. A Contrarian View.

Posted in China Business

I love baseball and basketball and I like football. What I most like about football is that any idiot (myself included) can on Monday morning blame such and such loss on such and such coaching shortcoming. You can, of course, do that in baseball and basketball as well, but it just ain’t quite as satisfying.

Monday morning quarterbacking, that’s me.

Oh, and I love doing it with trials to. The OJ trial? I would have won that one for the prosecution because I never would have done the cross of OJ like that. The William Kennedy Smith rape trail? There’s a reason I stayed up watching just about every bit of it: so I could tell you why I would have won it by destroying Ted Kennedy, not kowtowing to him.

Seriously though, I know for a fact that I’d make a lousy football coach (because I was a lousy basketball coach and I know that game ten times better than I know football) and I do not really believe that I could have changed those two famous criminal trials by dint of my great lawyering. But hey, it’s fun to talk about it.

Consultants and journalists love to talk about foreign companies that fail in China. Why? Because doing so shows how much they know and how they would have done things so differently and so much better.  Yeah, whatever.

CNBC did a doozy of a story explaining to China neophytes exactly how dumb various big companies were in failing in China. The big companies being, Ebay, Home Depot, Mattel/Barbie, and Google. Problem is that I am just not at all convinced.

Let me explain.

Home Depot. The article talks of how Home Depot went into China and failed because it just didn’t know China is “not the land of DIY.” According to the article, Home Depot opened 12 stores in China in 2006 and closed everything down six years later, leaving with its tail between its legs.

Really? First off, China is difficult for any foreign retailer. Retail in China is both very different from the United States and not at all easy or inexpensive. Home Depot’s retail operations in China did not succeed; that is obvious. But what is not obvious and what is not mentioned in this article is that Home Depot buys a helluva lot of product from China and, near as I can tell, they are real pros at this. Also not mentioned is what Home Depot actually lost in dollars in China and how those dollars stack up to its earnings. I do not know the numbers here, but I would bet that Home Depot’s China venture was but a blip on a blip for the company overall.

And nobody mentions what Home Depot should have done instead of trying China with twelve stores? Should it have conducted marketing studies? I’m skeptical that would have revealed much. Maybe those twelve stores were its marketing study. Big companies do that sort of thing all the time. Why not if you can afford it? I mean, Home Depot might have spent millions on surveys and marketing studies and focus groups and all that stuff and still have not really known whether its stores would have failed or succeeded without having actually having opened a few of them. I give Home Depot credit for having the guts to go into China first. It might very well have worked out. It didn’t. So what? Does anyone really believe that had Home Depot not gone in we wouldn’t be reading articles quoting pundits criticizing Home Depot for being overly cautious and missing out on 1.3 billion customers?

Mattel. The article rags on Mattel next for having spent $30 million dollars opening a Barbie store in Shanghai.  Just by way of a bit of comparison, Mattel’s revenues in 2012 were about $2.1 billion dollars. So spending $30 million on a store that didn’t work (who knows how much Mattel lost in total on this store, but I would guess it was less than $30 million not more) is just not a big deal. And again, let me make clear that Mattel, near as I can tell, is a huge success in China. One store didn’t work and was shut down, but Mattel toys seem to me (from my own observations) to be doing just fine in China and, despite a few hiccups, Mattel buying from China seems to be doing just fine too. It also would not surprise me a bit to learn that Mattel learned so much from its failed store that its increased sales of Barbies to China alone increased by more than the amount it lost on this store. And again, are we to blame Mattel for having tried this? I sure don’t.

Ebay. In the article, an Ebay spokesman says that ”It’s frustrating that people say we failed in China…. [because] from our perspective, we now have a very successful, large, and continuing-to-grow export business.” For all I know that is true. Maybe Ebay’s business in China evolved and is very different from its more visible businesses elsewhere.  Which leads me to the next company in the article, Google.

Google. The article says that companies must either do what might be considered “unsavory” or get out. But that simply is false and Google itself is proof of that. I ate in Google’s Beijing cafeteria not so long ago and if the quality of its free food and its bustling and lively cafeteria are any measure, Google-China is doing just fine. And if the people I know who worked at or still work at Google China are any indication, Google knows exactly what it takes to succeed at doing business in China, the Google way. Would it really have made sense for Google to have changed its ethics and its business methods for just one country? What about the impact that would have had on Google employees and customers everywhere but China? Did this article even consider that? Of course not.

Yes, Google search does not have the same percentage of usage in China that it does in the United States, but Google is selling Google ads in China and presumably making big bucks by doing so. Google is a lot more than just its search page and whomever wrote this article should have done at least some investigation into what Google is actually doing in China before proclaiming it a total failure there. Full Disclosure: I am a Google stockholder.

Be wary of the China consultant who publicly criticizes. Or at least realize that he or she is probably doing so as a marketing device more than anything else.

I can’t wait until Monday.

What do you all think?

  • damjand

    I see it time and again, these big companies just don’t understand Guanxi, or family relationship dynamics. If I were the Home Depot president I would have gone into China and just basically had a good time developing friendships in China for like a year or two, and used those to figure out what the market is about. I don’t know, I might have figured out a way to become part of a local family or an important trade guild. You have to understand Maoism and Qing dynasty dynamics, too. If this sounds too daunting, just drop me a line through the contact form at the top of the page.

    • bystander

      What on earth does guanxi have to do with figuring out the market? I’ve lived in China for ten years and have been to every kind of business meeting, but when it comes to understanding markets … ? It’s not like some guy with gov’t connections can make Chinese people start eating with fork and knife.

      I lived near one of the home depot stores in Beijing, and I just can’t understand how even a tanker full of guanxi would have made any difference to them. The store was situated quite near to the biggest tool / material market for the many, many construction workers and contractors that do virtually all the repairs / upgrade / renovation work that Home Depot buyers do themselves in the U.S. And of course those workers / contractors do all the work that Home Depot buyers would usually not attempt in the U.S. (heavy construction). Now, why would any of those contractors go to Home Depot to buy a circular saw or drill or nails or whatever when they could go to a market that is 50x bigger, just down the street, that has all the tools that are already standard among their pals & peers, that is 10x cheaper, and that mirrors the same markets in other cities all over China? It was a non-starter.

      How exactly should they have guanxi’d their way out of that one? Get Xi Jinping to order all the carpenters in Beijing to buy a more expensive hammer at Home Depot? Or make do-it-yourself home repairs part of the Chinese Dream? c’mon.

  • Lucas Blaustein

    Home Depot: When it costs so little to hire migrating labor, there is little demand for DIY home renovation projects. Anyone who has set foot inside a Chinese construction site has seen the thousands of handymen’s numbers plastered on every surface. A very simple market study would have revealed to Home Depot that if they wanted to enter China successfully, they would have to modify their business practices. In America skilled home labor is expensive, and this helps fuel do-it-yourself consumer demand.

    Mattel: There was nothing inherently wrong with Mattels strategy, other than not understanding Chinese disposable income. My wife loves telling me stories about 500 kuai Barbie dolls… and how so few in China can afford them, or are willing to spend so much on a children’s toy. The enormous store they opened in China had insufficient traffic to offset its costs. There was nothing wrong with the decision to open such a boutique store, but there was something wrong with opening such a large store in a market where consumer spending has yet to rise to a level that allows for such childlike largess. Barbie is not Prada. China is not Japan or South Korea.

    eBay: The issue with eBay is similar to Google. If you want to succeed in Chinese tech, you must cater specifically to the Chinese consumer. This can be done, as Samsung has so excellently demonstrated (twin sim card phones, support for domestic applications, etc.). eBay floundered because they could not compete domestically with Jack Ma, who made a product better suited to the Chinese consumer.

    Google: ‘Don’t Be Evil’ doomed the China business. Before Google went into China they had already made public their feelings about the Chinese government. Google executives stepped on the Emperor’s doorway on the way in.

    They hired a Chinese PR manager, who was fired for violating the foreign corrupt practices act, when she gave a handful of officials iPods. Even after she was escorted out, she still did not fully understand what she had done wrong.

    YouTube is an inferior product to Youku, which has become the default Hulu / YouTube / Netflix in Mainland China, and is imminently more entertaining than hours of cat videos and stupid human tricks. The irony now being that the most interesting thing on YouTube are all the illegal uploads from the millions of Chinese students studying in the United States that have added every drama and Chinese movie since the early 1980s.

    Lay aside Youtube vs. Youku and just examine the Google search engine and obvious problems arise. Google was asked to leave China primarily because the way the Google search engine is coded, its algorithms learn and can predict what users are searching for. So when every Chinese man in the Mandarinate discovered that Google would suggest pornographic sites not yet blocked by Chinese filters it quickly became the default naughty search engine of China. It was the last straw.

    I do not perform consulting work, and as of right now I have no skin in the China game. I think studying these blunders is important, not because they necessarily could have been avoided, but because in most instances hiring the right people, performing far better due diligence, and understanding the language, competitive landscape, Governmental relationships, and demands of the Chinese consumer might have led to different outcomes.

    The lesson in these stories is how obvious the mistakes were, and how very intelligent and capable people still made them. These quasi case studies make evident the difficulty of doing business in China – you must come prepared, you must come armed, and you must come with all the king’s horses and all the king’s men, because you too will likely make mistakes, but unlike Google, eBay, Mattel, and Home Depot, you need the capacity to put humptee dumptee back together again. The important lesson is each of these four large and respectable American companies abandoned the Chinese market, because they did not have the capacity to fix their mistakes.

    Yum Foods, Nike, General Motors have all had remarkable success in China, and unlike the aforementioned few, the mistakes the successful firms have made have not cost them presence in China.

    Understand the winners, study the losers.

  • r_s_g

    MAT’s revenue would have been over $6 bil in 2012.