The draw for companies to the China market has grown, particularly over the last two decades, as it has become an integral part of global economic development. But the risk-reward trade-off of entry into the market has also grown. Huge global businesses have tried and failed, but many others have entered, or grown up in, the China market and succeeded. So what is it that sets them apart from the likes of Amazon and eBay, which both failed in China?

In this interview, Lele Sang, author of Winning in China: 8 Stories of Success and Failure in the World’s Largest Economy, discusses the successes and failures of business adaptation to the China market, the growing strength of domestic competition, and their successes in penetrating international markets.

Q. What are the main challenges to doing business in China today and how does this compare to five to 10 years ago?

A. Firstly, I would mention the regulatory environment, which has always been challenging for businesses in China. In the past, regulation has been known to change quite quickly and it differed quite significantly across industries and locations, whereas today, compared to five or 10 years ago, the regulatory changes have accelerated with a greater focus on national security and data privacy. So understanding and navigating an environment like this requires significant effort and expertise.

Secondly, competition in the market has intensified quite a lot as well. Over the last decade, Chinese companies have become extremely competitive, both in terms of innovation and scale. This is in part thanks to the government support and promotion of indigenous innovation.

The last major difference has been the growth in geopolitical tensions. Relations between China and Western companies have become even more strained, especially following the trade war between China and the US in 2018. This is definitely posing challenges for foreign companies operating in China, but it has also had an effect on domestic companies, too.

Q. What are the keys to business success in the China market, both for domestic and international firms?

A. To succeed in China you have to meet three necessary conditions, as well as competently make several managerial decisions.

The three necessary conditions include demand, access, and advantage. For demand, you obviously need to have your product or service meet a specific demand in the China market. For a market like China, it’s easy to think that there must be a demand for every single product or service under the sun, but that is not the case. For example, the demand for online professional services in China is not yet evident, and that was one of the main reasons why LinkedIn failed in the country. The second condition is to enter the right arena to compete, where your firm is allowed to operate legally and has a chance to be successful. The third is to possess and maintain competitive advantage, and in the China market, it is quite easy to lose that advantage. For instance, in the book, we covered an Indian tech company called InMobi, which, when it first entered the China market, possessed a strong technological advantage, but that competence was threatened as Chinese competitors caught up. The company responded by both further investing in R&D and also developing other competitive advantages and it has proven to be successful by keeping that leading position.

In addition, there are also managerial decisions that need to be made, which center around a commitment to the Chinese market as well as decisions regarding governance structure and leadership strategy, such as levels of localization, and product-market fit.

Q. What are the key differences in doing business in China compared to other places in Asia or Western markets?

A. First of all, the Chinese government still plays an outsized role in guiding its economy, from Five-Year Plans to industrial policies, the influence is quite visible. The second key point is China’s speed, the market evolves incredibly fast and sometimes up to 10 times the speed of a mature market. So Chinese companies also operate and innovate at unprecedented speeds, meaning they’ll respond to opportunities in days, rather than months or quarters. This in turn means that they can emerge as major threats almost overnight.

Additionally, there is the evergreen issue of the English language typically playing a larger role in other markets, so language can often be a larger barrier in China than it might be elsewhere.

Q. What sectors are foreign businesses most involved in in China and what do you see as the biggest areas of opportunity?

A. Except for a few sectors that are closed to foreign businesses, such as air traffic control, I think the vast majority of business categories are open to foreign companies to some degree. Of course, some sectors are more attractive than others, given China’s large consumer market, manufacturing capability, and technological landscape, for example. You can see foreign companies involved in consumer goods, retail, the auto industry, manufacturing and healthcare.

In terms of the major opportunities, one would be technology and innovation, despite the wider challenges facing the industry I still think there is a market for things like AI and biotech. Another area is healthcare, given our declining population, increased healthcare awareness and expanding healthcare coverage, companies specializing in pharma, medical devices or even healthcare services, will have big opportunities. I also think that the service sector will hold opportunities as China’s economy shifts away from manufacturing, things like financial services or even entertainment have room to grow.

Q. Can you provide an example of a unique approach to the China market that proved successful?

A. Sequoia is one of the most successful VC firms in China and one of the main factors that set it apart from other businesses is that it adopted a unique decentralized and centralized operational approach. Many global companies tightly control their China unit, so every single decision has to be approved by the headquarters, which often leads to delays that can stretch for months or even years, Amazon is a good example of that. But Sequoia gave its China unit real autonomy, it allowed its China unit to make its own investment decisions. So even though sometimes those decisions seemed unconventional or even odd from a Silicon Valley perspective, they still allowed them to be made. This decentralization ensured autonomy, allowing Sequoia China to act fast, seize opportunities and generate tremendous returns on investment. But decentralization alone wouldn’t have been effective without the incorporation of centralization, where the company’s cultural values and shared financial interests tied the organization together. For instance, partners often invest their own money in funds controlled by other partners in other regions, sharing each other’s profits.

It is hard to set up and execute this sort of strategy, often it is difficult for leaders to relinquish control, but over a period of several years, Sequoia managed to work it out and master it.

Q. To what degree has localization played a role in business success in China in recent years and how do you see this trend developing?

A. Localization is a very interesting topic, it involves adapting your products, operations, governance and supply management to better align with your local conditions. In China, localization has proven to be critical for business success in most cases, but when it comes to localizing products the answer might be different. In some cases, the foreign nature of goods is an attribute that consumers value, for instance, many luxury brands have attempted to incorporate Chinese characters into their products, only to find that Chinese consumers are simply interested in exactly the same products that they can find in cities like Tokyo, New York or Paris.

Another example is Norwegian Cruise Line, one of the top cruise companies headquartered in Miami. It invested heavily in localization by including many Chinese features on its cruise ship, including interior design, Chinese restaurants and teahouses or games like Mahjong. But their effort missed the mark because it turned out that Chinese consumers were looking for an exotic ‘Western-style’ cruise experience, and the Chinese style was too familiar for them. This mismatch, along with a few other factors, led the company to eventually spend another $50 million removing the Chinese elements from their ship and exiting the China market completely.

Q. What are the trends in terms of foreign businesses entering into partnerships or joint ventures in China?

A. In the past, foreign businesses usually entered into partnerships or joint ventures because it was necessary, especially in some sectors where it was a legal requirement to have a Chinese partner. But now many businesses remain willing to do so even if they have access to that sector because of the government incentives that are available to Chinese companies. Additionally, the historical JVs tended to be with well-established Chinese companies, but a growing trend now sees foreign firms willing to collaborate with startups in China.

Many foreign companies, despite not being VC firms, are also investing in a variety of companies, for instance, Intel has invested in more than 100 Chinese companies. These emerging trends seem to stem from China’s enhanced R&D and innovation capabilities as well as the quality of its talent pool.

Q. To what degree are Chinese companies proving successful in entering international markets and to what degree are they adapting their existing business strategies to do so?

A. Chinese companies have become incredibly successful in entering international markets in the past couple of decades, especially in sectors such as telecommunications, electronics, the auto industry and e-commerce. Notable companies including TikTok, Xiaomi and BYD have exhibited a variety of degrees of adaptation to their existing China strategies.

For instance, Pinduoduo primarily replicated its low-cost strategy in the US through its subsidiary Temu, and that has resulted in Temu becoming one of the most downloaded apps in the US through the price points resonating with consumers. It is still too early to claim Temu as a complete success as the company hasn’t reached profitability yet, but it has done well in terms of growth.

Another example is Xiaomi, which became successful in China through its online selling strategy, but when it initially went to Europe it hit a wall. European consumers are very used to purchasing their cell phones in person, rather than online, so Xiaomi partnered with several cell phone carriers and retailers, as well as opening its own stores. It is now a leading player in the European smartphone market.

Q. How do you see the challenges and opportunities for businesses in China changing over the coming five to 10 years?

A. China’s economy is currently transitioning toward high-quality growth, which could lead to challenges for businesses in adjusting to new market demands. Secondly, the regulatory environment is likely to continue to change and evolve, posing compliance and operation challenges for businesses. And again, how geopolitical tensions change in the coming years could impact market access and potentially disturb supply chains and investment flow.

In terms of opportunities, China has masses of room to expand its innovation and research, which in turn presents opportunities for collaboration between Chinese domestic firms and international businesses, particularly in emerging industries like AI, robotics, and big data. Another field is China’s booming digital economy, which offers opportunities for businesses in FinTech and online services.

Interview by Patrick Body