Change Strategies to Avoid a Retreat from China
July 1, 2014

Several global companies are making series of U-turns from the ‘promised land’ of China. Along with Google who made an early return in 2012, U.K.-based retailer Tesco has sold its stores to a local company. Global cosmetics companies including Revlon and Garnier (part of L’Oreal Group) have also decided to retreat from China. This is in stark contrast to the fact that many global companies are still seeking for opportunities to enter the Chinese market. Many companies in China are not currently faring too well: Starbucks and Walmart have decided not to further expand their China businesses since 2010. However, the Chinese economic recession doesn’t explain how some global companies have continued to manage successful businesses in China.

CKGSB Associate Dean, Professor Teng Bingsheng, who visited Korea on June 19th to introduce the CKGSB-IMD Dual EMBA Program, said: “Until the 1990s, multinational companies (MNCs) were considered by young Chinese people the best companies to work in, which unfortunately is no longer true. It’s also true that many global companies who have been successful over the last 25 years are now struggling in the Chinese market. The ‘Chinese Dream’ is becoming even harder to achieve”.

Professor Teng said: “In addition to the economic recession, one of main reasons that many MNCs are struggling in China is ‘cost increase’. From 2008 to 2011, the average price of consumer goods has risen more than 60%, along with increases in labor costs (60%) and raw materials (70%). Above all, he pointed out the labor cost increase is at a critical level, especially for the MNCs who are establishing their production bases in China. Prof. Teng, an authority on strategic alliances, said that China is moving towards more technology-intensive industries, arguing that companies should set up new business strategies to leverage the relatively cheap labor cost of engineers. He highlighted Samsung as a successful example of establishing R&D centers in China, as well as a semiconductor company for NAND flash memory chips in Xi’an.

Prof. Teng also mentioned that high competition with local companies could be another threat to MNCs. He warned that some companies are still not aware of the changes in perceptions among Chinese consumers saying: “Samsung Electronics has suffered at the hands of local media because its after-sales service policies are not carried out properly as they are in other countries. Japanese car makers have also received criticism that their products are of lower quality than they are in Japan. Chinese consumers think they deserve to be treated at the level that their ‘buying power’ dictates. The companies should target Chinese consumers with high-end products, not with old models or low-quality products”.

Prof. Teng highlighted that MNCs will get in trouble if they are not aware of the local policies and tight regulatory measures against tax avoidance and bribery. Given that local government authorities and business people are trying to protect themselves from the regulations, a transparent business environment would have a positive effect for MNCs in China in the long term. However, he refuted the argument that the regulations are designed only to safeguard Chinese companies, saying: “Although it’s true that the government is protecting several businesses or industries, global companies are still playing a significant role in China. The Chinese government is also aware that there is no incentive to drive them out of the country”.

Meanwhile, Prof. Teng also mentioned several Korean companies which actively do their businesses in China saying: “Some Korean brands including Binggrae and Amore Pacific’s Sulwhasoo have adopted excellent business strategies in China. They initially targeted rich consumers and had huge success. However, it seems that their distribution channels should be expanded to Tier 2-4 cities. E-Land has also enjoyed huge success, but it should spice itself up with its unique ‘Korean Style’. If it fails to build up a unique identity, it will soon be copied. The copycats could be another threat to them”.

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