Is China Getting More Difficult? Common Problems that Foreign Companies will Encounter

Op/ed by Daniel R. Joseph

Just how difficult is it for a foreign company to succeed in China? When I started in China in the mid-1990’s, failure hung over the foreign business community like a thick fog. No one was making money. It wasn’t uncommon to see companies implode, i.e., make an investment, write-off the investment a short time later, and either head for the exit or start from scratch all over again.

Times have changed. In many ways, particularly administratively, China is easier. For example, partnerships are not required in as many industries. The rules are often (though not always) a bit clearer and a bit fairer. Surveys consistently reveal that 80+ percent of foreign companies in China are making money, while companies like Apple and industries like automobiles show it is possible for foreign companies to do very well in China.

Companies continue to struggle

But we still see companies struggle. There have been fairly high profile failures in tech, retail, food, and finance, just to name a few industries that have been in the spotlight for the wrong reason over the last few years. As any consultant, accountant, or lawyer active in China will tell you, below the companies making headlines there are plenty more companies struggling to make the most of China.

Of course, lately there has been much discussion of other challenges in China, such as the slowing economy and legal problems related to issues like corruption and anti-trust. Putting these kind of issues aside for a moment, and focusing simply on the challenge of managing for success in China, below are a few reasons why we continue to see companies struggling in China.

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New Sectors

While some sectors, like autos or industrial, have been active in China for a few decades, others, like tech, retail, and financial services, are still relatively new. It always seems like each sector and each company has to navigate the learning curve on its own.

New Entrants

Ask most companies who are doing well in China and they will tell you that it didn’t start that way for them. Trial and error seems to be a common way of learning, a testimony as to how challenging China can be. When new entrants in new sectors get involved in China, the success of other companies doesn’t necessarily mean they won’t have to learn a few lessons the hard way.

Stages, transitions, and complexity

Most foreign companies get involved in China in stages. For example, they source through an agent, source directly, then manufacture. Or they first export to China, then hire sales staff, then build a plant. Each transition usually requires the company to undertake a new activity for which it has limited experience in China. Plus, as the company grows and diversifies its activities, it increases the overall complexity of the operation, which also increases the management challenge.

Performance matters: Expectations have risen

In the old days, when horror stories were common and no one was making money, expectations were low, which helped to ease the pain of red ink and underperformance. Today things are different. Growth prospects are not as strong as they used to be in the developed world. Companies are looking to emerging markets for profits, and, even given China’s current economic headwinds, most companies are looking for growth in China over the long term. It is an important part of the plan, and often, for public companies, goals and expectations have been transmitted to shareholders. The bar has been raised. Failure no longer is an option.

New type of failure: Stuck in the mud

Total failure has become less common, though not unheard of, in China. But another risk is becoming more common: the inability to make progress, or, as I like to put it, the risk of getting stuck in the mud. You are in China but you aren’t getting anywhere. You are not failing, but at the same time you can’t seem to keep things on track. Of course this kind of situation becomes more painful when expectations are higher.

China is difficult because China is still early in its development

Perhaps the most important point to make is that China is still relatively early in its development. Per capita GDP is less than one quarter of developed economies. Half the population still lives on the farm, barely making a living. The gradual transition from communism to capitalism is still mid-stream. China is perhaps about half way across, depending on how you measure. Our collective knowledge and experience relative to emerging markets is still fairly thin. We therefore shouldn’t expect our troubles to go away so quickly.

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