China: The Growth Strategies of Local Companies

In early 2013, ten Kellogg School faculty members visited companies in China and met with executives from both local and multinational companies. The following roundtable discussion is the final part of our series of four (read parts one, two, and three). This week’s topic: capital markets and the different challenges faced by local Chinese companies versus their multinational counterparts.

Robert McDonald, Professor of Finance: Multiple people expressed the sentiment that China is so large and populous, it has to be centrally managed. Of course, most of us in the West would come to exactly the opposite conclusion. One tour guide told me, “China is so big that even Barack Obama would have trouble managing it.”

We accept chaos and the possibility of disorder, and that’s anathema in China. We tend to trust the market, sometimes to our regret, and they don’t. It’s not clear that this mistrust will help them avoid a financial crisis of some kind, or bad loans, or bad real estate investments. It may be that they have a lot of the same problems that we’ve had. But a Chinese regulatory official said that “a visible hand is needed to guide the markets,” to avoid a financial meltdown such as the one that occurred in the U.S. in 2008.

Another observation is that it’s much harder to accommodate innovation in China. This fact just leaps out at you. Capital markets are underdeveloped and very banking intensive—state-owned banks still dominate the landscape. In the West we have all this money sloshing around, and some of it sloshes toward people with the best ideas. But the Chinese really try to control the sloshing. In many respects they’ve liberalized the economy, and there are a lot of investments being made that wouldn’t have happened 20 years ago. They’re gradually trying to open things up, but they’re very afraid of making mistakes.

Thomas Hubbard, Senior Associate Dean, Strategic Initiatives and Professor of Management & Strategy: Our visit to the Poly Art Museum in Beijing was unexpectedly interesting. I assumed that I would enjoy a purely cultural experience, but Poly is actually a giant, state-owned enterprise—its main businesses is defense. We viewed amazing, truly impressive exhibits and learned that Poly also runs art auctions. Its traditional business in this space is in Chinese antiquities. It makes sense that the Chinese government would want some control over which pieces are sold and which are kept as national treasures, and the government has essentially given this business run by an SOE a monopoly in this space. The Poly uses the auctions to bring home precious items that have trickled out of the country over the years, but the museum also generates significant income.

Leaders of the Poly museum tell us that they’re expanding from antiquities into contemporary art―for example, works that feature high-end calligraphy. As it ventures further into the auction space—into areas where it’s not protected from competition—it will be forced to compete on equal terms with larger, established auction houses such as Sotheby’s and Christie’s. Now that they’re looking to grow outside the boundaries of that protection, it will be interesting to see whether the Poly’s sources of competitive advantage in market A, auctions of Chinese antiquities, also apply in market B, auctions of contemporary art.

Eric Anderson, Professor of Marketing: We visited a large Chinese electronics retailer—their store looked like Best Buy or Circuit City did ten years ago. I asked if they were aware of what’s happened to big-box electronic retailers in the United States and whether they thought they would be able to survive. Interestingly, this issue was not top of mind and the senior managers saw little threat to their stores from online retailers. When asked if they were aware of their own customers showrooming (trying out products in the store only to purchase them online), they said they believe it doesn’t happen. This contradicts a piece of IBM research that shows more showrooming goes on in China than anywhere else in the world by a large margin. A whopping 24 percent of shoppers surveyed in China reported showrooming versus 10 percent in India and just 4 percent in both the United States and United Kingdom.

These retail executives expressed the sentiment, “We work here, so we have to feel optimistic about the future of retailing.” It will be interesting to see how quickly some of the e-commerce trends from the United States and Europe gain momentum in China.

Craig Garthwaite, Assistant Professor of Management & Strategy: Representatives at China’s leading e-retailer, JD.com (formerly 360buy.com), explained to us some of the ways they work to maintain high-quality service and customer satisfaction. Their drivers, for instance, accept cash on delivery, and customers are able to refuse parts of or their entire shipment if the quality of the products doesn’t meet their expectations. While this level of service has gone a long way toward increasing trust in the brand and sales, in a market with ruthless price competition it adds massive costs. It’s possible in markets with sufficiently dense sales that this strategy could generate profits. However, it doesn’t match every market context and certainly wouldn’t work in all of the markets the company currently serves, particularly in smaller tier-three cities. Implementing the strategy involves an explicit decision to sacrifice growth in top-line sales, a choice that many companies―especially in high-growth markets―find very difficult.

Eric Anderson, Professor of Marketing: We met with the leadership group at Hengyuanxiang (恒源祥), a huge wool manufacturer that sources from all over the world. Everyone in China seems familiar with their ads—largely consisting of jingles that run for 6 to 30 seconds where a voice simply repeats the word “sheep!” over and over again. When we asked local Chinese consumers about the brand, they were all aware of the advertisement.  It has been extremely effective at generating brand awareness. Also impressive is that for the past two Olympiads, the company manufactured all of the uniforms for the Chinese national team. Hengyuanxiang is a global company, but despite all its success and brand recognition in the home market, the company is struggling with a global branding strategy.

Alexander Chernev, Professor of Marketing: Many Chinese companies find it difficult to build global brands. And while it is true that many U.S. companies face challenges repositioning their brands to fit the needs and preferences of the Chinese consumer, their task is somewhat easier because the Chinese are willing to adopt authentic brands such as Nike, Häagen Dazs, and McDonald’s. The same does not hold true for the American consumer, who is not ready to adopt Chinese brands. The issue is further complicated by the fact that many Chinese brands are difficult to translate into English.

Despite its local success, turning the Hengyuanxiang brand into a success outside of China will require not only repositioning the meaning of the brand to the specifics of the global market but also creating a new brand that can be easily recognized and spelled out. This is akin to building a new global brand from scratch—a task that is much more challenging than repositioning an existing brand for local markets.

Photo credit: Kendra Busse