I ran across this video that really illustrates the results - and complexities - of globalization. It’s about 6 minutes long, but well worth the time to watch.
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Branding the Dragon
I've written a few posts about how a lack of cultural competency has affected US firms trying to do business in China, but cultural mis-communication is a two-way street. This morning I had the opportunity to meet with Wayne Cozad, owner of Cube Management. During the course of our discussion the topic of culture as it relates to business came up. Mr. Cozad told me about lectures he conducted in China about branding, and how his Chinese audience audience just couldn't grasp the concept.
An example he used was a Chinese shoe manufacturer who can produce "Nike quality" shoes for $2/pair. She'd been trying to penetrate the US market, confident that Americans would see the value of her product. However, she could not find a US distributor that was interested. Mr. Cozad tried to explain to her the concept of branding and US consumers' perception of value based on price. However, as hard as he tried she just didn't get it.
Made in China
This conversation brought up an interesting point: the "Made in China" brand is a weak one. Both American and Chinese consumers tend to associate Chinese made goods as being cheaply made and of inferior quality. However, consider for a moment the high-quality brands that source from China. Brands like Think Pad (computers), Cummins (diesel engines), and Nike (sport shoes) have stellar reputations for quality, and all source at least part of their product lines in China. These brand identities override the lesser respected "China brand", earning customer respect and brand loyalty. Obviously Chinese made goods can be of superior quality. Perhaps we (Americans) are responsible for the the Chinese brand identity due to our historic focus on price over quality?
Re-branding China
I believe the next step in China's economic development (and the next big industry) in China will be the the re-branding of the "Made in China" brand. I spoke of this in a previous post about China's economic cycle. As the cost of labor continues to rise, Chinese exports will shift from price-based to quality-based. Haier (appliances) is ahead of the curve as they are already penetrating US markets with quality appliances. Japan made this same transition. Immediately after WWII, Japan flooded the US market with cheaply made goods in an effort to generate capital to rebuild its infrastructure, earning it a reputation as a source of low-quality manufacturing. Once the Japanese economy started to pick up, so did the quality. Today Japan is known for sophisticated, high-quality exports. Why would China be any different?
In order to successfully make this shift, China will have to re-brand itself as a source of quality goods. However, unlike post-WWII Japan, China has a severe shortage of managers and less experience in dealing directly with western markets and business models. Entrepreneurs in China poised to educated Chinese manufacturers about branding and western perceptions of quality based on pricing will be instrumental in facilitating this shift, and be rewarded dearly for their efforts.
An example he used was a Chinese shoe manufacturer who can produce "Nike quality" shoes for $2/pair. She'd been trying to penetrate the US market, confident that Americans would see the value of her product. However, she could not find a US distributor that was interested. Mr. Cozad tried to explain to her the concept of branding and US consumers' perception of value based on price. However, as hard as he tried she just didn't get it.
Made in China
This conversation brought up an interesting point: the "Made in China" brand is a weak one. Both American and Chinese consumers tend to associate Chinese made goods as being cheaply made and of inferior quality. However, consider for a moment the high-quality brands that source from China. Brands like Think Pad (computers), Cummins (diesel engines), and Nike (sport shoes) have stellar reputations for quality, and all source at least part of their product lines in China. These brand identities override the lesser respected "China brand", earning customer respect and brand loyalty. Obviously Chinese made goods can be of superior quality. Perhaps we (Americans) are responsible for the the Chinese brand identity due to our historic focus on price over quality?
Re-branding China
I believe the next step in China's economic development (and the next big industry) in China will be the the re-branding of the "Made in China" brand. I spoke of this in a previous post about China's economic cycle. As the cost of labor continues to rise, Chinese exports will shift from price-based to quality-based. Haier (appliances) is ahead of the curve as they are already penetrating US markets with quality appliances. Japan made this same transition. Immediately after WWII, Japan flooded the US market with cheaply made goods in an effort to generate capital to rebuild its infrastructure, earning it a reputation as a source of low-quality manufacturing. Once the Japanese economy started to pick up, so did the quality. Today Japan is known for sophisticated, high-quality exports. Why would China be any different?
In order to successfully make this shift, China will have to re-brand itself as a source of quality goods. However, unlike post-WWII Japan, China has a severe shortage of managers and less experience in dealing directly with western markets and business models. Entrepreneurs in China poised to educated Chinese manufacturers about branding and western perceptions of quality based on pricing will be instrumental in facilitating this shift, and be rewarded dearly for their efforts.
The Culture of Business or the Business of Culture?
I recently chimed in with my own two cents regarding this question on LinkedIn:
"Does cultural sensitivity and awareness deliver better business results when it comes to doing business in China?"
I've written about cultural issues in business before and cited examples of cultural incompetence which created business problems in China for both Dell and Starbucks. The author of that question responded by posting a link to an article in "China Business Services" titled "China Mobile Eats Apple for (i)Breakfast"
We can now add Apple to the list of Western companies behaving poorly in China. For those that haven't been watching, Apple approached China Mobile with a deal similar to the one it offers AT&T. Following Apples long tradition of price skimming (selling new products for a premium), Apple sold its new iPhone through AT&T at an inflated price AND demanded what is reported to be 50% of the service fees AT&T charges for the phone.
China Mobile was an ideal partner for Apple in China. Enjoying 70% market share in the Middle Kingdom, China Mobile is widely recognized and has the infrastructure to support rapid market penetration of the iPhone. However, China Mobile is much different from AT&T in one important respect: China Mobile sells cellular service, not handsets. After all, this is the country where they are made. Handsets are readily available in more variety and cheaper than China Mobile could offer them.
By offering to support iPhone sales in China, China Mobile would have been offering Apple a service, not the the other way around. Apple's response was a demand for up to 30% of the service fees charged by China Mobile for iPhones. Can you say "slap on the face"?
According to the article, China Mobile is already at work spinning the issue with the Chinese consumer. This has now become an issue of nationalistic pride. Mr. Gao Nianshu, general manager of China Mobile's date department presented lessons learned to a local group of MBA students:
Apple really blew it on this deal. If they can't get China Mobile back to the table, they will face an uphill battle for market share in China. In fact, they may miss the huge opportunity they saw in China altogether.
"Does cultural sensitivity and awareness deliver better business results when it comes to doing business in China?"
I've written about cultural issues in business before and cited examples of cultural incompetence which created business problems in China for both Dell and Starbucks. The author of that question responded by posting a link to an article in "China Business Services" titled "China Mobile Eats Apple for (i)Breakfast"
We can now add Apple to the list of Western companies behaving poorly in China. For those that haven't been watching, Apple approached China Mobile with a deal similar to the one it offers AT&T. Following Apples long tradition of price skimming (selling new products for a premium), Apple sold its new iPhone through AT&T at an inflated price AND demanded what is reported to be 50% of the service fees AT&T charges for the phone.
China Mobile was an ideal partner for Apple in China. Enjoying 70% market share in the Middle Kingdom, China Mobile is widely recognized and has the infrastructure to support rapid market penetration of the iPhone. However, China Mobile is much different from AT&T in one important respect: China Mobile sells cellular service, not handsets. After all, this is the country where they are made. Handsets are readily available in more variety and cheaper than China Mobile could offer them.
By offering to support iPhone sales in China, China Mobile would have been offering Apple a service, not the the other way around. Apple's response was a demand for up to 30% of the service fees charged by China Mobile for iPhones. Can you say "slap on the face"?
According to the article, China Mobile is already at work spinning the issue with the Chinese consumer. This has now become an issue of nationalistic pride. Mr. Gao Nianshu, general manager of China Mobile's date department presented lessons learned to a local group of MBA students:
- Understand the increasing power of local players and technologies (and decreasing power of foreign ones);
- Note that business drivers and perceived benefits may be different for a local firm (especially a dominant one - or even a less dominant one, such as China Unicom, that suddenly becomes partner of last resort!);
- Keep discussions private, but be ready to play the consumer PR game;
- Appoint, use, and listen to local managers who know the local market;
- Have a “Plan B”!
Apple really blew it on this deal. If they can't get China Mobile back to the table, they will face an uphill battle for market share in China. In fact, they may miss the huge opportunity they saw in China altogether.
China's Economic Cycle
Recent changes in Chinese labor laws have been mentioned all over the net lately. China Law Blog wrote an excellent piece on the details of the changes. Forbes wrote an article about the ramifications of those labor law changes yesterday in "Taiwan Fears Rising China Business Costs".
This is an interesting dilemma. China's economy is growing by leaps and bounds because of its abundance of inexpensive labor. However, as its economy grows, labor is becoming more expensive, forcing manufacturers who outsource to China to look elsewhere. Right now the "next China" is Vietnam, whose economy is the fastest growing in the world. In fact, Nike is currently relocating its production facilities there rapidly.
So what happens in China? Urban coastal areas are seeing the benefits of China's new openness with increasing wages and a corresponding standard of living. But wages remain relatively untouched in the inner, western provinces. This is exactly why China has introduced economic incentives for businesses to expand in these areas. However, the lack of adequate infrastructure has made the region too expensive for western manufacturers to build new manufacturing centers there. This dilemma only adds to the many pressures China currently faces, increasing risk for western investors.
This is an interesting dilemma. China's economy is growing by leaps and bounds because of its abundance of inexpensive labor. However, as its economy grows, labor is becoming more expensive, forcing manufacturers who outsource to China to look elsewhere. Right now the "next China" is Vietnam, whose economy is the fastest growing in the world. In fact, Nike is currently relocating its production facilities there rapidly.
So what happens in China? Urban coastal areas are seeing the benefits of China's new openness with increasing wages and a corresponding standard of living. But wages remain relatively untouched in the inner, western provinces. This is exactly why China has introduced economic incentives for businesses to expand in these areas. However, the lack of adequate infrastructure has made the region too expensive for western manufacturers to build new manufacturing centers there. This dilemma only adds to the many pressures China currently faces, increasing risk for western investors.
Starbucks Coffee: The Visionary is Back
In the article "Can Howard Schultz Save Starbucks?", Howard Schultz has returned as CEO and is reaffirming the company's ambitious growth plans with a long-term target of 40,000 stores, half of which will be in the US. Starbucks now has 15,000 stores in the US, so international expansion is going to be aggressive.
The article alludes to Russia, Brazil and India being other focuses of international expansion, however I think China will yield the best ROI for the company. If you read two posts ago, I explained the unique opportunity Starbucks enjoys in China, selling brand rather than product. Facing pressure from less expensive competitors domestically and abroad, strategic pricing in China would give the company a competitive edge globally.
I recently read a book that illustrates this point very well. In "Winning the Profit Game", the authors make a point by linking price and brand. A 1% improvement in price yields a 7.1% improvement in profit. We discussed this financial model quite a bit in grad school, but opportunities to use it don't come along very often. Considering that Starbucks' global strategy is to develop a full 20% of its profits in China, maximizing profits there would make a huge difference to the coffee giant's bottom line.
The article alludes to Russia, Brazil and India being other focuses of international expansion, however I think China will yield the best ROI for the company. If you read two posts ago, I explained the unique opportunity Starbucks enjoys in China, selling brand rather than product. Facing pressure from less expensive competitors domestically and abroad, strategic pricing in China would give the company a competitive edge globally.
I recently read a book that illustrates this point very well. In "Winning the Profit Game", the authors make a point by linking price and brand. A 1% improvement in price yields a 7.1% improvement in profit. We discussed this financial model quite a bit in grad school, but opportunities to use it don't come along very often. Considering that Starbucks' global strategy is to develop a full 20% of its profits in China, maximizing profits there would make a huge difference to the coffee giant's bottom line.
"Grease Payments": Uncle Sam Has Long Arms
Initiating payments to foreign government officials, even if made outside of
Obviously this puts US firms overseas at a distinct disadvantage compared to their foreign competitors. Therefore, the FCPA allows specific exceptions to this rule. These include:
- “bona fide expenditures (e.g. reimbursement of travel and lodging expenses) incurred for the promotion, demonstration, or explanation of products or services of the
Starbucks Changes Tactics in China
Here's an interesting article about Starbucks in China: "Starbucks adjusts its formula in China" Being somewhat familiar with Starbucks from a professional standpoint as well as a recent business student who worked on numerous Starbucks case studies, I think I can safely say that Starbucks expected to enter the Chinese market with the same business strategy it uses in the US. However, market penetration was slower than expected.
Facing declining stock prices, (what surely must be close to) domestic market saturation, and supply issues that loom in the foreseeable future, Starbucks has put a lot of its earnings expectations in the Chinese market. Starbucks is currently forecasting a full 20% of their profits to be from the growing Chinese market.
In this article it appears that they are finally starting the see the Chinese market as a different kind of animal. In contrast to the US, Chinese consumers see the coffee giant as a destination restaurant of sorts. With a cup of coffee costing as much as a days earnings for many, the newly emerging Chinese middle class see Starbucks as a trendy place to present themselves as affluent and sophisticated. I think that being seen with a cup of coffee rather than the traditional tea, they are also presenting an image of "westernization".
By increasing their seating area and focusing sales on the "Starbucks experience" or "third place", Starbucks is starting to realize its challenge and its true product in China: BRAND. This is a relatively unique situation in business. In China Starbucks' value proposition is actually its brand, and by increasing prices there, it will actually increase its value proposition to customers. This is a rare window of opportunity... I wonder if they'll get it?
Starbucks' second challenge in China will be in protecting its brand. Opening a store in the Forbidden City (which was closed by the government) and at the Great Wall was a huge mistake, outraging and alienating the proud Chinese. They'll need to balance market penetration with cultural sensitivity if they wish to continue to capitalize on their brand in China.
Facing declining stock prices, (what surely must be close to) domestic market saturation, and supply issues that loom in the foreseeable future, Starbucks has put a lot of its earnings expectations in the Chinese market. Starbucks is currently forecasting a full 20% of their profits to be from the growing Chinese market.
In this article it appears that they are finally starting the see the Chinese market as a different kind of animal. In contrast to the US, Chinese consumers see the coffee giant as a destination restaurant of sorts. With a cup of coffee costing as much as a days earnings for many, the newly emerging Chinese middle class see Starbucks as a trendy place to present themselves as affluent and sophisticated. I think that being seen with a cup of coffee rather than the traditional tea, they are also presenting an image of "westernization".
By increasing their seating area and focusing sales on the "Starbucks experience" or "third place", Starbucks is starting to realize its challenge and its true product in China: BRAND. This is a relatively unique situation in business. In China Starbucks' value proposition is actually its brand, and by increasing prices there, it will actually increase its value proposition to customers. This is a rare window of opportunity... I wonder if they'll get it?
Starbucks' second challenge in China will be in protecting its brand. Opening a store in the Forbidden City (which was closed by the government) and at the Great Wall was a huge mistake, outraging and alienating the proud Chinese. They'll need to balance market penetration with cultural sensitivity if they wish to continue to capitalize on their brand in China.
Dell Rethinks its Chinese Market Strategy
Dell came met with the harsh reality of the Chinese market. Relying on the business plan that made it so successful in the US, it intended to duplicate its systems in China. Offering online sales, Dell has always been able to offer cutting-edge technology to it customers for far less than its competitors by building each machine to the specifications of buyers. Carrying costs and overhead associated with traditional "brick and mortar" businesses were eliminated, streamlining Dell's finances.
In China Dell tripped up for the first time. In a country rapidly emerging from 3rd World status, most consumers generally want to actually see and feel the product before buying, especially for an enormously expensive "luxury" item like a computer. Remember, this is a country where the average annual income for urban Chinese is $1,000/year, and those in rural areas average around $300/year. Further, internet access is not widely available and credit cards are non-existent. China is a cash society.
Dell has addressed these issues by going brick and mortar in China, attempting to build a presence in a relationship-based culture. Further, they recently launched the EC280, a computer Dell hopes will meet demand for first-time PC buyers in China's rural areas according to the Shanghai Daily. However, priced at 2,300 Yuan or approximately $310 US, I think they're still missing the mark.
OLPC's XO laptop is a mere $100 in comparison, and is designed specifically for the relatively harsh conditions of a 3rd World rural area. It also has networking capabilities that Dell's computer will not, increasing the range of wireless internet to ridiculous distances, something that will be needed in rural China. Moreover, OLPC is working through United Nation's education programs which will likely give the company an edge over Dell, a US for profit company. With products like this on the market, I think that Dell's will be a tough sell in rural areas.
Dell's change of strategy will give it the edge it needs - in the urban areas of China. But if they intend to get any market share in rural China, they're going to have to go on a field trip to see what the market actually looks like.
In China Dell tripped up for the first time. In a country rapidly emerging from 3rd World status, most consumers generally want to actually see and feel the product before buying, especially for an enormously expensive "luxury" item like a computer. Remember, this is a country where the average annual income for urban Chinese is $1,000/year, and those in rural areas average around $300/year. Further, internet access is not widely available and credit cards are non-existent. China is a cash society.
Dell has addressed these issues by going brick and mortar in China, attempting to build a presence in a relationship-based culture. Further, they recently launched the EC280, a computer Dell hopes will meet demand for first-time PC buyers in China's rural areas according to the Shanghai Daily. However, priced at 2,300 Yuan or approximately $310 US, I think they're still missing the mark.
OLPC's XO laptop is a mere $100 in comparison, and is designed specifically for the relatively harsh conditions of a 3rd World rural area. It also has networking capabilities that Dell's computer will not, increasing the range of wireless internet to ridiculous distances, something that will be needed in rural China. Moreover, OLPC is working through United Nation's education programs which will likely give the company an edge over Dell, a US for profit company. With products like this on the market, I think that Dell's will be a tough sell in rural areas.
Dell's change of strategy will give it the edge it needs - in the urban areas of China. But if they intend to get any market share in rural China, they're going to have to go on a field trip to see what the market actually looks like.
Mattel's Apology to China: Cultural Lessons Learned
I was reading another blogger's response to Mattel's public apology to China regarding the massive toy recall that Mattel was forced to implement when it was discovered that its toys being manufactured in China were contaminated with lead paint. His reaction was outrage:
When the story broke, Mattel laid a good share of the blame on Chinese manufacturers, and by default the Chinese government that represents them. Mattel's strategy was to pass negative press on to a logical scape goat. After all, the Chinese government has no share holders, and to this day no one knows the names of the contract factories Mattel was using to make the lead-laden toys. Mattel saw this as a PR issue and passed the problem to an anonymous Chinese system. This is a typical American response to a PR nightmare like this.
However, the massive publicity the story got was an embarrassment to the Chinese. Those of you who are familiar with Asian culture will recognize the importance of saving "face", especially with the 2008 Olympics right around the corner. (The 2008 Olympics are causing face saving headaches for the communists already).
The communists were backed into a PR corner and had no recourse but to penalize Mattel - and perhaps every other Western business operating in China. In a country of inexpensive labor, government officials that turn a blind-eye to labor laws and no government inspectors to insure the quality of manufactured goods, Western manufacturers operating in China had a LOT to potentially lose. My guess is that other manufacturers got to Mattel before the Chinese government had to formalize a response, their message being: "Don't rock the boat!"
"Mattel's apology should be publicly and vociferously deplored, not simply for the craven act itself, then for its assuredly lasting after-effects upon other foreign firms, who will now find themselves pressured to act similarly, at pain of who knows what sanction."I think that Mattel's decision confused most Americans, and I still wonder if it might open them up to potential legal liability. HOWEVER, I strongly feel they made the right decision, considering the circumstances.
When the story broke, Mattel laid a good share of the blame on Chinese manufacturers, and by default the Chinese government that represents them. Mattel's strategy was to pass negative press on to a logical scape goat. After all, the Chinese government has no share holders, and to this day no one knows the names of the contract factories Mattel was using to make the lead-laden toys. Mattel saw this as a PR issue and passed the problem to an anonymous Chinese system. This is a typical American response to a PR nightmare like this.
However, the massive publicity the story got was an embarrassment to the Chinese. Those of you who are familiar with Asian culture will recognize the importance of saving "face", especially with the 2008 Olympics right around the corner. (The 2008 Olympics are causing face saving headaches for the communists already).
The communists were backed into a PR corner and had no recourse but to penalize Mattel - and perhaps every other Western business operating in China. In a country of inexpensive labor, government officials that turn a blind-eye to labor laws and no government inspectors to insure the quality of manufactured goods, Western manufacturers operating in China had a LOT to potentially lose. My guess is that other manufacturers got to Mattel before the Chinese government had to formalize a response, their message being: "Don't rock the boat!"
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