Hitting the Wall in China, Pt. 1
For decades, U.S. companies—like those Blue Canyon advises—have lamented the fact that China’s B2B customers don’t appreciate the value that they create. The sometimes subtle but often explicit question to us has been, “When are they going to grow up and start appreciating quality and value?”
For the most part, China’s markets have now matured; yet, for many, success with Chinese customers has been getting more elusive, rather than more achievable. Many have “hit a wall” with a market share far below their global level and no obvious prospects for duplicating the success they have known elsewhere. Recent assignments have provided good examples of some of the factors at play.
But first, let’s dismiss the notion that lack of growth in sales is due to the economic slowdown in China. Granted, China has pushed down their growth targets from double-digits to 6-7% over the past several years and has largely met those targets. As we have noted before, this was a deliberate effort to reign in the excesses of an economy that had grown at double digits year-after-year for 30 years. Therefore, this is not a result of a downward economic cycle. In fact, the economy appears to be strong and shifting as envisioned: from rural to urban, from subsistence agriculture to modern economic activity, from infrastructure spending to improving people’s well-being, from low-end manufacturing to high-tech and services. Working down debts is still high on the agenda, and a major challenge, but at this point, production is strong, growth is solid, and plans are on track.
As usual, there are risks. The U.S. is about to impose still-more tariffs on steel production as the Obama administration did last year. Also, the euphoria over the Trump-Xi visit early in the administration is giving way to renewed concerns about trade wars. However, it’s apparent that businesses are not taking the risks too seriously. Ford just announced plans to produce the 2019 Focus in China, instead of building a plant in Mexico. They will join a smaller number of Chinese-made Volvo and GM vehicles on U.S. roads.
So, the economy is reasonably healthy and maturing—what, then, accounts for “hitting the wall?” We would ask those who have had this challenge to consider three explanations:
- Value drivers that do not drive value
- Forgetting how you build a business
- Not sticking to your knitting
Value Drivers that Do Not Drive Value
We could cite hundreds of examples of a mismatch between a company’s value proposition and the needs of Chinese customers. Early on, stubbornness in refusing to adapt to China was understandable; most believed that the Chinese would soon “catch on” and start to value the same things that other customers value. However, in 2017 suppliers are faced with a modern, rich, and sophisticated China that still isn’t much like home.
A very common difference is time horizon. Despite its thousands of years of history, China is a fast-moving market with little experience and even less trust in the longevity of business models and relationships. In the U.S., we value products that last for a long time and require little attention. For instance, building equipment suppliers go to China with value propositions centered on long warranties and lack of required maintenance. Yet, neither is of particular interest to most potential buyers in China. The typical responses we receive to questions about supplier value creation include:
- “We don’t expect this building to be here in 15 years, so why would we want a 20-year guarantee?”
- “No one in China keeps a cell phone for more than a year; why would we want the components certified for 3?”
- “Why wouldn’t we prefer to have fast response than expensive products that seldom need service, but when expensive products do need service it’s a challenge?”
In many cases, immediate success greeted companies with value propositions tied to expensive, over-specified products. When products were new to China, buying the best—even at high price premiums—made sense. However, as the local buyers gained confidence, got more familiar with the plusses and minuses of various offerings, and learned their own drivers of success, they became more sophisticated buyers of products and not necessarily buyers of more sophisticated products.
We have written at length about “Second Mouse” business models in China: the approach of local, fast followers who tailor their offerings to be “almost as good as Brand X, but at a much lower price,” or in their words, to provide a much more attractive price-performance ratio. In some cases, U.S. companies have cracked the code for succeeding in the mid-market, but mismatched value propositions are much more common than successes.
Another common theme is different decision-makers. For example, commercial buildings in the U.S. are built to standards of quality and efficiency that are well-understood; sophisticated building control systems for climate, lighting, and security are important businesses. In China, developers most often do not have a stake in success after construction is finished; their key to success is getting access to land, conserving cash, and putting a building in place quickly and at the lowest cost possible. Individual offices are left as shells to be finished by the new tenants. Most often, even the climate control systems are chosen and installed by the first office or shop tenant; in fact, this is true outside of a handful of the most advanced cities. Solutions built around creating efficiency for an entire commercial complex will, thus, find little resonance outside of a few very high-end opportunities.
Safety, fire, and environmental regulations that drive business models in the U.S. may be absent in China. They are the clearest example of different decision-makers. While few have succeeded in getting elements of global regulations written into Chinese law, meeting the regulations at the lowest price is the primary goal of buyers.
Whether it is different roles, different mindsets, or different rules, China does present a challenge of U.S. value propositions not resonating with those who make decisions. Part of the answer is messaging, but more fundamentally, it is making sure that the customers value the offerings.