Interest in the China market is re-surfacing. All the newcomers have an idea of what success would be like. Unfortunately, this often is based on invalid assumptions.
Success for foreign companies in China is often elusive. Many companies embark on China ventures with very little insight, great hopes and low chances of success.
Investors who want exposure to the China growth story need to be able to evaluate the potential for success for companies that are engaged with China.
Companies using the wrong strategy wreak destruction on their share price and your investment in them.
There are three essential features for foreign company success in China. They apply to large corporations and smaller enterprises.
Also, look for companies that employ these features when investing in listed companies with business in China, because failure to adapt to local conditions can leave assets stranded. CapitaLand’s railway station-based malls are an example of a strategy that works well in Singapore but which was less successful in China.
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Social status
The first factor is businesses offering status and value on products or services. It is very difficult to compete on price in China, so the field of competition must be different.
It is a strategy of “luring the tiger from the mountains”. The tiger has an advantage in the dense forests in the mountains, but he is vulnerable on the open plains. If you cannot compete on price in the jungle of the Chinese marketplace, then compete in some different areas where you have a natural advantage.
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This includes status and service quality. It is difficult to win on price. Chinese consumers remain very statusconscious, although the cachet attached to foreign bands has diminished in the post-Covid environment.
Many Chinese consumers are willing to pay more for goods or experiences that give face and enhance their social status because this delivers social value beyond the price paid.
This has exploded with social media posts of out-of-the-way destinations in China. These personalised recommendations give face and transfer face.
Middle-class consumers go to high-end stores to buy high-status face items which increasingly include Chinese brands. The domestic high-end fashion and accessory chains are good investments for China exposure as foreign brands become less attractive.
Consistent quality
The second factor is the way brands the Chinese trust have become increasingly important. Paradoxically, the Covid restrictions that limited Western business expansion meant that Chinese brands had to increase their competitive advantage as new customers had higher expectations.
This is especially true in the food sector, where food safety and clean and green credentials are increasingly important issues.
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The Chinese have a sophisticated taste for food. Chains like the Haidilao hot-pot restaurants and the meatheavy Xibei restaurants have expanded because they offer the same consistent quality and safe food that were once the hallmark of the US fast food chains. Like Luckin Coffee, they have taken substantial market share from the Western brands.
Regional diversity
The third factor in success goes to foreign businesses that understand their local market — not the China market. This sounds contradictory, but treating China as a single consumer entity is a mistake.
Tastes in Shanghai are very different from tastes in Beijing or Xi’an. Many Chinese cities are the population size of small countries and are viable markets just by themselves.
China is a collection of different regional markets. Each has its own consumer habits and preferences. Superficially the malls may look similar, but the retail and consumer patterns are different.
This is most obviously seen in the cluster of restaurants. The cuisine combinations in the Super Brand mall next to the Mingzhu roundabout in Shanghai are different from the selection on the fifth floor or the Golden Resources mall in Beijing. Unlike every Singapore shopping mall, there are just a handful of restaurant chains common to both.
The business focus on Beijing and Shanghai is understandable. These are the headline cities of China, but it is also important to remember the socalled second-tier cities.
Second-tier cities like Dalian, Nanjing, Changsha and others have populations of around five million to six million. This is a significant market base within the city.
Exporters to China often imagine the China market as a single entity, and then discover the complexity of distribution, advertising, regional differences and other complicating factors. Businesses profit from their understanding of this regional diversity.
For many years, the most profitable store for Giorgio Armani in China was in Taiyuan city. This is a large, heavily polluted coal-mining city in northern China. Taiyuan has many very rich coal-mine bosses. Their purchasing power sustained Armani, Louis Vuitton and others.
Investors should look for companies, domestic or foreign, that understand the regional advantages in China rather than those that just have a blanket China strategy.
Businesses that are contemplating entering the China market should decide which elements of these strategies are appropriate for their business and emulate them where appropriate.
This is a competitive market and companies that choose to play based on price will fail, because there will always be a competitor that will offer a similar product at a lower price.
There was a time when the advantage for foreign companies was in status branding, quality and trustworthiness. These are still important features and Chinese competitors understand this.
Covid gave a boost to domestic competitors, so increasingly, success comes from creating a diversity of regional strategies.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia China Business Council
