Over the past several months, I covered three case studies on international expansion. The first on how eBay failed in China going up against Taobao. A year after eBay entered China, Amazon went up against Taobao’s parent company, Alibaba; this was the second case study. And the third case study was on Groupon’s cultural mistake.
Taking a look back at the five practices that U.S. technology firms need to adapt to succeed in China, we see that eBay, Amazon and Groupon all neglected implementing these steps. We now explore each step in greater detail to analyze the strength and benefits of each practice.
1. Partnering with a local Chinese brand with a strong name as method of entry.
2. Adapting a meaningful, easily recognizable Chinese name.
3. Hiring local leadership.
4. Launching a separate service based locally in China.
5. Giving local Chinese operations autonomy to build their own business model and operate independent of US based headquarters.
Partner with (not acquire) a Chinese company as method of entry.
Brand name and reputation play a big part in any consumer market, and the Chinese are no different. At the end of 2016, Amazon had an estimated $3.8B in goodwill. A well-known brand allows technology giants to enter the international market with an existing customer base. When Netflix announced in September 2015 plans to expand to South Korea, Singapore, Hong Kong and Taiwan in early 2016, excitement was palpable after a successful expansion to Japan earlier that year. Unfortunately for U.S.-based technology giants, their brand does not hold much merit in China.
Because of China’s firewall, various U.S.-based household names are largely unknown to the average Chinese consumer. Groupon aggressively forced its entry into the China market, assuming brand-recognition existed in this new consumer market. eBay and Amazon both attempted to buy market share. For reasons noted above, this did not work. By partnering with a local company, U.S.-based technologies can leverage the existing customer base to advertise its own services and grow its market share.
The second large benefit of partnering with a Chinese company is the understanding of the consumer market. Although Groupon partnered with Tencent, as elaborated on above, Groupon only did so with publicity in mind. Groupon did not actively seek Tencent’s help in building a business model that better fit the Chinese consumer.
Uber, on the other hand, partnered with both China Broadband Capital (CBC) and Baidu. In doing so, Uber was not only able to tap into CBC and Baidu’s network to build its consumer base, Uber was also able to avoid many mistakes by better understanding the Chinese consumer market.
In summary, partnering with a reputable China-based company gives U.S-based companies instant credibility, customers and guidance to expanding operations. Acquiring a Chinese company does not have the same effect.
Adapt a Chinese name is independent of English brand. Chinese names that are meaningless and sound similar to the English name are doomed to fail.
When Google first opened operations in China, Google decided not to rebrand. It took years for Google to realize that many Chinese couldn’t pronounce its name. The company ultimately had to rebrand itself as GuGe in China, as GuGe resembled Google, but was easier for Chinese locals to pronounce. Unfortunately, Chinese fans of Google soon created an online petition on the website, www.noguge.com, asking Google to change its Chinese name, citing reasons that the name is ‘weird, unsophisticated and could damage the cool image of Google in China’. Years later, Google discovered that GuGe never stuck, and Chinese locals commonly referred to Google as Gogo.
It is difficult for the average Chinese consumer to get behind a company whose name he/she has difficulty pronouncing. As explained above, TaoBao means, ‘searching for treasure, finding the diamond in the rough’, and was far easier to pronounce than eBay, which in Chinese had no meaning. Similarly, Alibaba rolls off the Chinese tongue smoother than Amazon. When asked about his motivation for naming his companies, Jack Ma explained that everyone was familiar with the story of Ali Baba and the Forty Thieves. In the story, the phrase “Open Sesame” magically opens the secret door to a treasure trove. Alibaba, therefore, ‘opens sesame’ for small- to medium-sized companies. He also added that he did not want a Chinese name, as he knew Alibaba would one day be global, all cultures and languages in the world can pronounce Alibaba.
Similarly, Tencent understood the importance of having an easily pronounceable name. Wechat, formerly known as Wei Xin, was rebranded to Wechat in April 2012, when international expansion plans were announced.
For a consumer to want to advertise a service to his/her friend, the consumer must first be able to easily pronounce the company name. If the name is meaningful, it is even easier for a consumer to get behind it. Unfortunately for most U.S.-based technologies expanding to China, they neglect this step, instead hoping to build its worldwide brand with its household staple name.
In addition, although unproven, many argue the competitive landscape in China is uneven. As Travis Katz, CEO and co-founder of Trip.com says it, “When we were launching MySpace in China, sites that showed video were required to register as “media companies,” requiring a license that was near impossible to get and which came with heavy regulatory oversight. The regulators, however, turn a blind eye to the Chinese YouTube clones, allowing them to grow and grab share while holding the foreign competition at bay.” Whether or not the rumor that China is attempting to cultivate so-called ‘national champions’ has any merit, it cannot be doubted that the average Chinese consumer prefers to ‘shop local’, knowing local companies better understand local tastes. As U.S.-based services do not have the most successful tract record in China, it makes sense for the average consumer to approach American technologies with a hint of hesitation. A local name may help alleviate this hesitation.
Hire local leadership. Western managers find China’s political structure, legal system and regulatory rules complex and vexing.
Similar to the advantage of partnering with a local Chinese company, hiring local leadership sets up the company for success locally. As noted time and time again, the Chinese consumer market, political structure, legal system and regulatory rules are different. eBay introduced auctions when the local market was more accustomed to sales instead. Groupon attempted to pull 40% margins in China like they did in the United States, although competitors in China were scrapping for 14%. Uber never introduced voice addresses into its service. As Yinan Du says, “For any startup to be successful, there has to be a magic team behind it. You have to be bi-cultural, you have to have someone who really understands how things work in American and how it differs in China”.
eBay and Groupon infamously neglected hiring local leadership. EachNet’s founder retired when he sold EachNet to eBay. As mentioned before, only one member of Groupon’s senior membership was Mainland Chinese. Uber hired local leadership and was quick to adapt Uber China for the Chinese. Despite Didi Chuxing being backed by both Alibaba and Tencent, Uber China understood the importance of a more reliable payment system than credit and debit, and was eventually able to implement both WeChat and Alipay.
Something less tangible is the work environment of companies as a function of leadership. Local leadership may not just help with better understanding the local consumer market, it may also help shape company culture into one more efficient and productive.
Launch separate service in China and give them autonomy. This improves Internet speed and allows the Communist Party to better censor the company to reduce risk of being placed behind the firewall.
To compete in China, or any country for that matter, the technology service needs to be fast. To do this, local servers are needed, especially in China. Otherwise, if a firm’s servers are not local, all its data must first pass through The Great Firewall, an operation, as previously mentioned, that requires scanning all incoming traffic. Running through the firewall will not only slow the service to a crawl, data will also be much more prone to being blocked and placed behind the firewall, banning the service from China.
Additionally, launching a separate service in China goes hand in hand with the fifth and final practice, giving the Chinese branch autonomy.
As Bo Shan said about eBay EachNet following the migration, the local team lost control of the site and was unable to adapt to rapidly changing consumer trends. By launching a separate service in China and distancing itself from its parent headquarters in the United States, companies will not only be placing themselves at lower risk of being blocked by the firewall, companies will also be allowing their local leadership to operate independently. As eBay, Amazon and Groupon have shown, a successful business model in the United States is not necessarily a successful business model in China.
If a firm’s Chinese operation needs to get approval from its American-based headquarters to make business or product moves, it is already running too slow for the fast moving Chinese market. Chinese products are quick to innovate. Wechat is a prime example of this: After launching as a messaging app in January 2011, Wechat added video clips in August of that year, added voice and video calls in July 2012, gaming and mobile payments (WeChat Wallet) in August 2013, taxi booking in January 2014, and added online shopping in May 2014. In less than 30 months, WeChat evolved from a simple messaging app competing against SMS to a lifestyle app. A U.S.-based technology firm’s China operation needs autonomy in order to innovate at this level. In addition, the autonomy allows the China operation to develop its own business model. As elaborated above, eBay, Amazon and Groupon’s traditional business model did not work in China.
If you have any thoughts or questions, please comment. And if you are working on anything in the industrial or mobility space, send me a note at alex.lee@alliance-rnm.com — I’d love to connect.
