‘Going East’ – overcoming barriers of entry for Western brands

‘Going East’

A few years ago, if you were a Western brand, the word on the street was ‘Go East’. Western brands were assured that, in China, the sky was the limit – they simply had to set up shop and, then, instant success. For many, this was the case.

In 2014, however, China is an entirely different landscape. It’s become harder – not easier – for many Western businesses and brands to do business in China. It seems contradictory at first. With its budding middle class and mistrust of local brands, shouldn’t the Chinese be even more receptive to Western offerings?

Let’s look at a couple of new and recent barriers:

  1. China’s role is in the world is changing and increasing. Compared to a few years ago, China and its people have become a lot more confident about themselves, making them more demanding when it comes to products and their value. They will no longer pay any price for a brand just because it’s from the West. Rather, they want something that is genuinely better, and right for them. This means downward pressure on (generally higher) prices in China, as well as more shopping abroad, where the prices are better.
  2. Partly driven by this renewed confidence, Chinese brands are making headway in several categories, Case in point: Xiaomi. The company redefined the Chinese smartphone market, and has been referred to as China’s Apple equivalent; if it continues to grow its domestic base and spread internationally, as planned, it could be a separate beast entirely. Other companies, like consumer electronics and home appliance company Haier and technology company Lenovo, are enjoying an ever-increasing international presence and following.
  3. With the new Chinese leadership’s crackdown on wasteful spending, (foreign) luxury is out, and a more frugal lifestyle is in. Using a famous example – in what has been referred to as ‘couture politics’, the President Xi Jinping’s wife, Peng Liyuan, only wears more affordable, logo-free domestic brands. With government spending under more scrutiny, some 5-star hotels are voluntarily ‘destarring’ themselves to 4-star (so that government officials can stay there) and restaurants are closing, no longer supported by big entertainment budgets. Luxury, as a whole, is suffering. Sales of high-end spirits/luxury goods are down (case in point, sales of some high-end whisky and cognac brands have dropped by 30% or more).
  4. In addition, there has also been increased scrutiny of Western brands and companies by the Chinese government. Apple has been told that its prices are too high and its service levels not good enough. International pharma companies are being investigated for graft/bribery. There have been accusations of collusion/price fixing against foreign IMF brands, a sensitive category that, to date, has done very well, due to mistrust of local brands.
  5. Meanwhile, IP infringement against famous brands (copying/refilling/faking/counterfeiting) continues, putting even more pressure on sales and margins and detracting from the quality image of iconic Western brands.

In general, China is still quite a hard place to for foreign companies to do business. There are many rules that can be easily and unwittingly broken, hiring and retaining good staff is difficult, and, in many sectors (banks, internet), foreign brands still have restricted access.

It’s no wonder, then, that Western companies and brands are feeling the strain. L’Oreal isn’t leaving, but they have stopped selling their Garnier brand. Revlon is pulling out. Tesco has left. Mattel tried to set up a Barbie outlet in Shanghai and failed, as did Media Markt and many others.

So, ‘going east’ is not as easy as it once was. The easy money, which may have been a myth to begin with, is now non-existent. What does that mean for companies that still want to enter – and win over – the Chinese marketplace? They need to accept that there are no more shortcuts.

If they’re serious about succeeding in China, they need to develop a deeper understanding of what it means to do business and create brands here. It means they need to commit to working within Chinese parameters and accept that China is big – so big, in fact, that having one single strategy for the whole country will never work. The difference between regions is so vast that one could argue the difference between Beijing and Guangzhou is more than that between Oslo and Barcelona. If a brand wants to ‘Go East’, they must be willing to understand the journey will be hard, complex and long – all facets of it.

Han joined BrainJuicer in 2010 to start up BrainJuicer’s Shanghai office, and is currently managing director – Asia. He has almost 20 years of experience spanning client-side marketing and international brand development, marketing strategy consulting, advertising production, and consumer insight and research.

Read more from Brainjuicer in our Clubhouse.