
For Fumio Kishida’s ‘new capitalism’ to succeed, Japan’s PM must offer more than nostalgia
Japan has a serious problem with cultivating and retaining talent, says IMD professor of Innovation and Leaders...
by Karl Ulrich , Lele Sang Published 17 August 2022 in Asian hub • 4 min read
Yes and no. More than one million multinational companies operate in China and many of them are profitable, so those ones have definitely learned how to get things right. Among the companies we looked at in our book were US chipmaker Intel, which in 2021 had a quarter of annual revenue coming from China (US$21 billion) and Italian luxury fashion group Zegna, which had 45% (€589 million). But we’ve also seen the failure of star players who have managed to succeed in many global markets except for China such as Amazon, Airbnb, Uber, LinkedIn and Norwegian Cruise Line. For them, success in China has remained elusive.
The Chinese market has some characteristics that make it different from anywhere else. It operates at a far higher speed than more mature markets. With this pace, new competitors can emerge and become major threats in a short period, new consumption habits can form suddenly – such as the rise of livestreaming shopping which happened almost overnight – and policies can also change quickly. All of this requires faster decision making to respond to rapidly evolving opportunities and threats, which in turn requires granting substantial autonomy for companies’ China units. Many firms are unwilling to relinquish this kind of control and thus remain in the way of their China units’ ability to operate efficiently.
Of course, sometimes too much autonomy can also lead to inconsistencies, duplicated work, and other challenges, so it’s important to strike a balance. For instance, Sequoia Capital, the venture firm featured in our book, adopts a decentralized and centralized governance structure: investment decisions are made locally with little interference from the headquarters, but shared values, culture, and financial interests keep its China unit on track and unite the whole organization.
We conducted more than 100 in-depth interviews with executives at multinational corporations based all around the world and found that, when it comes to China, companies tend to make same mistakes again and again. For instance, some assumed the competitive advantages that had made them successful in their home countries would seamlessly transfer into new global markets. Such was the case with Amazon (a company we studied in depth here). Others overestimated the demand for their offerings. Although China is a huge market, some products just don’t fit well there, such as LinkedIn, as the demand for online professional networking is not yet evident. And others lacked sufficient commitment to the Chinese market and failed to surmount setbacks, such as Norwegian Cruise Line, whose cruise ship built specially for the country only operated 19 months before being transferred to another location.
“If international businesses can get through this difficult period (COVID-19), they still have the chance to thrive.”
China’s recent containment measures have significantly disrupted not only foreign businesses, but also domestic businesses. Both are worried and concerned. But if we put things in perspective, businesses in China, including international businesses, have faced similar regulatory challenges in the past. Some have emerged even stronger and achieved even more success. If international businesses can get through this difficult period, they still have the chance to thrive.
We’re confident in China’s growth potential in the long term. The dynamic market offers ample opportunities for foreign businesses to make profits. For instance, when Sequoia invested in Chinese ecommerce firm Pinduoduo, Alibaba and JD.com already controlled over 70% of Chinese ecommerce market. Yet it only took Pinduoduo three years from inception to IPO and it became one of the top three ecommerce firms in China. Indeed, at one point its market value even exceeded that of JD.com.
In the past two years, companies like Starbucks and Walmart have kept investing in China. In 2020 China overtook the US as the world’s leading destination for foreign direct investment and attracted a record high of US$179 billion foreign investment in 2021, a 20% increase from 2020. The real challenge for foreign businesses is how to find opportunities and make the right managerial decisions to win there.
CIBC Professor of Entrepreneurship and e-Commerce and Advisor on Asia Strategy at Wharton School of the University of Pennsylvania
Karl T Ulrich is the CIBC Professor of Entrepreneurship and e-Commerce and Advisor on Asia Strategy at the Wharton School of the University of Pennsylvania. His research is focused on innovation, entrepreneurship, and product development. As well as Winning in China, he is also the co-author of Product Design and Development (7th Edition, 2020), a textbook used by a quarter of a million students worldwide, and Innovation Tournaments (Harvard Business Press, 2009).
Global Fellow at the Wharton School of the University of Pennsylvania
Lele Sang is a Global Fellow at the Wharton School of the University of Pennsylvania. Previously she worked as a journalist and editor for China’s Beijing News and Caijing Magazine, covering business and politics, including interviewing world leaders from prime ministers to Fortune 500 company CEOs.
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